Marketing Finance

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Marketing finance is a challenging area, with issues in properly collating, calculating and analyzing the data, and many KPIs, metrics and measurements involved.

 

Marketing Finance Challenges

 


 

Marketing finance is a challenging area, with issues in properly collating, calculating and analyzing the data, and many KPIs, metrics and measurements involved.

 

Marketing Finance Challenges

 

  • Revenue attribution challenges
  • Cost allocation strategies, variable costs, fixed costs and shared costs
  • Building an investment case using Net Present Value (NPV)
  • Return on Investment (ROI) and Return on Marketing Investment (ROMI)
  • Metrics Covered: ROI, ROMI, Economic Value Added (EVA), NPV, Revenue, Net Profit, Payback, Margin, Variable Cost, Fixed Cost

    COGS – Cost of Goods Sold

    • Cost of manufacturing or buying a product
    • Third party costs directly attributable to an order
    • Cost of services harder to determine but may be estimated using timesheets & loaded costs
    • For example, in Retainers
    • Most COGS costs are Variable Costs

    Metrics: Gross Profit, Gross Margin

    The Question:

    What is my profit after paying for the goods I sell

    Approach:

    Calculate the COGS (Cost of Goods Sold ) & deduct from Revenues

    Commentary:

    The classic form of British Empire accounting, used by merchants to calculate the margin they make after they buy goods at wholesale or discounted price & sell at a retail marked or up priceThe Formula

    Gross Profit = Revenue – Cost of Goods Sold (COGS)

    Gross Margin = (Revenue – Cost of Goods Sold)/ Revenue

    SG&A – Sales, General & Administrative Expenses

    • Shared costs that can’t be attributed to a specific product or client. Sometimes called Cost of Business
    • SG&A costs include: Wages, Rent, Utilities, IT & Telecoms, Office supplies, Brand advertising, Non-attributable promotional costs, Non-dedicated staff costs, Transport & entertainment, Training, Etc
    • Most SG&A costs are Fixed Costs

      Metrics: Operating Profit or Earnings Before Interest & Taxes (EBIT)

      The Question:

      What is my profit from the companies operations

      Approach:

      Take revenues, both COGS and SG&A (Sales, General & Administrative) expenses

      Commentary:

      This formula includes both costs that can be attributable to products or services sold and general expenses such as staff, overheads & brand advertising, but not cost of capital or taxes

      The Formula:

      Gross Profit = Revenue – (COGS) – Sales General & Admin (SG&A)

      Gross Margin = (Revenue – COGS – SG&A)/ Revenue

      ABC – Activity-Based Costing

      Using timesheet systems, project resource tracking or allocation methodologies, we can determine how much of our fixed costs are dedicated to particular products, clients or lines of business

      We can use this approach to bring SG&A costs into COGS – or think of Fixed Costs as Variable Costs

      If we want to really get a full view on marketing profitability, then we need ABC or some similar approach

      How do you calculate your Marketing Financials?

      What COGs expenses do you normally work with?

      What SG&A expenses do you normally work with?

      Are there cost ‘issues’ or ‘unknowns’ that you constantly grapple with?

      Do you have a standard cost accounting structure in place, such as ABC?

      Do you have ad hoc ways that you can suitably account for costs? Can you think of new/ better/ quicker ways?

 

 

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