Marketing Financial Analysis Review
1. Explain what principles of accounting teaches and what it does not teach. Review the
marketing concept and why cash flows are critical to their careers.
2. Profit equation
Profits = Revenues - Costs
= (Price * Quantity sold) - ([unit cost * units sold]) - fixed costs).
There are two types of costs: fixed and variable. Marketing has both fixed and variable costs.
Example: Sales Manager Salary & Bonus. Salespeople are salary & commission. Have travel
and entertainment costs. Sample costs.
3. Breakeven = Fixed costs/unit contribution.
Unit contribution = Unit price - unit cost.
You can use unit breakeven translated to market share to determine the feasibility of a strategy
(explain).
Total Contribution (or total dollar contribution) = total direct revenues - total direct costs.
Total Contribution can include lump sum positive cash flows (one time payments, cash
from assets sold, etc....) and lump sum costs (salary, investments for a new operation, etc....).
Example: Joe the salesperson is paid $30,000 salary, $9,000 benefits and a 5% sales
commission. His selling expenses last year were $19,500. He sold $2,200,000 last year. Cost of
goods sold (excluding commissions) were $1,650,000. He won a company sales contest last year
costing $1,500. Joe’s sales manager made $165,000 last year with $13,000 in benefits. Joe only
sells one product. It cost $300,000,000 to develop. The product was launched 5 years ago.
What is Joe’s total contribution?
Answer: Well, first you have to determine which costs and revenues are relevant. A good
way to do this is to identify which costs would be saved if Joe is fired & what revenues would be
lost if Joe is fired and the customers abandoned. There are a mix of fixed and variable costs and
revenues to consider.
Relevant cash flows here are:
Revenues: $2,200,000 in sales.
Costs: $30,000 salary, $9,000 benefits, 5% sales commission, $19,500 sales expenses, Cost of
goods sold of $1,650,000.
Total Contribution = $2,200,000 - $30,000 - $9,000 - $19,500 - $1,650,000
- (.05 x $2,200,000)
= $381,500
Why were the sales managers salary, benefits, and the cost to develop the product not included in
the total contribution calculation? The product development cost has already been spent and is
not a reoccurring expense. The money spent to develop the product is now irrelevant to future
decisions. The money is gone and there is not a future expenditure tied to the cost. The costs of
the sales manager are irrelevant if they will continue to be employed at the same costs regardless
if Joe is retained or fired. That cost is just not dependent on Joe’s employment here.
The cost of the sales contest is the most difficult thing to classify. If you assume that the sales
contest will be run next year (with or without Joe), then the cost is not relevant to a decision to
keep or release Joe.
The terms unit contribution and total contribution are not the same thing.
4. Breakeven is not our goal. We want to do at least as well as we did before. Incorporating
previous profit level into breakeven calculations is commonly done to recognize this.
Breakeven Is Usually = (Past Profit Level + Direct Fixed Costs) / Unit Contribution
For a new brand a company might replace past profit level with target profit or required profit
level.
Total dollar contribution (pretax profits; profitable cash flow...). When I ask for unit
contribution and total dollar contribution, I am NOT asking for the same thing.
5. One of the real keys in marketing decision making is to determine what the cash flows are for
a decision.
Sunk cost fallacy (R&D is a classic).
Relevant cost fallacy.
6. The exact same cost may represent vastly different risk levels for different firms. An
expenditure that is risky for one is trivial for another. Part of your situation analysis.
7. What does an income statement mean? Include the depreciation argument. Be sure to talk
about both total dollars and percentages. Both are important and the distinction is subtle.
8. What does a balance sheet mean? What are retained earnings? What can we spend on
marketing decisions anyway?
9. Most firms keep 2 sets of books, many firms keep 3 sets (one for internal business operations,
one for the IRS and a third for stockholders if it is publically traded). Explain why this is the
case.
Remember, Profit is an opinion but cash is a reality.