Marketing Finance Introduction

Marketing Finance

• Accounting and finance with marketing overview

• Pro forma invoice statements creation

Variable and fixed costs

• Variable cost– COGS– Materials, Labour

• Other variable costs– Overheads– Sales commissions– Discounts

Fixed costs

• Programmed costs– Advertising– Sales promotion

• Committed costs– Rent– Administrative / clerical

• Variable /Fixed costs– Selling expenses– Salary– Commission / bonus

VC

• COGS – Materials, Labor, overheads tied directly with

production• Other VC– Volume related VC– Commissions, discounts etc.

FC

• Programmed costs– Those that generate sales– Marketing costs such as ASP, Sales force salries etc

• Committed costs• Those that maintain the organization• Rent, administrative/ clerical salaries

V/F costs

• Fixed plus variable components• Fixed Salary• Variable commission or bonus

Relevant and sunk costs

• Relevant costs are expected to occur in future due to some marketing action

• Includes opportunity cost

Sunk costs

• Past expenses for an activity• R&D, test marketing and advertising expenses• Sunk cost fallacy: Recover all the spent money

by spending even more money in future

Margins

• Difference between SP and Cost• Three types• Gross margin • Trade margin• Profit margin

Gross margin (gross profit)

• TR – TC for total• Unit SP – unit cost for each unit

Gross margin

• GM Value Percentage• Net Sales 100 100%• COGS 40 -40%• ------------------------------------------------------• GP margin 60 60%• Same concept for both total or unit GP

Trade Margin

• Difference between Unite sales price and unit cost at each marketing channel

• (Manufacture to wholesaler to retailer)• Also called Markup and expressed as

percentage

Trade Margin

• Always expressed as percentage of selling price

• (Margin ÷ Selling Price) x 100• (10 ÷ 20 ) x 100 = 50%

Trade margin workings

• Always work backwards• MRP 100• Retailer 80 20%• Wholesaler 72 10%• Manufacturer 36 50%

Net Profit Margin (Before Taxes)

• What remains from the sales revenue after all costa have been deducted

• Net Sales 100• COGS 30• GPM 70• Selling expenses 20• Fixed expenses 40• NPM 10

Contribution analysis

• Difference between total sales revenue and total variable cost

• Or for each unit, SP – Vc

• Contribution analysis brings out the relationship between costs, prices, volume and profit

Breakeven analysis

• No profit no loss point• TR = TFCc+ TVc• Unit Break even volume =• Total Fc ÷ (Unit SP – Unit Vc)

• Denominator = contribution per unit

Break-even analysis

• If SP =5, Vc= 2, Fc = 30,000

• Unit break even volume =• 30,000 ÷ (5-2) = 10,000 units• Or • Rupee break-even volume=• 10,000 x 5 = 50,000 rupees

Contribution margin

• CM = (Unit SP – Unit Vc) ÷ Units SP• (5 – 2) ÷ 5 = 0.6 or 60%• Rupee Break even volume = • Total Fc ÷ CM = 30,000 ÷ 0.6 = 50,000 rupees

Sensitivity analysis

• BEP can change when SP, VC FC change• SP Vc Fc CM BEP units BEP Value• 5 2 40k• 4 2 30k• 5 1.5 30k• Can you find out?

Contribution analysis and profit impact

• A modified break even analysis is used to incorporate a profit goal

• To incorporate a profit goal in the BE formula, simply treat it as additional fixed cost

• Unit volume to achieve profit goal =• (Total Fc + Rupee Profit Goal) ÷ Contribution

per unit

Contribution analysis and profit impact

• Profit goal example• SP = 25, Vc = 10, Total Fc = 200,000,• Profit Goal = 20,000• Unit break-even volume with profit goal • = (200,000 + 20,000) ÷ (25 – 10) = 14667 units

Contribution analysis and profit impact