Financial Aspects of Marketing Management

Marketing 6201Chip BesioCox School of Business

Relevant Accounting ConceptsVariable Costs

Costs of Goods SoldIndirect Variable Costs

Fixed CostsProgrammed CostsCommitted Costs

Relevant Accounting ConceptsRelevant Costs

Expected Future Marketing RelatedVary According to Alternative Chosen

Sunk CostsPast Expenditures Irrelevant to Future Planning

Research & Development Previous Advertising Expenditures

Sunk Cost Fallacy

Relevant Accounting ConceptsGross Margin

Total Revenue - Total C.O.G.S.Unit Selling Price - Unit C.O.G.S.Expressed as Dollars or PercentageCan Be Impacted by a Change in:

Volume C.O.G.S. Selling Price Mix of Products Sold

Relevant Accounting ConceptsTrade Margin

Each Level of Distribution Chain“Markup or Mark-On”Usually Determined on Selling Price

Net Profit MarginSales Revenue less:

C.O.G.S. Other Variable Costs Fixed Costs

Equal Net Profit Margin (Before Taxes)

Contribution AnalysisBreak Even Analysis

Total Revenue = Total Variable Costs + Total Fixed Costs

Unit Break Even = Total $ Fixed Costs / Unit Selling Price - Unit Variable Costs

Unit Contribution = Unit Selling Price - Unit Variable Cost

Contribution AnalysisSensitivity Analysis

Contribution Margin Has Many ApplicationsVary Each Element to Look at Alternative

Strategies

Contribution AnalysisContribution Analysis & Market Size

Variety of Contribution Analysis ChoicesMarket is Smaller than Desired Sales

Contribution Analysis & Profit ImpactBreak-even Not EnoughBusinesses Must Make Profit to SurviveUnit Volume to Achieve Profit Goal = Total $

Fixed Cost + $ Profit Goal / Contribution per Unit

Contribution AnalysisContribution Analysis & Performance

MeasurementEvaluate Each Product in MixManagers Should Evaluate Each Element:

Unit Price Sales Volume Unit Variable Costs Total Variable Costs Unit Contribution Total Contribution Net Profit

Contribution AnalysisCannibalization Assessment

New Products May Attract Existing Product’s Customers

Determine the Financial Impact of New Product on Existing Products

Financial ConceptsLiquidity

Meet Short Time Financial ObligationsWorking Capital = Current Assets - Current

LiabilitiesOperating Leverage

Relationship of Fixed to Variable CostsHi-leverage: airlines/heavy

equipmentLow-leverage: wholesalers

internet retailers

Financial ConceptsPro-Forma Income Statements

Anticipated Revenues vs. Related CostsBased on Managers Strategic Scenarios