How Sales & Marketing Drives Financial Performance
By Grace Chow
This article provides an insight on how sales & marketing (S&M) initiatives drive financial performance, directly or indirectly.
The first thing to establish is an appropriate measure of financial performance. There are many measures, the most common being ROA (Return on Assets). ROA is the operating profit generated from every $ tied up in assets, examples of assets being machinery, inventory and receivables.
Marketers affect ROA through sales and the use of resources associated with S&M initiatives. Translating this into financial terms, marketers affect ROA through:
• Profit
• Assets
Effects of S&M initiatives on profit
S&M initiatives are designed to drive sales volume &/or increase selling price, taking various forms from straightforward advertising to more complex building of brand equity. Volume &/or price growth translates into higher top-line sales but not necessarily higher bottom-line profit. Profit is also affected by S&M spending such as advertising & promotion and sales incentives (termed “selling expenses”); this is illustrated in Figure 1.
In addition to selling expenses, other expenses can be indirectly driven up by S&M initiatives. Higher sales volume inherently brings about more processing costs such as more invoicing and more handling of inventory. Where a business is already operating at full capacity, any capacity expansion to accommodate further volume growth would drive up production cost (termed “cost of sales” in Figure 1).
Effects of S&M initiatives on assets
Resources are spent not only on expenses, but tied up in assets too. With no change in credit period or supply-chain management, more sales result in more receivables and inventory. What are the costs associated with receivables and inventory? Financing costs, opportunity cost of money, administrative costs, risk of bad debts and inventory losses respectively, and storage & supply-chain costs (for inventory).
Investment in longer-term assets such as production equipment may also be necessary to cope with anticipated higher sales volume. In addition, inherent risks associated with S&M initiatives often necessitate a higher amount of buffer cash.
The range of assets directly and indirectly affected by S&M initiatives are illustrated in Figure 2.
Putting it all together
Combining the effects on profit and assets (see Figure 3), marketers drive ROA through initiatives which affect the:
• Operating Profit Margin (profit from every $ of sales)
• Asset Turn (sales generated from use of every $ of assets)
There are other measures of financial performance besides ROA. Whatever the measure, what is most important is for marketers to understanding the benefits and full costs & risks associated with their sales & marketing initiatives, and be able to use financial tools to justify those initiatives.
The above article is contributed by our trainer, Grace Chow, who specialises in customised financial training and business consulting service. She has over 20 years of working experience and has worked closely with many clients in developing & assessing business plans covering strategic marketing to process improvement.
Grace will be conducting the following public learning course at the Marketing Institute:
• Financial Justification for Sales & Marketing Initiatives – 29 & 30 Sep 2008
• Finance for Non-Finance Professionals – 21 & 22 Jul and 24 & 25 Nov 2008
For more information on the course, please contact Angelina or Su at 6327 7586 or 6327 7588, or email seminars@mis.org.sg
The views expressed in the above article do not necessarily represent those of the Marketing Institute of Singapore. No responsibility is accepted by the Institute or its staff for the accuracy of any statement, opinion or advice contained in the article. All articles on our website are copyright and no part may be reproduced without prior written permission of the Marketing Institute of Singapore.
