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Introduction of Marketing Finance.
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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