MARKETING FINANCE- NOTES

Marketing is the management process responsible for identifying, anticipating and satisfying

customer requirements profitably.’ The new one is: ‘The strategic business function that creates

value by stimulating, facilitating and fulfilling customer demand. It does this by building brands,

nurturing innovation, developing relationships, creating good customer service and communicating

benefits. By operating customer-centrically, marketing brings positive return on investment,

satisfies shareholders and stake-holders from business and the community, and contributes to

positive behavioural change and a sustainable business future.

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THE FIRM AS AN ECONOMIC UNIT: in order to survive and grow, a firm or business unit has to

be economically viable- it has to run as a viable economic unit. In the first instance, the firm has to

acquire or make available to available itself some resources. Only then, through planned,

systematic, efficient and effective use of such resources can the firm produce some results. The

resources and results may be described as input and output respectively. The balancing of such

inputs and outputs should eventually leave some surplus. The surplus is called profit in commercial

organizations. When profit does not accrue, the firm cannot be called an economically viable unit.

Another interesting point to note that both resources and results are external to business and only

through management skills can resources be exploited to produce results favourable to the

business unit.

Resources are of various types. They are chiefly:

1. Men

2. Materials

3. Machines

4. Market and

5. Money

Each one of these resources needs efficient management. This is how different functions of

management have been developed.

1. Men : Personnel Management

2. Materials : Materials Management

3. Machines : Productions Management / Operations Management

4. Market : Marketing Management

5. Money : Financial Management

Pivotal Role of Money / Pivotal Finance: Money is one of the most important resources. But the

pivotal role of money is evident from the fact that, besides itself being a resource, money can also

acquire other resources as well as measure the changes in them. It necessarily follows that the

firm has to acquire finance first and then other resources.

The well known age “Money is what money does” illustrate this pivotal role of money.

ACCOUNTING CONCEPTS/ PRINCIPLES:

Business Entity Concept: Treating each business unit as an independent entity, quite distinct

from its owners.

Money Measurement Concept : Taking cognizance of only such transactions as are amenable to

strict monetary measurement.

Accounting records state only those facts about a business firm, which can be expressed in

monetary terms. In other words, business events and facts that cannot be expressed in monetary

terms, howsoever important they may be, are excluded.

For example, the death of the managing director who was guiding the destiny of the company since

its inception, the emergence of a better product at a lower price in the market, the emergence of a

new technology and so on (though very significant from the future perspective of business) are

ignored.

The operational implication of the Money Measurement Concept is that financial statements do not

provide all information about the business.

Continuity or going concern approach: The Going Concern Concept implies that the firm will

continue to operate in the foreseeable future. The operational implication of this assumption is that

assets are not shown in Balance Sheet at their realisable market value, which implies liquidation

value.

Instead, evaluation of assets is with reference to the value of goods and services they are likely to

produce in future years to come.

Historical Costs: Recording transactions as past or historical money value.

Cost Concept : Assets/resources owned by the firm are shown at their acquisition cost and not at

current market value/current worth.

The rationale for this assumption is that it provides objective and verifiable basis for accounting

records. Market valuation of assets in use is not only difficult to be made but also is related to

subjectivity. Besides, market values may be constantly subject to change.

Above all, determination of objective and undisputed market price of assets, say of land and

buildings, plant and machinery, furniture and so on that are not intended for sale is fairly expensive

and time consuming. Further, it is important to note that these long-term assets are acquired to be

used in business and not for resale.

Clearly, Cost concept is a logical fall-out of Going Concern concept in which current market value

of assets does not hold relevance.

Evidently, individual assets (except cash and bank balances) shown in Balance Sheet do not

reflect their current market value. Some assets such as land and buildings in major cities may have

higher valuation than shown in books and some other assets, like plant and machinery may have

lower valuation than shown in records.

Accounting Period Concept : Accounting Period Concept requires that Income Statement

should be prepared at periodic intervals for purposes such as performance evaluation and

determination of taxes. Conventionally, the time span covered is one year. Corporate firms, as

per Companies Act, are required to produce interim accounts and many business firms

produce monthly or quarterly accounts for internal purposes. Very often, the accounting

period chosen is 1st April to 31st March to conform to the financial year of Government. Other

accounting periods adopted may be calendar year (January 1 - December 31), Diwali year,

Dussehra year and so on.

Accrual Concept

Accrual Concept is a fall-out of Accounting Period concept. This concept requires that

expenses incurred for a particular accounting period should be reckoned in the same period,

irrespective of the fact whether these expenses have been paid in cash or not in that year.

The same holds true for revenues, i.e., revenues earned in a specific accounting period are

construed as incomes of the same period, irrespective of their receipts.

This concept is very important to compute true income of a business firm for each accounting

period. Let us illustrate. Suppose, a business firm has salary bill of Rs 50 lakh per month. Due

to the cash shortage, even though employees worked, the firm could not pay salary for two

months. The salary paid is for 10 months only (Rs 50 lakh × 10 months = Rs 500 lakh). In the

following accounting year, the firm will be required to pay salaries for 14 months (including

salary arrears of 2 months of the preceding year) that is, Rs 50 lakh × 14 months = Rs 700

lakh. The question we are to address is, how much should be considered as salary expenses

in both these years. Should it be on the basis of cash payment? If it is so, salary expenses in

previous year is to be reckoned as Rs 500 lakh and in the current year Rs 700 lakh. Or,

should it be on accrual basis? In the latter situation, it will be Rs 600 lakh in each of these two

years.

Evidently, cash basis of expenses recognition has an inherent drawback of manoeuvring and

distorting income results of the accounting periods. Under this approach, other things being

equal, profit of the previous year will be higher (by Rs 200 lakh) as compared to the current

year. Obviously this misrepresents income/profit figures of both these years. Due to this,

wrong inferences are drawn about the better performance in the previous year compared to

the current year, which is not true. The correct approach obviously is to treat salary expenses

of Rs 600 lakh in both the years.

In the absence of Accrual accounting, the Income Statement may indicate more profit in one

year at the cost of the profits of some other year, which is entirely inappropriate and illogical.

In other words, cash basis of expense recognition will hamper comparison of profit figures

over the years. Clearly, there is a very strong case for a business firm to adopt accrual basis

of accounting, known as Accrual accounting to determine correct profits.

From the foregoing, it is apparent that deferring expenses, such as salary, cannot increase

profits. Likewise, profits cannot be lowered by advance payment of expenses such as, rent

and insurance. For instance, insurance payment of Rs 12 lakh as on January 1, for one full

year is to be pro-rated. Assuming the firm has the accounting period from April-March,

insurance expenses of Rs 3 lakh only (January-March) will form part of income statement of

the current year and the balance sum of Rs 9 lakh will be reckoned as expenses of the

following year.

What holds true for expenses, the same holds true for revenues. Revenues are recognised at

the time of sales and not at the time of receipts from debtors. In operational terms, cash

surplus and deficiency are not indicative of profit and loss situations respectively.

Matching Concept: The Matching concept is, in a way, an extension of Accrual concept. In fact,

this is the most comprehensive Accounting Principle that enumerates normative framework of

income determination of an accounting period of a business firm.

In simple words, this principle requires matching of expenses/costs incurred to revenues realised in

an accounting period. The more perfect this matching is, more correct is the income determination.

As per this principle, revenues as well as expenses are to be estimated for an accounting period.

As far as estimation of revenues is concerned, it is, by and large, a relatively simple task.

Revenues are equivalent to value of goods and services sold during the specified accounting

period, irrespective of actual receipt of cash.

However, cost estimation is a relatively difficult task. The example of Royal Industries was very

simple in this regard. In practice, there are many expenditures, which benefit several accounting

years. Therefore, these expenses cannot be charged to Income Statement of a single year. For

this purpose, it is useful to classify expenses into capital and revenue categories.

Capital expenditures (for instance purchase of plant and machinery) involve relatively large

investment sum and often have some sales value. Obviously, the purchase cost of plant and

machinery (say of 500 lakh) cannot be considered as an expense of a single accounting year in

which it is purchased; its cost needs to be spread-over (technically known as depreciation), on

some scientific basis, among all the years in which this machine is used. In practice, however,

there will be subjectivity involved on the amount of depreciation to be charged every year.

In contrast, revenue expenses, such as rent, salaries, stationary, repairs, etc., benefit one

accounting year only and, hence fully charged/written off against the revenues of the same year.

They require relatively small sums and do not have sales value. At the best, adjustment for

advance/arrears may be needed (already explained under Accrual concept). This adjustment is

simple arithmetic exercises and does not involve subjectivity. Thus, for revenue expenses items,

the Matching principle is easy to follow.

However, even in the revenue category, there are certain expenses, which are essentially

revenue in nature (in the sense that they do not have sales value) but the benefits from them

extend to more than one accounting year. For instance, massive advertisement expenditure

incurred in launching a new product needs to be shared by the subsequent year(s) also, as it

promotes sales of these years and hence augments revenues of these years. Evidently, it is very

difficult to apportion with precision the share of advertisement expenditure to be charged in Income

Statements of the affected accounting periods. Other notable examples are flotation costs incurred

while raising funds through issue of shares/debentures, and Research and Development

expenditures. The firms, in practice, are expected to evolve some scientific criterion to apportion

these expense items over the years. Howsoever-tall claims may be made about objectivity in this

regard, arbitrariness and subjectivity cannot be done away with. It remains in the system.

Consistency Principle: Matching principle has underlined the importance of treatment of capital

expenditure items in income determination process. It focuses on the equitable methods, which

must be used to write off the cost of plant and machinery (and in that way of other long-term

assets) so that its cost is fairly allocated as expense, in form of depreciation, to each accounting

period throughout its estimated useful life. There are various methods of charging depreciation.

The two notables methods are, Straight-Line Method (SLM) and Written Down Value Method

(WDV).

The assumption underlying the SLM is that depreciation is basically a function of time. Accordingly,

the cost of depreciation is allocated equally to each year of the estimated useful life of plant and

machinery. The sum of depreciation is obtained by dividing the depreciable cost of machine

(Purchase price of machine - Estimated Salvage Value) by the number of estimated economic

useful life (in years).

In contrast, according to the WDV method, a fixed rate (say 25%) is applied to the cost of the

machine (disregarding salvage value) of the first year to determine depreciation charge. In each

subsequent period, the depreciation expense is determined with reference to the same fixed rate

(25 %) to the written down balance (cost of machine less depreciation in the first year). Obviously,

both the methods will provide different answers towards depreciation charges.

The Consistency Principle requires that there should be a consistency of accounting treatment of

items (say depreciation method used in respect of plant and machinery) in all the accounting

periods. For instance, if Straight Line method of depreciation is used for plant and machinery, the

same should be used year after year. Switching over to Diminishing Balance method in any of the

subsequent years will obviously affect depreciation charges and, hence, their profits. As a result,

the profit picture will not be comparable over the years and, therefore, the justification and

relevance of consistency principle.

Likewise, there are different methods for valuation of inventory such as, Last-in-First-Out, First-in-

First-Out, Weighted Average Cost Method and so on. In order to maintain uniformity and reveal

true and fair view of the performance of business firm, the accounting policies should be followed

on a consistent basis. In case, there is a necessity to change, the impact of such a change should

be clearly mentioned.

ACOUNTING CONVENTIONS:

1. Conservatism

2. Consistency

3. Disclosure

4. Objectivity

5. Materiality

CAPITAL EXPENDITURE, REVENUE EXPENDITURE AND DEFERRED REVENUE

EXPENDITURE :

The distinction between Capital and Revenue is a logical requirement of Accounting Period

Concept.

Capital transactions mean transactions involved in the purchase, acquisition, sale or disposition of

assets which have a life of more than one year.

Revenue Transactions, on the other hand, relate to the income and expenses connected with the

normal day to day operations of the business.

If the life of a business is not divided into a number of distinct accounting periods or years, the

distinction between capital and revenue will lose its significance.

Capital Expenditure are those incurred for acquisition of some assets intended to be used in the

business at least for more than an year to maintain and / or enhance its profit earning capacity.

Revenue Expenditure relate to those connected with the normal operations of the business which

do not result in some enduring benefits to the business.

Deferred Revenue Expenditure is expenditure strictly of a revenue nature , but the full amount

involved is not treated as such expenditure in the particular year in which it is incurred , since the

benefits thereform do not cease to exist in that particular year itself.

Examples: Expenditure on massive advertisement compaign

Preliminary Expenses

Discount or loss on issue of debentures

Research & Development Expenses (including expenses on development of new

products)

ACCOUNTING : Definition: The oft-quoted definition of accounting is ...

“Accounting is the art of recording, classifying and summarizing in a significant manner and in

terms of money, transactions and events which are, in part at least, of a financial character and

interpreting the results therefrom. ”

COST ACCOUNTING: Definition: “ application of costing and cost accounting principles, methods

and techniques to the science, art and practice of cost control sand the ascertainment of

profitability...”

The technique of costing involves two fundamental steps:

1. Collection and classification of expenditure according to cost elements

2. Allocation and apportionment of the expenditure to the cost centres or cost units.

Cost Centre is defined as a location, person or item of equipment (or a group of these) for which

cost may be ascertained and used for the purpose of cost control.

Cost unit is a device for the purpose of breaking up or separating costs into smaller subdivisions

attributable to products or services. It is the unit of quantity of product , service , or time (or a

combination of these) in relation to which costs may be ascertained and expressed. We may for

instance, determine the cost per tonne of steel, per tonen –km of transport service or cost per

machine –hour.

Why Finance in marketing or Why should we learn the subject “Marketing Finance”

To what extent the 2 disciplines marketing and finance are related or inter –dependent ?

How the success of an enterprise depend to a great extent on the closest possible co ordination

between marketing and finance.

There has been a tendency to treat marketing and finance as two completely different functions

and separate them into water tight compartments.

Marketing guys have tended to create an impression that they are the money spinners and

accounting / finance guys are unproductive parasites living on their earnings.

Finance people, on the other hand, with rigorous professional qualifications in most cases, have

tried to find fault with the marketing people and despised them for lack of knowledge of finance and

some times condemn them for their so-called attitude of frittering away the company’s precious

financial resources.

COST- REVENUE – INVESTMENT FRAME WORK IN MARKETING: This is a perspective view of

marketing finance, comprising 3 components:

The term cost has a broad meaning here and covers in its ambit, all costs of setting up as well as

running a marketing organization.

(A cost is generally understood to be that sacrifice incurred in an economic activity to achieve a

specific objective, such as to consume, exchange, or produce.)

Some of these costs are one time in nature –the capital cost in accounting terminology. Other costs

are revenue or recurring costs. But even those one –time capital costs become a part and parcel of

the recurring costs through the process of depreciation and amortization, so that in the end, all

costs get absorbed or recovered through operations.

Revenue is what the organization earns by selling its products and / or services to customers

outside the organization.

The sum total of all revenues is matched against the sum total of all costs (both direct and indirect)

and the difference is worked out. A positive difference is profit and a negative difference loss.

To keep the recurring operations going in marketing, there has to be some investments. These

are broadly of two types, viz. investment in capital assets( motor cars, warehouses, office

equipment, etc) and those in working capital ( inventory, accounts receivable, etc).

The recurring costs of these investments have to be absorbed (along with direct costs) by

revenues earned through marketing efforts. Recurring costs due to investments in marketing

usually takes any or both the following forms:

1. Depreciation or diminution in respect of capital assets, inventory, value of amount to be

collected, etc.

2. Financing of interest charges (actual or notional) covering all investments both in fixed

assets and working capital.

The Cost- Revenue- Investment relationship discussed above is represented by the financial ratio

Return on Investment (ROI)

ROI = Net Profit

Capital Employed

ROI = Net Profit x Sales

Sales Capital Employed

ROI = Margin Ratio (or Net Profit ratio) x Capital Turnover Ratio( Rate of turnover of capital)

Net profit / Sales = Contribution X Net Profit

Sales Contribution

= PV Ratio X Margin of Safety

Marketing ROI:

From the view point of marketing management, it will be both interesting and useful if an attempt is

made to arrive at the marketing ROI, as distinct from corporate ROI. For this purpose, marketing

ROI may be defined as the relationship between net marketing margin and the capital employed

only in marketing operations.

Marketing ROI = Net Marketing Margin (NMM)

Investment on Marketing operations

A new survey by TargetBase shows that only 8% of all marketing execs feel that their firm’s marketing and financial goals are congruent.

Almost 75% said they are aligned, but need some degree of improvement. (The need is “significant” for 28%). And 23% flat-out said that the goals are not aligned at all.

Here’s one possible reason why: Half of the marketers said they are frequently pressured to produce short-term results at the expense of long-term growth. And 28% claimed they are sometimes asked to do this.

In addition, a fifth claimed lack of support from the parent company, and an equal number cited lack of internal approval and support.

And the beancounters are watching. Fifteen percent of the marketers said their programs are evaluated on a monthly basis for impact on company growth. Another 10% noted that they are examined at random intervals.

But some marketers have breathing room. A fourth of those surveyed said they are evaluated on a yearly basis, and another fourth indicated quarterly.

And which metrics are used to monitor growth? The chief one is sales at 83%. This is followed by revenue at 80% and profits at 78%.

What are the biggest challenges facing marketers in their pursuit of growth For 43%, it was discounting versus building value. Tied for first place was inadequate marketing funds. And 40% cited elusive ROI measurements.

That lack of funding is serious. A whopping 40% said that their marketing budgets are not sufficient to meet their growth objectives this year. Another 35% said they were, and 25% aren’t sure yet.

As for media, 23% of the marketers said direct mail had most impact on their growth goals. This was followed by print (15%); e-mail (10%); and point-of-purchase (10%).

However, print was cited by 78% of those surveyed as helping them reach their sales goals, and direct mail by 60%.

And how did they choose their channels this year? Past results were cited by 80%, and the best projected ROI by 65%. Another 63% sought insight from primary or custom consumer research. And 33% based it on “gut feeling.”

The survey was conducted among 40 CMOs from a variety of companies, including Disney, General Mills, Honda, Sunkist and Whole Foods.

Here are some additional statistics:

What of the following measures are tracked by your company to monitor growth?

Sales: 83%

Revenue: 80%,

Profits: 78%

Market share: 73%

Brand awareness: 70%

New customers: 68%

Customer satisfaction: 65%

Customer retention: 55%

Share Price: 30%

Number of locations: 15%

Other: 3%

Which is the most important measure?

Revenue: 28%

Profits: 18%

Sales: 15%

Market share: 13%

Customer retention: 10%

Customer satisfaction: 8%

New customers: 5%

Brand awareness: 3%

Intent to recommend: 3%

Which are your biggest challenges to achieving your growth objectives this year?

Discounting versus building value: 43%

Inadequate marketing funds: 43%

Elusive ROI measurements: 40%

Competitive pressure: 38%

Lack of program integration: 35%

Difficulty collecting consumer data: 35%

Trouble achieving speed to market: 30%

Lack of staff: 30%

Unclear or unrealistic goals: 25%

Inability to leverage latest marketing methods: 25%

Lack of support from parent company: 20%

Lack of internal approval and support: 20%

Can’t produce relevant reports: 18%

Ineffective targeting: 18%

Changing product technology: 13%

Other: 13%

Ineffective creative: 10%

Unable to keep pace with changing consumer needs: 5%

How did you select the marketing channels used this year?

Past results: 80%

Best projected ROI: 65% Insight from primary or custom consumer research

New strategy/testing innovations in marketing

Insight from secondary consumer research

Instinct or "gut feeling"

Resposne to competitive marketing

Other

Please describe your approach to growing your business in today's marketing environment

Consumer targeted communication: 12%

Customer identification/segmentation: 12%

Identify/satisfy consumer needs: 12%

Strengthen communications to consumers: 12%

Don't know/refused: 8%

Partnering with retailers/distirbutors: 8%

Communication via numerous channels: 6%

Improved operational performance: 6%

Educate consumers to value of product/service/solution: 4%

Increase market share: 4%

Online marketing: 4%

ROI measurement: 4%

Creative communication: 2%

Identify growth opportunities: 2%

Long-term planning: 2%

Reallocation of resources to most productive tasks: 2%

Strengthen relationship with current customers: 2%

Marketing vs finance: The great debate

5 May 2009

Professor Robert Shaw discusses how organisations can ensure that their marketing continues to

reap financially what it sows creatively in the current financial climate.

Key points

Finance and marketing have a disjointed relationship.

Finance focuses too much on budget and not enough on performance, whereas marketing

concentrates on brand awareness/image but not on sales or profit.

The best organisations strike a balance between financial rigour & marketing imagination.

Progress can be made by holding marketing/finance workshops and ensuring both sides

ask the right questions.

Marketing’s costs have long been the subject of discussion. A century ago, Lord Leverhulme,

founder of Lever Bros and the first president of the Chartered Institute of Management Accountants

(CIMA) said: “Half the money I spend on marketing is wasted. The trouble is I don’t know which

half”. Unfortunately, finance and marketing seldom have meaningful discussions about this

problem.

Finance and marketing departments sometimes have disjointed working relationships. They often

ask different questions and answer them in different languages. Questions that finance ask focus

too much on budgets and too little on performance; and marketing focus too much on brand

awareness and image and too little on sales and profit performance. Everyone retreats into their

own technical jargon, each bewildering the other and wasting lots of time pursuing irrelevant

questions. Ultimately any attempt at finance/marketing dialogue gets derailed.

The infinity model

In a bid to get to the bottom of this frustrating business challenge, a new report entitled Return on

Ideas has been published. The need for this guidance paper came from joint discussions between

the Chartered Institute of Management Accountants (CIMA), the Chartered Institute of Marketing

(CIM) and the Direct Marketing Association (DMA). It emerged that members of all three

professional bodies were concerned about the value contributed by marketing and what constitutes

sound evidence about its value. Pivotal to this, they also recognised the need to drive productive

teamwork between finance and marketing working together.

The report is packed with practical suggestions, checklists and case studies, solidly based on

candid research on over 100 organisations, large and small across industries.

This essence of this candid research has led to the creation of the ‘infinity model’, an innovative

framework designed to put the finance-marketing dialogue back on the rails. The report is

prescriptive about what constitutes good and bad evidence about marketing efficiency and

effectiveness, and enables managers to decide for themselves what is feasible. The model can be

tailored to the needs of all types and sizes of organisation.

The best organisations comprise a positive creative tension between financial rigour and the

marketing imagination. More specifically this involves:

Harnessing the marketing imagination to create value adding ideas.

Predicting how much financial value these ideas will contribute.

Delivering and demonstrating that value really was created.

Establishing learning that will improve future ideas, predictions and results.

This creative tension is found in all their working practices, and these are things that any other

organisation can and should copy. Managers can assess their adherence to this model by

answering the questions listed in the report’s checklists.

By adopting this double cycle, the failure rate of marketing ideas and associated waste can be

reduced significantly. It can never be totally eliminated because customers are forever changeable

and are never completely predictable. Good senior management accepts uncertainty and risk as

an innate part of marketing. They do not try to force a ‘right every time’ philosophy; instead they

manage uncertainty using the best methods available.

Putting it into practice:

A lot of progress can be made in just one day through holding a workshop with finance and

marketing. By discussing the questions listed in the report, participants can find out how they can

do a better job of making marketing more efficient, effective and value adding. In the process they

will start to speak a common language that focuses on performance as well as conformity.

Having a follow-up session with the managing director or business unit heads can be helpful too.

The report sets out departmental specific questions to be answered by the key players. A common

issue that such discussions can resolve occurs when business units hold the marketing purse

strings, and they use the marketing department as an internal service function. All too often such

expenditure is squandered on vanity projects, whose sole effect is inflation of managerial egos,

without sound commercial justification.

Quick wins from these workshops can be put into practice with immediate benefits. A longer term

programme of change may be identified too, and the report contains a road map to plan out this

more strategic approach.

The 10 benefits

Making the marketing budget work harder.

Holding agencies rigorously to account for results.

Eliminating production wastage and its causes.

Making marketing assets and collateral (images, video, text) work harder.

Maintaining media effectiveness while reducing costs.

Getting agencies to do a better job in less time.

Avoiding surprises in budget commitments.

Wasting less time on budgetary bureaucracy.

Faster marketing approvals with fewer errors.

Forecasting more accurately.

Return on Ideas:

Professor Robert Shaw discusses how in these tough economic times, organisations must ensure

that their marketing continues to reap financially what is sows creatively.

An important new report “Return on Ideas” has just been published. Its subject? How any

organisation that has to market itself can be more efficient, effective and value adding. This is a

frustrating business challenge and what we’ve delivered isn’t theoretical or waffle. The report is

packed with practical suggestions, checklists and case studies, solidly based on candid research

on over 100 organisations, large and small and across industries. When we shared it in draft with a

sample of CIMA members they gave it their unanimous thumbs up.

The need for this guidance paper came from joint discussions between the Chartered Institute of

Management Accountants (CIMA), the Chartered Institute of Marketing (CIM) and the Direct

Marketing Association (DMA). It emerged that members of all three professional bodies were

concerned about the value contributed by marketing and what constitutes sound evidence

about its value. Pivotal to this, they also recognised the need to drive productive

teamwork between finance and marketing working together.

Why do finance and marketing often have meaningless discussions?

Marketing’s costs have long been the subject of discussion. A century ago the saying “half the

money I spend on marketing is wasted. The trouble is I don’t know which half” was uttered by Lord

Leverhulme, founder of Lever Bros and first President of CIMA. Yet finance and marketing seldom

have meaningful discussions about this problem.

Finance and marketing sometimes have disjointed working relationships. They often ask different

questions and they answer them in different languages. Questions that finance ask focus too much

on budgets and too little on performance; and marketing focus too much on brand awareness and

image and too little on sales and profit performance. Everyone retreats into their own technical

jargon, each bewildering the other and wasting lots of time pursuing irrelevant questions.

Ultimately any attempt at finance-marketing dialogue gets derailed.

The Infinity Model

The essence of this candid research has led to the creation of the “infinity model” – an innovative

framework designed to put the finance-marketing dialogue back on the rails. Full of practical self-

help exercises, questions, checklists and illustrative case study examples, the report is prescriptive

about what constitutes good and bad evidence about marketing efficiency and effectiveness, and it

enables managers to decide for themselves what is feasible. The model can be tailored to the

needs of all types and sizes of organisation.

What we found is the best organisations have a positive creative tension between financial rigour

and the marketing imagination. More specifically this involves:

• harnessing the marketing imagination to create value adding ideas

• predicting how much financial value these ideas will contribute

• delivering and demonstrating that value really was created

• establishing learning that will improve future ideas, predictions and results.

This creative tension is found in all their working practices, and these are things that any other

organisation can and should copy. Managers can assess their adherence to this model by

answering the questions listed in the report’s checklists.

Figure: the infinity model of marketing value creation

Figure: the infinity model of marketing value creation

By adopting this double cycle, the failure rate of marketing ideas and associated waste can be

reduced significantly. It can never be totally eliminated because customers are forever changeable

and are never completely predictable. Good senior management accept uncertainty and risk as an

innate part of marketing. They do not try to force a ‘right every time’ philosophy; instead they

manage uncertainty using the best methods available.

What can companies do to put the report into practice?

A lot of progress can be made in just one day, through holding a workshop with finance and

marketing. By discussing the questions listed in the report, participants can find out how they can

do a better job of making marketing more efficient, effective and value adding. In the process they

will start to speak a common language that focuses on performance as well as conformance.

Having a follow-up session with the managing director, or business unit heads, can be helpful too.

The report sets out departmental specific questions to be answered by the key players. A common

issue that such discussions can resolve occurs when business units hold the marketing purse

strings, and they use the marketing department as an internal service function. All too often such

expenditure is squandered on vanity projects, whose sole effect is inflation of managerial egos,

without sound commercial justification.

Quick wins from these workshops can be put into practice with immediate benefits. A longer term

programme of change may be identified too, and the report contains a road map to plan out this

more strategic approach.

So what are the benefits?

Ten of the benefits of this are:

1. Making the marketing budget work harder

2. Holding Agencies rigorously to account for results

3. Eliminating production wastage and its causes

4. Making marketing assets and collateral (images, video, text) work harder

5. Maintaining media effectiveness while reducing costs

6. Getting Agencies to do a better job in less time

7. Avoiding surprises in budget commitments

8. Wasting less time on budgetary bureaucracy

9. Faster marketing approvals with fewer errors

10. Forecasting more accurately

Conclusions

This report is aimed at giving practical help to any organisation that has to market itself. Free to

CIMA, CIM and DMA members, grab a copy of the report, read it and run a workshop. We believe

this is the way of the future for responsible marketing in the 21st century.

Further information about the report can be found at: www.return-on-ideas.com

Professor Robert Shaw is a veteran observer of marketing and finance, passionate about

improving marketing effectiveness, and proficient at penetrating partial and confusing data. Over

the past 25 years his analysis and advice has been sought by senior executives in finance and

marketing in over 50 companies and professional bodies. He is founder of Demand Chain Partners

(www.demand-chain.com). His recent books include Marketing Payback: Is Your Marketing

Profitable? published by FT Prentice Hall; and Improving Marketing Effectiveness published by The

Economist.

Return on Ideas addresses the perennial issue of accurately assessing the financial value that

marketing departments add to the bottom line of corporations. While the apparatus of direct

marketing makes it the most accountable form of marketing because of its ability to provide a clear

outline of return on investment, companies often lack a sufficient blend of marketing and

accountancy acumen, either to establish the value of their marketing campaigns or to account to

shareholders on the effectiveness of investment in marketing. This is particularly important at a

time when the economy is stalling and companies need to make well informed decisions when

cutting costs.

Return on Ideas was authored by Dr Robert Shaw, Honorary Professor of Marketing Metrics at

Cass Business School. Dr Shaw surveyed more than 100 organisations to understand where

marketers succeed and fail in working with their finance business partners to create and

demonstrate marketing’s financial worth. Dr Shaw also researched current academic measurement

theories that are commonly used by accounting firms, consultants and marketing service firms. The

outcome of this candid research led to Dr Shaw’s development of the Infinity Model, a practical

framework that can be used by any size of organisation in any market to create greater sustainable

value.

The Infinity Model encompasses the following principles:

The processes that deliver ideas, predictions and demonstrations of value must run

smoothly and should be aligned with other corporate processes

It is also a matter of ensuring that marketing kicks off the business planning cycle and that

marketing and financial plans are aligned throughout the financial year

A well-balanced team has the mix of people needed to imagine, predict and demonstrate

value, with a creative tension between ideas and numbers

Good ideas can come from not only marketing but finance, sales, customer service,

production and suppliers

Marketing people should be allowed the freedom to imagine and create value-adding ideas

Rigour should be achieved through leadership and motivation, with marketing insisting on

rigorous cost-benefit analysis of their own ideas

Ideas should not be killed off or subjected to prolonged delays just because the data about

them is not perfect