Lecture Date

Page 1 of 59 - Marketing Finance (Ver 1.
1)
]amnalal Bajaj !nstitute of Ngmt Studies

.
What is Market ing Fi nance?
BeIore we answer this question, let us answer a Iew other questions
What is the purpose oI business? Without being modest, let us admit that sole purpose oI
business is to earn PROFI1. And where does the proIit come Irom? It comes Irom having
the customers and customers are earned by Marketing. Marketing, most simply deIined, is
'Getting into consumers` mind.
Marketing is a capital intensive exercise. Starting Irom consumer survey (to know his needs and
preferences) to advertising campaigns and establishing distribution channels and so on, every
activity costs money. Thus, there is a Iinancial perspective to almost every marketing
activity.
Earning and retaining customers is very Iine. But what is the cost beneIit analysis? Are
positive product-market results translating into positive Iinancial results? Am I investing
more to earn/keep a customer than I expect to earn Irom him? This cost beneIit analysis is
vital beIore taking any marketing decision. ThereIore, the interIace between Marketing &
Finance is vital Ior any company.
Given a Iree hand, marketing department would splurge on marketing overdrive through
advertisement campaigns, promotions, dealer appeasements and so on. But at the end oI it
all, have the proIits grown? What are the Iinancial consequences oI marketing decisions?
What is the ROI on each penny invested on marketing? Have the marketing people dumped
the product in the market to paint a rosy picture oI their perIormance beIore the CEO? A
little analysis oI Iinancial data oI marketing department would liIt up the veil. This is the
role oI Marketing Finance.
efore going any furt her, let us revise fundamental s of Marketing.
As already said, Marketing most simply deIined is getting into consumers` mind. Finding
out what his needs are (needs could be physical, psychological, security, social, etc, etc, apparent or
dormant, etc) and then creating product or else packaging the product to IulIil those needs is
Marketing. Take the classical real liIe case oI repositioning an existing product to address
consumers` need.
Whirlpool launched its washing machines in India in 1997 and became a raging success in next two
years against some well established competition, like, Jideocon, Onida and BPL, through innovative
marketing strategy. However, come 2001 and consumer durables market got stagnated due to economic
conditions. When the markets stagnate, the only way to increase sales is by biting into the competitors share.
It then becomes dog eat dog world. Price discounts, promotions, gifts, etc, galore and competition becomes
tougher with passage of time. The story replayed as ever in washing machine market. However, Whirlpool,
being an International brand, follows some strict profitability norms and therefore, could not match
aggressive discount war in the market and began to lose market share.

Page 2 of 59 - Marketing Finance (Ver 1.1)

In addition,, a perception grew in the market that because of bigger agitator in Whirlpool washing machines,
it could take less clothes than other machines. Such perception led to waning consumer interest in the product.
Whirlpool then launched an in-depth study regarding consumers expectation from a washing machine. Study
revealed that while every machine was promising 'whiter than milk` shirts and sarees, there was an
unfulfilled demand for machine which could wash heavy clothes like curtains, bed covers, etc. Whirlpool
decided to position their machine to fulfil this unfulfilled demand. They launched an ad campaign showing a
wild party scene in a house. People were frolicking and food was every where, on table clothes, curtains, etc.
Daughter was worried and asked her mother what she was going to do. The lady replies 'Mummy ka magic
chalega`. And then she is seen washing all those heavy clothes in a whirlpool washing machine. Ad also
fustified its capability saying that because its agitator is big and heavy, it can wash those clothes.
Whirlpool recaptured its lost market share and more within a very short time.
What we see Irom above marketing success story is that by proper insight into consumers`
mind and little strategic marketing eIIort, whirlpool converted its perceived negative (heavy
agitator) into a positive attribute oI the machine and by repositioning the product, succeeded
in the market.
oming to more specifics about marketing finance -
'Finance provides cont rol point s in a marketing exerci se. Such cont rol
points hel p in taking bett er marketing decisions`.
Let us understand above statement.
Any company sets its goals. Those goals are then converted into targets Ior each
department/section/individual to achieve. ThereaIter, plans are chalked out to achieve those
targets. These are the System Inputs.
System output is PerIormance` in terms oI achieving the set targets. Two questions are
important here. One Whether people are achieving their targets, Two II yes, then at what
cost? Are people maintaining proIit levels while achieving their targets? As we will see in a
short while, it is quite possible that company loses out when people achieve their targets.
Take the case oI sales team achieving their sales target. It is quite possible that they could
have dumped the product in the market/extracted orders Irom dealers on the promise oI
extended credit period. Such dumping may lead to any or all oI the Iollowing consequences:
(a) Sluggish take oII Irom Iactory in subsequent months owing to glut in the
market due to dumping.
(b) Losses due to expiry oI shelI liIe oI perishable products. Remember that
products which have tendency to quickly become obsolete due to
technological upgrades, like, mobile phones, computers, and other electronic
gadgets or cyclic products, like Iashion clothes and accessories, also Iall in
the category oI perishable goods, though theoretically speaking they are not.
(c) Higher inventory levels and consequent increased working capital cost.


(d) Higher receivables oIten translate into higher bad debts.
(e) II the company has No-Return policy, dealers are likely to sell those liIe
expired products to unsuspecting customers and soil the brand name oI the
company.
Thus, while the sales team was able to demonstrate that target was achieved, did it boost the
proIit level? On the contrary, it has negatively impacted the proIit levels. Application oI a
little marketing Iinance interIace will be able to call the bluII by analysis oI a Iew relevant
Iinancial ratios.
Where al l do the Market ing and Finance interface?
Product Related
O New Product Launch BeIore launch oI any new product, sales projections over
the entire product liIe cycle are done. There aIter, the variable cost projections are
done. DiIIerence between the two gives the gross margin. From the gross margin,
marketing expenses over the liIe cycle oI the product are extracted. That gives the
net margin. Those Iuture earnings are then discounted to the present period to
calculate proIitability oI the product.
Compare the DCF oI all the options and decide which product to opt Ior launch.
O Product Mix Decisions Which product mix gives maximum contribution to the
company given the constraints oI labour, material, production capacity and proIit
margins? This calculation is done by Iinance department and communicated to the
marketing deptt to enable them to draw their marketing strategy to achieve the
desired product mix sales.
O hether to continue or drop a product? - A product could be incurring losses in
the market. Should product be dropped? This is not a purely marketing or even
Iinance decision which can be taken alone by either deptt without assistance oI other.
There could be other Iorces at play, like use oI some by-product which otherwise
may go waste. Or, this product pushing sales oI some other proIitable product
indirectly. There could be many more such reasons where marketing Iinance
interIace will help in taking right decision.
O Pricing Decisions Pricing decisions are again some thing that oIten necessitate
involvement oI Iinance people. Production cost, variable cost, Iixed cost, proIit
margin under various conditions, etc are all calculations which need involvement oI
Iinance people. But it is so only when price cuts are to be eIIected. During the price
rise, marketmen`s wisdom is better not adulterated. Take the interesting case oI
Mercedes Benz Vs Toyota Lexus.
Toyota Lexus was launched in competition with Mercedes Ben:. Lexus was priced tantalising lower
than Merc though with same features. Mercedes Ben: defied the normal wisdom and instead of


responding with a price cut, increased the prices of their cars. Lexus, with a considerable price gap
now, was thus pushed into a lower strata and Mercs sale increased despite price increase.
O Product Modification Decisions Product modiIications, like added Ieatures,
improved quality, etc, cost money. How much money? How much additional proIit
is expected out oI modiIication? Is the expected additional proIit commensurate with
the risk oI loss oI investment?
dvert ising Relat ed
O dvertising Effectiveness Evaluation oI eIIectiveness oI advertising helps in
proper channelising oI the expenses. Which medium, which territory, which time oI
the day, which advertisement, etc are giving the maximum sales growth?
Advertising is effective when there is 'Differentiation` benefit available (Product can boast of a
benefit that others can not. Or it has taken the first movers advantage by a claim which may be
generic but not yet exploited by others, like use of clove oil by Promise toothpaste. This is called
USP-Unique Selling Proposition). If there are too many people advertising on same aspect of the
product (all washing soaps claim to wash the whitest), each one will probably be able to maintain its
existing share of pie. Any substantial shift of customer base can not be expected.
O Evaluating ROI for various marketing alternatives. What is the sales
growth/proIit growth Ior each rupee spent on marketing in a particular medium or
territory, etc.
O Performance Evaluation PerIormance evaluation in Iinancial terms oI each
element oI marketing like product, territory, dealer, salesmen, etc, is necessary Ior
corrective measures.
O Outsourcing Decisions Decisions regarding outsourcing oI marketing activities
are oIten inIluenced by Finance deptt. Outsourcing could be Ior product
manuIacturing as is the case with most oI the large manuIacturers including giants
like Hindustan Lever. Or it could be Ior distribution. Company may decide to have
its own Ileet oI vehicle Ior distribution or decide to outsource the delivery oI product
to various destinations. Or it could be combination oI the two. Long distance
distribution could be outsourced and local distribution may be through company`s
vehicles.
O $ervice Level Decisions AIter Sales Service can be a big USP Ior any company.
Maruti and Tata score over every other automobile company on this count in car and
heavy vehicle segments respectively. (Maruti uses it in its ad campaigns). But
service level decisions are complex. Prompt service means better customer
satisIaction and increased sales but also large inIrastructure which translates into
huge investments. Slow service means unsatisIied customers but lesser investments.
Cost beneIit analysis will help to decide at what level service should be kept.
O PEX Expansion oI the distribution markets could be through company owned
showrooms/oIIices or through dealership/retailers etc. Similarly, distribution could


be through company owned vehicles or be outsourced. Such decisions are taken in
consultation with Finance deptt based on capital availability with company vis a vis
proIitability oI investment.
O Life cle ost Marketing resource allocation at diIIerent stages oI product liIe
cycle.
O R&D expenses Ior assessing customer preIerences/acceptance/needs, product
modiIications, etc.
O rand Valuation Brand valuation is oIten required Ior mergers and acquisitions.
Market ing Fi nance
Marketing imposes high working capital requirement. Working capital has three basic
components: Receivables, Inventory and Liquidity ie cash.
Level oI Iinished goods inventory at various levels, like in transit, with C&F agents,
stockists, retailers, etc, aIIects sales volume. Low level oI inventory would reduce visibility
and increase service time thereby aIIect sales adversely. However, higher inventory
increases working capital and costs associated with it.
Credit period is also used as a marketing strategy. Increased credit period is sometimes
oIIered to dealers as inducement Ior stocking the product. This again leads to higher
inventory levels. Higher inventory levels, apart Irom increased working capital
requirements, also increases various risks depending upon the nature oI product. Products
with low shelI liIe either due to Irequent technological upgrades or perishable nature or
susceptible to Irequent changes in customer demands, like Iashion goods, or with seasonal
demand like Air conditioners, heaters, cooler, etc pose heightened risk.
Higher receivables again increase working capital requirement. Higher receivables also
increase risk oI bad debts. OIten discounts are oIIered Ior early payment to reduce the
receivables and the deIault risk.
Cash management is also vital. While idle cash carries a cost, inadequate cash may result in
opportunity loss.
All the three components oI working capital would be dealt with in detail in subsequent
lectures.
Receivables Management
Health oI receivables can be gauged by examining Iollowing 4 Iinancial ratios-
1. Account Receivables Turn Over Ratio Annual Credit Sales
Avg Account Receivables


. Collection Period in Days . 365 .
Receivables Turn Over Ratio
3. Account Receivables to total assets
4. Account Receivables to sales
Also, percentage oI bad debts to sales can be used.
Problems:
Prob: Company A shows the Iollowing Iinancial data
s On 31.12.21 s on 31.12.22
Sales 4,, 5,3,
Total Assets 6,1, 6,7,
Account Receivables 6, 1,,
Account Receivables as on 1 Jan 1 were Rs 5,.
Solution:
Average Account Receivables Ior year 1 5 6, 55,

Average Account Receivables Ior year 6, 1,, 8,

Receivables Turnover Ratio Ior year 1 4,, 7.63
55,
Receivables Turnover Ratio Ior year 5,3, 6.65
8,
Collection Period in Days in 1 365 48
7.63

Collection Period in Days in 365 55
6.65

Account Receivables to total assets in 1 55, 9
6,1,
Account Receivables to total assets in 8, 1
6,7,


nalysis
Against 6 growth in sales there is 66 rise in receivables. This is a sure sign oI dumping.
Company B presents the Iollowing Iinancial data: -
s On 31.12.2001 s on 31.12.2002 Effect
Sales 9 1 33
Account Receivables 8 31 39 43 4
Bad Debts 3 3.33 35 .91 16
When we analyse the perIormance in percentage terms, we see that against 33 increase in
sales, there is 4 increase in account receivables which gives the impression oI dumping.
There is also an increase oI Rs 5 in bad debts.
However, when the data is analysed in absolute terms, sales have grown by Rs 3.
Taking a proIit percentage oI measly , proIit growth is Rs 6,. Increased account
receivables is Rs 11,. Even at a high capital cost oI , it means an increase oI Rs
,. Add to that additional bad debts oI Rs 5 and total cost is Rs ,7 against income
oI Rs 6. Thus, there is a net minimum gain oI Rs 3,3.
Invent ory
In order to check the health oI the inventory, we check two ratios
1. Inventory Turnover Ratio Cost oI Sales
Avg Inventory
(Please note that it is Cost of Sales and not Sales because sales includes profit margin which has no bearing
on inventory)

. Age oI Inventory . 365 .
Inv T/O Ratio

Company C gives Iollowing Iinancial data oI its perIormance -
s On 31.12.21 s on 31.12.22
Finished Goods 11, 17,
Cost oI Sales 73, 85,
As on Jan 1, 1, Iinished goods were Rs 8,.


Solution:

Avg inventory Ior year 1 8 11 95

Avg inventory Ior year 1117 14

Inventory Turnover Ratio in 1 73 7.68
95
Inventory Turnover Ratio in 1 85 6.7
14
Age oI Inventory in 1 365 47.5 days
7.68
Age oI Inventory in 365 6 days
6.7
Thus, inventory turnover has gone up by Irom 47.5 days to 6 days which is an increase oI
5. This will lead to increase in working capital requirement. Also some risk is associated
with higher inventory turnover iI it is low shelI liIe item but not much iI it is a standardised
product.


Date: 24 1ul 2
iquidity (ash) Management

Company B reports the Iollowing inIo Ior the year ended on 31 Dec 1.
Net Income 75
Depreciation 3
Interest Payment 14
Sale oI Fixed Assets
Payment oI debt principal 3
Dividends 9
Capex 8
Find iI company`s liquidity position is satisIactory.
Soluti on:
The Key to solving above problem is to Iirst Iind out the operating income and thereaIter
deduct the expenses Irom it.
Operating Income/ProIit
Net Income 75
Adjustments
Depreciation 3
Sale oI Fixed Assets () 1
Total 76
Add Back Interest Payment 14
Total Operating Income 9
Liabilities
Interest Payment 14
Payment oI Debt Principal 3
Dividend 9
Capital Expense 8
Total Liabilities 81

Cash Position aIter meeting the liabilities 9 81 9
Thus company will be leIt with Rs 9 aIter meeting all its liabilities. Now it is hard to
say iI this cash balance is adequate or not. One way to examine this is to check the historical
cash to sales ratio.


Cash holding oI the company depends upon the nature oI business, business model and
standing oI the company in the market. A company like Reliance can get away with Iar less
cash holding than most other companies as it can raise cash Irom banks and market
whenever required. Thus, adequacy oI cash is a completely subjective decision oI the
company`s management.
ROSE or ROSHE Return on Share Holders Equity.

W
PAT

1
4
4
4
4
8
W
IJESTMET
IJESTMET
SALES
SALES
PBT
PBT
PAT
L L L
TAX MKTG TURN OVER LEVERAGE
MGMT MGMT TO CAPTAL

Explanations
PAT ProIit aIter Tax
NW Net Worth
PBT ProIit BeIore Tax
Investment Net Worth or Shareholders Iunds Borrowed Funds.

PAT to PBT ratio is basically indicator oI tax management eIIiciency.
PBT to Sales ratio is the marketing department`s eIIiciency indicator.
Sales to Investment ratio is indicator oI eIIiciency oI capital utilisation
Investment to NW ratio indicates the leverage. How much loan has been taken against the
shareholders Iunds.

ROI
4
4
4
IJESTMET
SALES
SALES
PBT
L

ROI
I
S
S
C S
L

ROI Rate oI Margin L Turnover oI Capital

Thus, we see that ROI is dependent on two Iactors. One Rate oI Margin or proIit margin
on sales and Two Turnover oI capital. Both these are independent Iactors and aIIect the
ROI independently.

Now, let us compare Kamath Restaurants and the Five Star Hotels.


In case oI Kamath Restaurants, the is small investment. Business starts Irom early morning
and continues whole day till late in the night. Customers` visits are short and oIten tables are
shared by two or more unrelated customers. A single table could have been used by 5 or
even 1 people during the day. There is high turnover oI customers but the bills are small.
Margins are also very small. The business basically runs on volume oI customers.

A Iive star hotel require huge investment. Business starts late in the early aIternoon.
Becomes dull again in late aIternoon and picks up again in the night. Customers visits are
leisurely. One table is never shared by two diIIerent groups. A single table is rarely used by
more than 4 groups in a day. But bills are considerably larger. Thus, a Five Star Hotel
business runs on very heavy margins but less customer volume and capital turnover.

Managing ccount Recei vables
It is business Iact that most businesses run on credit.

II all the other Iactors are same, there are basically two ingredients oI a business success
story

1. Price
. Credit

While high amount oI credit is sure to increase the sales, it will also increase the cost
through increased working capital requirement besides higher bad debts. On the other hand,
though low credit will save cost due to low working capital cost, it will aIIect the sales.
Thus, there is a need to optimise the credit.

But why indulge in credit sales at all?

Credit sales are a way oI liIe in business world due to Iollowing reasons:

1. To be able to compete successIully in the market and get more sales.

. To win over shelI or dealer space. This is the strategy that was adopted by
Whirlpool in the initial years oI launch in 1996-97 to gain penetration in the market.
Being a multinational company, it was cash rich and could aIIord large credit line.
But once the product was established in the market and demand grew, credit line are
squeezed. Credit strategies are diIIerent during launch and growth phase.

The companies/product which have good 'MARKET MUSCLE generally oIIer less or nil
discount. Market Muscle means A well diIIerentiated and in-demand product. Product
demand is so good that shop keepers are Iorced by market dynamics to stock that product to
earn proIit. Nirma had once achieved that status.

Elements of redit Policy for Management of ccount Recei vabl es: -


1. Who to give credit? (Setting Credit Worthiness)
. How much credit to be given to each? (Setting Credit Limit Ior each customer)
3. For how long to give credit? (Declaring stated credit duration policy)
4. Discounts Ior early payment oI credit
5. Liberal credit to increase sales.

hecki ng redit Worthi ness -

(a) By checking past records oI old customers
(b) By obtaining Bank ReIerence Ior new customers. (This is not a very reliable
method since customer may have good relations with bank management).
(c) Check with other suppliers.
(d) Check Irom own old customers.
(e) From own sales people who have market intelligence through their Iriends
working Ior diIIerent companies.

Steps in Receivables Management -

(a) Formulate a well deIined billing cycle. Customer should be able to anticipate
when he is likely to get the bill. Phone Bills and Credit Card Bills are payable
always by the same date. Customer arranges Iinances in advance Ior payment
(b) Stamp Bill 'Pay By clearly.
(c) Indicate late payment penalty even though it is never levied.
(d) Bill big customers immediately.
(e) Carry out age analysis oI A/c Receivables customer-wise. This will make
customer credit rating easy.
(I) Start chasing customers Ior old dues payments
(g) Go Ior Bill Discounting (Sell your dues to another company/bank for a discounted
price. The company pays the amount due immediately and collects the dues from customer.
In case of default by the customer, you will need to pay back the company).
(h) Don`t allow credit to doubtIul customers. At least, reduce the credit period.
(i) Ask customers to pay when due. (In many case marketmen fight shy of reminding the
customer to pay because they work with those customer on personal relations basis. So,
those customers are not defaulting on company but on the sales person).

Problems:


Prob 1: lake company provides following data:
Current Annual Credit Sales 8,,
Collection Period Months
Terms Net 3 (Officialese for declaring credit period of 30
days)
Minimum Rate oI Return 15 (Opportunity cost oI Capital employed
Proposal oI Marketing Department
OIIer /1 Net 3 discount
5 customers will take advantage
Collection period should decline to
1.5 months

(OIIicialese Ior saying discount Ior payment
within 1 days)
Should the Marketing Department proposal be accepted? Why?
Solution:
Avg amount locked in credit sales beIore proposal months worth oI sales
Rs 8,, x
1
Rs 13,333,333
Avg amount in credit sales aIter the proposal Rs 13,333,333 5
Rs 1,,
Amount released Irom credit Rs 3,333,333
Working Capital Cost saved Rs 3,333,333 x 15
5,
Cost oI implementation oI proposal oI 5 oI sales
x ,,
4,
Net Gain by implementing the proposal 5, 4,
1,

Prob 2: ong orp gives following data:


Selling Price per Unit Rs 5/-
Variable Cost per Unit Rs /-
Fixed Cost per Unit Rs /-
Annual Credit Sales 6,, units
Collection Period 1 month
Returns 4
Proposal
Liberalise credit
Collection period
Sales Increase Expected
Bad Debt Increase

Months

Rs 9,
Please assess iI the credit period should be liberalised.
Solution:
dditi onal Earni ngs due to proposal
Increase in unit sales due to proposal x 6,,
1,
Increase in sales (Rs) due to proposal 1,, x Rs 3 (Contribution per unit Ior
additional units oI sales)
Rs 3,6,
ost of Implementi ng the Proposal
Additional Working Capital to be locked up due to increase in additional sales
MIg cost oI months oI additional sales
Additional Unit Sales x variable cost
6
1,, units x Rs /-
6

Rs 4,
Additional Cost incurred on existing WC due to increase in credit period by one month
5, units x Rs 5 x
Rs 5,
Additional Cost oI Capital Cost oI existing WC Ior one month Cost oI
Additional capital Ior two months


5, units x Rs 5 x ,4, x 4
5, 57,6
6,6
Cost oI bad debt 9,
Total cost oI proposal 1,5,6
Net Gain 3,6, - 1,5,6
,7,4


Date: 31 1ul
Prob 1: Ponds Ltd has annual sales oI 1, units at Rs 3 per unit. Tha variable cost is
Rs /-. Fixed cost amounts to Rs 3,,/- per annum. The present credit period is one
month. The company is considering proposal to increase credit period to months or 3
months and has made the Iollowing estimates: -
redit Policy Existing Proposed
(1 month) (2 months) (3 months)
Increase in Sales -- 15 3
oI bad debt 1 3 5
There will be increase in Iixed cost by Rs 5,/- iI the sales increase beyond 5 oI
present level. The company plans to earn pretax return oI on investement in account
receivables.
What should company do? Please advice.
Solution:
Credit Policy Existing Proposed
(1 month) (2 months)
(15" inc)
(3 months)
(3" inc)
(3 months)
(25" inc)
Sales 3,, 34,5, 39,, 37,5,
Number oI Units 1, 11,5 13, 1,5
Variable cost Rs ,, 3,, 6,, 5,,
Contribution/Gross Margin 1,, 11,5, 13,, 1,5,
Fixed Cost 3,, 3,, 3,5, 3,,
Net Contribution 7,, 8,5, 9,5, 9,5,
Avg Account Receivable
(Sales/1 months)
,5, 5,75, 9,75, 9,37,5
Investment in Receivables 3,,/1
1,91,667
6,,/6
4,33,333
9,5,/4
7,37,5
8,,/4
7,,
(a) Opportunity cost oI
capital oI investment
38,333 86,633 1,47, 1,4,
(b) Bad Debts (1,3,5 oI
sales)
3, 1,3,5 1,95, 1,77,5
Cost oI option (ab) 68,333 1,9,133 3,4,435 3,17,5
Net Gain Irom option - Net
Contribution cost oI policy
7,, -
68,333
6,31,667
8,5, -
1,9,133
6,59,867
9,5, -
3,4,435
6,7,515
9,5, -
3,17,5
6,3,5

From above analysis oI proIits, it is clear that increase in credit period Irom one month to
two months is beneIicial to the company. However, any Iurther increase in credit period is
counterproductive due to steep rise in opportunity cost oI capital as well as on account oI
bad debts.


Points to Ponder
1. II credit period is increased by one month, sale is increased by 15 only. Ideally, it
should have been to the extent oI or 5.
. For credit period increase by one month or two months, increase in bad debt rate
Irom one to 3 and 5 is not acceptable.
Prob 2: Company D classiIies its customers by risk ratings
ategory Uncollectable
mount
ollection
Period
redit Policy Increase in
nnual Sales
A 1 Days Unlimited Rs 5,,
B 4 4 Days Restricted Rs 5,,
C 18 7 Days Restricted Rs 7,,

Given proIit is average oI sales. Minimum rate oI rate on investment is 14.
Recommend should the company relax credit policy.

Solution:

ategory
Incremental Gross ProIit 5, x
1,,
7,, x
1,4,
Investment in A/c Receivables
(incremental)
(5,, x 4)/365
x 8 43,836
(7,, x 7)/365
x 8 1,7,397
Bad Debts on increased sales 4 oI 5,,
,
18 oI 7,,
1,6,
Opportunity Cost oI Capital
invested 14
14 oI 43,836
6,137
14 oI 1,7,397
15,36
Cost oI Policy , 6,137
6,137
1,6, 15,36
141,36
Net ProIit 1,, - 6,137
73,863
1,4, - 141,36
(1,36)

Thus, it is seen that iI restriction oI credit policy is removed Ior B category oI customers,
there is likelihood oI increased proIits oI Rs 73,863 per annum. However, restriction on
credit policy is recommended to be continued as any relaxation in policy is likely to lead to
losses.


Date: 21 ug 2
SE S1UDY: MPOUEEA1S

In September 1991, Mr. Marwari, the Credit Controller oI Ampouleagents, wrote to the
Sales Manager oI the Company requesting him to stop the supply oI Rs. 1.5 lacs worth oI
goods to Messrs. Pharmax Laboratories as many past dues Irom the party were yet to be
recovered.

Ampouleagents were suppliers oI ampoules and vials Ior injectibles manuIactured by the
pharmaceutical industry. It was a prosperous and growing company in a competitive
environment with its base and major market in Bombay. The Company was now having big
expansion plans with an eye Ior exports. The Sales Manager and the Managing Director
kept reminding everyone that 'we must consolidate our base in India beIore entering world
market.

Pharmax Laboratories was a Delhi based pharmaceutical company which the Sales Manager
oI Ampouleagents had recently converted into a customer aIter much wooing and persistent
eIIorts. This party represents a market worth about 15 Lacs per year and moreover the Sales
Manager Ielt that this would be the beginning to secure business Irom many more such
medium size pharmaceutical companies in Northern India.

The Credit Controller, Mr. Marwari, had consistently pointed out to the Sales Manager and
Managing Director that it is necessary to analyse the cost at which these new markets were
being pursued. In his most recent note he had written: 'In spite oI my many suggestions to
the contrary, I Iind that we are getting ready to dispatch goods worth Rs. 1.5 Lacs to
Pharmax Laboratories. I Iind that the party has an overtraded Iinancing pattern and does not
deserve any more credit. Our outstanding Irom the party are now overdue by more than six
months. I am also attaching some relevant Iigures which I hope will prove my point.

Discussion Areas: 1) Is Mr. Marwari making a mountain out oI a mole hill.
) Evaluate credit worthiness oI Pharmax Laboratories.

LNE $EET OF PRMXI ROTER$ s on 31.12.1990

Liabilities
Rs.
Lacs Assets
Rs.
Lacs
Equity Capital 11. Net Fixed Assets 1.53
Reserves 43. Investment .1
Term Loans 7.63
Raw Material
Inventory 46.69
Bank Borrowings 153.61 Work-in-progress 15.1
Deposits maturing 6.89
Finished goods
stocks 74.35
in one year Sundry 75.53 Goods in transit 5.76


Creditors
Other current Liabilities 1.48
Cash & Bank
Balances 3.
(including provisions) Sundry Debtors 81.48

Unsecured
Advances 3.56
Other current Assets 3.84

(including advance
tax)
Total 593.54 Total 593.54

oarsened Income $tatement for ear ending 31.12.1990

(Rs. In
lacs)
Sales 666.3
Material Cost 39.17
Employee Costs 17.41
Selling & General Administration 15.57
Interest 35.34
Depreciation 9.97
Investment Allowance .96
ProIit beIore Tax 57.88
Tax 34.73
ProIit aIter Tax 3.15

Note: Company maintained dividend at 1 Ior 199.

$LE$ TO ND OLLETION$ FROM PRMX LORTORIE$
Sales Outstanding

(Rs.
Lacs) (Rs. Lacs as on 1st Sept. 91)
February 91 and beIore .74 .18
March 91 .36 .36
April 91 . .
May 91 .64 .64
June 91 -- --
July 91 .85 .85
(No sales oI collection
since then up to Sept 91)
Total 4.81 4.5

Note: Up to July end 1991, Ampouleagents had registered total sales oI Rs. 57.9 lacs and
the outstanding as at July end stood at Rs. 18.19 lacs. It was normal practice oI
Ampouleagents to give 45 days credit.


Financial nalysis
Ampouleagents
1 Sales up to Jul 57.9 Lakh
Pharmax Contribution to Sales 4.81 Lakh 8.3
Growth Potential oI Sales to Pharmax 15
Outstanding oI Ampouleagent 18.19 Lakh
Outstanding with Pharmax 4.5 Lakh 3
Average Outstanding oI Ampouleagent . Months*
1

Outstanding with Pharmax 6 Months*

Aotes

verage Outstanding of mpouleagent 7 . 8
7
9 . 57

Average Outstanding Months .
7 . 8
19 . 18

Outstanding with Pharmax Lab
Total Outstanding 4.5 Lakhs
Average Monthly Sales to Pharmax Lab 687 .
7
4.81

Average Outstanding Months 6
687 .
5 . 4

(a) Current Ratio
s Liabilitie Current
Assets Current
..
..

9 .
378
35

Current Ratio should ideally be in the range oI 1.33 to 1.5. Thus, current ratio is bad
and the company is Iacing liquidity problems.
(b) Another thing which is evident Irom the balance sheet is that 54 oI the assets are
inventory which are the least liquid kind oI assets. Thus, company has poor
inventory control.
(c) Bank borrowing are short term loans which stand at 153 lakhs which is considered to
be quite high considering that Equity Reserves are only 144 Lakhs.


3. ash Position (iquidity)
PAT 3 Lakh
Depreciation 1 Lakh
Total 33 Lakh
Less - Div Payment 1 Lakh
Term Loan Repayment 1 Lakh - ( Lakh)
Balance Cash 13 Lakh
Considering that there are current liabilities worth 378 lakhs which are also to be satisIied,
company`s liquidity position is very bad and company is likely to deIault on some payment
obligations.
This is what the Iinancial analysis oI the Pharmax Lab tells us which is all gloomy. Going
purely by the Iinancial analysis, there is every reason to stop Iurther supplies to Pharmax
Lab.
Aow let us examine the issue f rom marketing perspective.
First some unwritten ground realities
Company is a North Indian Company. North Indian companies are traditionally hard
at paying debts. It is a universal truth.
Balance Sheet shows that Pharmax had an owing oI Rs 75.53 Lakhs against its total
purchases oI Rs 39.7 Lakhs.
Thus, Credit Payment period Months Months 4 8 . 3
7 . 39
53 . 75

It is clear that company has a history oI paying its dues in about 4 months. Major
part oI Ampouleagents dues are oI Jul vintage only (Rs .85 Lakhs) which as per Pharmax
payment philosophy are not due Ior payment yet (in Sep). Previous months` dues are just a
Iew thousand each.
Secondly, 9 oI the marketing works on relationship management. Pharmax Lab
being a new customer, marketing people were vary oI pushing the company too hard on
payment issue. Now, there is a need Ior marketing people to use their negotiation skills to
extract some payment Irom the company.
Company aspires to enter international market. International markets are Iar more
diIIicult than Indian markets. II the company is not careIul, it will lose all its money. So, iI
the company can not tackle the diIIicult clients in India, international trade will be
disastrous.
Pharmax Lab promises to be worth almost 15 oI the total sales market oI the
Ampouleagent which is considerably large pie to let go easily.


Marketing Deptt wants to use this big company as a mascot Ior approaching other
Pharma companies. Losing this client will be a serious set back Ior expansion plans in North
India.
II supplies are stopped, there is a risk that entire credit oI Rs 4.5 lakh may sink.
Considering all the above points, it may be worthwhile to continue the supplies but
with a tactIul thrust by Sales Deptt Ior recovery oI dues.


SE S1UDY
PRODU1 IAE PROFI1II1Y AYSIS

MMF Ltd. decided to analyse its selling and distribution costs Ior products A, B, and C and
arrive at product-wise proIit Iigures.

The income statement oI the company Ior the past year is at Iollows:

Sales 5,,
Cost oI sales ,5,
Gross proIit on sales ,7,
Selling and distribution costs
Salesmen`s salaries 4,5
Salesmen`s commission 7,5
Sales oIIice expenses 14,8
Advertising 65,
Warehouse 4,5
Packing and shiIting 5,6
Transportation & delivery 8,4
Credit and collections 4,1
Bad debits 9,4
1,63,81
General and administrative expense 41,5 ,5,6
Net ProIit 64,94

dditional Information:
Product Product Product

Sales 1,, 1,5, ,5,
Cost oI sales 55, 7, 1,5,
Salesmen`s salaries 8, 7, 9,5
Salesmen`s commission 11, 6, 1,5
Advertising () 6
Warehouse space occupied 1/3 1/3 1/3
Invoice lines (packing and shiIting) 1,5 ,5 3,
Transportation and delivery 5,5 6, 8,5
Average account receivable 15, 35, 5,
Bad Debits 1.8 1.5 1.7
Sales oIIice expenses: Allocated in the same ratio as packing and shiIting.
General and administrative expenses: Allocated on the basis oI sales.
Require: A product-wise P & L Account.


Profit and Loss $tatement
asis for llocation 1otal
Exp
Prod Prod Prod
Sales Direct 5,, 1,, 1,5, ,5,
Cost oI Sales Actuals ,5, 55, 7, 1,5,
Gross Margin Calculated ,7, 65, 8, 1,5,
Salesmen Salaries Actuals 4,5 8, 7, 9,5
Salesmen Comm
n
Actuals 7,5 11, , 1,5
Sales OIIice Exp Invoice Lines
(15:5:3)
148 3,171 5,28 6343
Advertising 1:1:3 65 13, 13, 39,
Warehousing 1/3:1/3:1/3 4,5 1,5 1,5 1,5
Pack & Shipping 15:5:3 5,6 1, , ,4
Transport and
Delivery
55:6:85 8,4 ,31 ,5 3,57
Credit and
Collections
A/c Outstandings
15:35:5
4,1 615 1,435 ,5
Bad Debts 16:5:45 9,41 ,345 ,4 4,613
Total 1,63,81 43,141 41,183 79,436
General Admin Sales 1:15:5 41,5 9,519 11,899 19,83
Total Costs ,5,6 5,66 53,8 99,38
Net ProIit 64,94 11,97 6,537 7,16

The Key` to solving this question is to Iind the correct Iigures. In many cases, the total that
is given in summary oI expenses in Exhibit II does not match with break-up given in other
two exhibit. Whenever such a situation occurs, use the detailed break-up as ratio and
distribute the expenditure given in same proportion.

nalysis

Analysis oI above table indicates that Product B is most proIitable since a proIit oI
Rs 6,537 is earned through a sale oI Rs 1,5, which is 17.7 oI sales. Product C which
is second most proIitable gives a net proIit oI Rs 7,16, which though numerically
marginally higher than Product B proIit, comes Irom a sale oI Rs 5,.

The heads that have resulted in less than optimum proIit Ior Products A and B are Salesmen
Salary and Commissions. Similarly, excessive advertisement expense has resulted in poor
proIit margins Ior product C. However, it is hard to comment whether these excess
expenditures on salesmen`s salaries, commissions and advertising are unjustiIied. It is quite
possible that nature oI product and market may have necessitated such expenses.


SE S1UDY: OO IADI 1D.

Early in 1984, Mr. Lingnath, the General Manager oI Cool India Ltd. called a meeting oI the
controller and the Far Eastern Zone Manager to discuss what action he should take with
regard to the Far Eastern Zone in which the company had been incurring losses Irom, year
to year.

Cool India is one oI the Iast coming up companies in India in the Iield oI Industrial
accessories. The technical nature oI the product line requires substantial promotion eIIort by
the company`s salesmen, besides the amount spent on advertising and promotion. In view oI
the importance oI eIIective marketing, right Irom the beginning the Indian market has been
divided into 4 zones: Southern, North-Western, Mid Central, and Far Eastern and each zone
is placed under the charge oI a zonal manager who is given complete Ireedom on regard to
operations and who is responsible Ior the entire range oI marketing operations in his
territory i.e. receiving goods Irom the company`s plant, warehousing, sales promotion, sales
control, delivery and ROL oI the division.

The company`s manuIacturing is located at Fridabad where Irom the stocks are supplied to
zonal warehouse as per requirements. The zonal managers are required to sell the product at
uniIorm prices in all the territories and maintain stocks in warehouses so as to ensure an
inventory turnover oI at least 4 times. Likewise he should ensure that the receivables turn
every 3 days.

IN view oI the rising price level, the market value today oI the warehouse building is
considered equal to their original gross book value and the market value oI warehouse
equipment and delivery truck is estimated to be one halI oI their original book value.

Mr. Lingnath observed that the Far Eastern Zone could not make any progress in
eliminating the losses and iI that zone was to continue its operations it would be a drain on
the resources generated by other divisions. The company`s investment in the Far Eastern
division was producing a negative return oI over 1 per year which Iacts greatly disturbed
Mr. Lingnath Ior reason that a losing division not only eats away other divisions` proIits but
also corrodes its own investment. He thereIore asked the committee whether as a strategy
the company should attempt divestment in Far Eastern Zone reducing the volume oI
operations OR seek expansion and sink possibly additional investment, so as to salvage the
zone. In any case, he said, the present state oI aIIairs should not continue.


E-9
ool India Ltd.
$elling $tatistics for ear ending Dec.31, 1983

Southern
Zone
Aorth
Western
Zone
Mid entral
Zone
Far Eastern
Zone
(Rs.) (Rs.) (Rs.) (Rs.)
No. oI salesmen 36 3 15
Avg. sales per salesman ,, ,15, ,18,75 ,66,666
Avg. direct selling,
advertising & promotion
expenses Ior salesmen

13,

14,6

13,8

18,3
Avg. no. oI calls per customer
per month (according to
customer annual sales
volume)
Rs.
-,
,1 4,
4,1 6,
61 8,
over 8,1

1
1.8
.9
5
5.

.6
1.6
.8
4.3
5.

1
1
.7
4.1
5.1

.5
1.4

3.
5.1


E-9

ool India Ltd.

Deliver Expenses and $tatistics for ear ending December 31, 1983

$outhern
Zone
North
estern
Zone
Mid
entral
Zone
Far Eastern
Zone
(Rs.) (Rs.) (Rs.) (Rs.)
Truck Drivers 1,6, 3 1,,
Drivers` Assistant 54 3
Depreciation oI
trucks(5)
1,5, , 3, 1,,
Gas, oil & supplies 56, 4, 6, 49,
Taxes, Insurance &
Licence
3, 3, 5, 18,
Repairs &
Maintenance
44, 6, 8, 34,
Freight out ,8, 3,3,
Total 4,87, 3,1, 4,9, 3,71,
No. oI trucks 15 3 1
Avg. annual miles
per truck
8, 1, 1,6 ,
Avg. no. oI daily
deliveries per truck
1 16 15 8
Avg. value oI order
delivered
83.3 1 15 86.75


E-9 V

ool India Ltd.
arehouse Expenses for ear ending December 31, 1983

Southern
Zone
North
Western
Zone
Mid Central
Zone
Far Eastern
Zone
(Rs.) (Rs.) (Rs.) (Rs.)
(square Ieet) (4,) (3,3) (5,) (4,)
Variable expenses ( with
sales)

Salaries oI storekeepers
and mineral handlers
8, 51, 99, 83,
Fixed Expenses
Depreciation oI equipment
(1)
8, 7, 9,1 7,8
Depreciation oI
warehouse ()
6, 5,4 7,5 6,3
Supervision 15, 1,8 17,4 15,4
Clerical 1, 6,3 1,6 1,
Utilities 5, 3,9 5, 5,
Taxes & Insurance 4, 3,8 5,1 4,9
Repairs and maintenance 14, 6,4 17,4 9,3
Supplies & Misc. 1, 8, 9,9 7,1
Total 1,5, 1,5, 1,83, 1,5,


E-9 V

ool India Ltd.
arehouse Expenses for ear ending December 31, 1983
Southern Zone Northern Zone Mid Central Zone Far Eastern Zone

Amoun9
(Rs)
% of
sales
Amoun9
(Rs)
% of
sales
Amoun9
(Rs)
% of
sales
Amoun9
(Rs)
% of
sales
Sales un9s 14,000 5,620 10,800 6,000
Marke9 Sare
10.5 10.1 11 8.7
Sales value 72,00,000 100 43,00,000 100 70,00,000 100 40,00,000 100
Cos9 of sales 46,80,000 65 30,10,000 70 50,40,000 72 32,00,000 80
26,20,000 35 12,90,000 30 19,60,000 28 8,00,000 20
Drec9 9err9ory
E5enses:
Sellng(Salares only)
3,32,000 4.6 1,88,000 4.3 3,20,000 4.6 1,80,000 4.5
Delvery 4,87,000 6.7 3,01,000 7 4,29,000 6.1 3,71,000 9.3
Wareousng 1,52,000 2.1 1,05,000 2.5 1,83,000 2.6 1,50,000 3.7
Drec9
Drec9 Adver9sng & Sales
5romo9on
1,37,000 1.9 1,05,000 2.5 1,20,000 1.7 95,000 2.4
Offce (fed) 90,000 1.2 72,000 1.6 83,000 1.2 70,000 1.8
11,98,000 16.5 7,71,000 17.9 11,35,000 16.2 8,66,000 21.7
Alloca9ed sellng & Admn
e5enses of sales
2,88,000 4 1,72,000 4 2,80,000 4 1,60,000 4

Margn -efore alloca9ed
sellng & Admns9ra9ve
e5enses
13,22,000 18.5 5,19,000 12.1 8,25,000 11.8 66000 -1.7

P/L -efore ncome 9a
10,34,000 14.5 3,47,000 8.1 5,45,000 7.8 2,26,000 -2.3


Solution:

Sales 4,,
Cost oI Sales 3,,
Contribution/margin 8,,
Other Expenses 8,66,
Net Loss 66,
Add : Depreciation
Trucks 1,,
Equipment 7,8
Ware House 6,3 1,34,
Operating ProIit 68,

We see that while the region is running into net loss, it is still generating gross proIit. As a
policy, don`t drop a product or region as long as operating proIit are in positive. Since Iixed
costs are beyond the control oI manager and recovery on their sale may entail heavy losses,
it is worthwhile normally to continue the business and try and revive it by improving the
operating eIIiciencies and cost management exercises.

Micro analysis oI the Iinancial data indicates that: -

1. Cost oI sales 8 oI sales which is the highest in all the regions. High cost oI
sales could be due to inappropriate product mix in the region. ProIit margins on all
the products oI the same company are never the same. ProIit margins are Iunction oI
market Iorces. It is responsibility oI the management to employ more thrust on
higher proIit margin product and thus change product mix to ensure higher margins
even while sales do not improve. Second reason Ior higher cost oI sales could be due
to higher transportation cost Irom works in Faridabad to Warehouses in Far Eastern
Region since the distance is large compared to other regions (Delivery expenses are for
moving the items from warehouse to customers premises. Prior to that there are transportation
expenses involved in moving the items from works to warehouses which has been clubbed with cost of
sales). This Iactor is beyond the control oI Regional Managers or even company`s
control unless company adopts diIIerential pricing norms Ior diIIerent regions.
(Company currently has a policy of uniform pricing all over India).
. Far Eastern Region consists oI seven north eastern states. Individual Iigures oI sales
in each oI states are not given. It may be necessary to check iI sales in any states are
too low. It may be useIul to appoint strengthen distribution network in those states
by appointing distributors and C&F agents.
3. Delivery expenses in FE region are over 9 oI sales compared to 6-7 in other
regions. It is recognised that FE regions have hilly terrain and are less densely
populated and thereIore delivery costs ought to be high there. However, Iigures
indicate suIIicient scope Ior Iine tuning delivery system which would result in
substantial savings in Iuel and operating cost oI trucks. II reorganisation oI delivery
system can result in reduction oI one truck and improve Iuel eIIiciency marginally,
proIits can improve by as much as Rs 35,.


4. Possibility oI outsourcing the delivery system was also examined. Two things were
highlighted during discussions. First, private distribution system in Far Eastern
Region is not much developed and thereIore unlikely to be cost eIIective. Secondly,
cost oI outsourcing is comparable in Western and Mid Central sectors with Southern
Sector which has its own delivery system. ThereIore, worthwhile savings are
unlikely to be accrued by outsourcing.
5. Another high cost area is Warehousing. Following issues were highlighted: -
(a) The warehouse is too large to meet current requirements. For a sale oI Rs 4
lakh, it has 4 sqm area which is same as southern region with 8 more
sales. A smaller warehouse would save on capital cost. However, in could be
a long term investment to cater Ior growth oI business.
(b) Despite handling 8 less stores, salaries oI storekeepers and mineral
handlers is 4 higher than southern zone. StaII requires to be trimmed.
(c) Similarly, clerical and supervisory are very high and need to be curtailed.
What we have seen so Iar is control oI expenses which in case has a limit. Another way, and
that too more eIIective, is to increase sales.

Analysis oI exhibit II reveals that there are only 15 salesmen and sales per salesman
are highest in the region. It is clearly stated in case study that the technical nature oI the
product line requires substantial promotion eIIort by the company`s salesmen, besides the
amount spent on advertising and promotion. It seems that low number oI salesmen is
aIIecting sales in the region, which is also borne out oI Iacts that FE Zone has lowest market
share among all zones as well as lowest number oI avg calls per customer. Increasing
number oI salesmen is likely to increase the sales and any Iurther increase in sales is likely
to have higher contribution.

On the whole, even though Far Eastern Region is incurring losses at present, there does not
seem to be any requirement to close the operations due to Iollowing reasons: -

1. Zone has positive operating proIits and as a rule, operations should not be terminated
till operating proIits are positive. (When there is net loss but contributions and operating
profits are positive, it means that though selling price is higher than variable cost, fixed costs are
very high leading to losses. Since fixed costs have already been taken care of, increased sales will
increase contribution and losses will be wiped out. However, when operating profits are negative, it
means that selling price is lower than even variable cost and any increase in sales will increase the
losses. Situation then is beyond redemption and it is prudent to close the operations).

. There are enough prospects to improve the proIitability oI the zone, both by
controlling expenses and by increasing sales and altering product mix.


Prob: A company plans to supply its products to ultimate consumer through wholesaler,
retailer or directly. The objective is to maximise sales, earn better prices and better proIits.
Advice manager as to which distribution channel to adopt Irom Iollowing inIo: -

Direct (I) Retailer (II) Wholesaler (III)
Unit Selling Price Rs 18 Rs 16 Rs 13
Estimated Unit sales 9,, 8,5, 8,5,
Selling and Distribution Cost per
unit
Rs .5 Rs Rs 1.8
Cost oI Production Rs 3
Fixed Cost Rs 6,,

Please also explain which other Iactors you will consider.

Solution:

Sales 1,6,, 1,36,, 1,7,5,
Variable Cost 3 7,, 5,5, 4,75,
Selling and Distribution Cost ,5, 17,, 14,85,
Operating ProIit 1,1,5, 93,5, 67,65,
Fixed Cost 6,, 6,, 6,,
Net ProIit 1,6,5, 87,5, 61,65,

Another way oI solving the same problem is by calculating the unit contribution and then
Iinding proIits.

Per Unit Cost oI Production 3 3 3
Per Unit Selling & Distribution Cost .5 1.8
Per Unit Variable cost 5.5 5 4.8
Per Unit Selling Price 18 16 13
Per Unit Contribution 1.5 11 8.
Total Contribution 1,1,5, 93,5, 67,65,
Less: Fixed Cost 6,, 6,, 6,,
ProIits 1,6,5, 87,5, 61,65,

Other Iactors which need to be considered while taking the decision are

1. Resources vailable Having own selling and distribution network is capital as
well as manpower intensive exercise. S&D network would probably require more
resources as well time, energy, attention and manpower than required Ior production.
Thus, availability oI resources is major criteria.

. Nature of Products Nature oI product plays very important part on intensity oI
selling and distribution operations. The S&D chain oI a product with limited shelI


liIe, like milk and newspaper, is Iar more vigorous, complex and sensitive to
administer than say Cars. Again, the mechanics oI distribution oI milk and
newspaper, which are daily purchase and consumed items, are Iar diIIerent Irom
items which are consumed daily but purchased at little longer intervals, like soap.
Having own distribution network (without the help of that friendly neighbourhood
Kiranawala) Ior such items is literally impossible.


Date: 4 Sep 2

MRKE1IA ROI

Marketing ROI is deIined as relationship between marketing net proIit and capital
employed/investment Ior marketing operations (it is expressed as percentage/ratio).

There are basically two kind oI investments in marketing: -
(a) Working Capital Investments in Iinished goods inventory and receivables.
(b) Investments in Fixed Assets Ior marketing purposes, like sales oIIice,
delivery logistics (Trucks, vans, etc), oIIice equipments, etc.
Let us see how is marketing ROI diIIerent Irom business ROI.
SAo 1otal Mktg Deptt
1. Capital Employed in Fixed Assets 1 1
. Working Capital Employed 1 6
Total 7
3. Sales 4 4
4. Cost oI Sales (as pre transfer pricing) 3 35
5. Gross Margin/ProIit 1 5
6. Operations Cost 4 3
7. Finance Charge/Interest/Opportunity Cost 7
8. Net ProIit 4
9. ROI
4
2"
7
6
28."

Role of ROI in Sales Management
How is a Sales Manager's performance evaluated?
It can be done by measuring his perIormance vis a vis target in terms oI volume or value.
But what iI he has achieved his target by giving huge discounts to dealers which aIIected the
proIitability oI marketing operations or increased bad debts enormously. So, achievement oI
targets in terms oI volume or value are not authentic measures oI perIormance oI a Sales
Manager)
To overcome such problems, proIit targets are set Ior the sales managers. Now iI we have to
compare perIormance oI two Sales Managers who have both achieved their respective
targets, what should be the basis?
Suppose there are two managers Mr 'A and Mr 'B who have both achieved equal sales.
How do we determine who is more eIIicient?


Manager " Manager "
Maintained low inventory levels and
ensured customer satisIaction by better
inventory review and Iorecasting and thus
incurred low working capital costs
Maintained high inventory level to ensure
customer satisIaction but had to incur high
Working Capital costs.
Ensured quick receivables collection and
kept working capital requirements and costs
low.
Allowed longer credit period to push sales
and thus blocked substantial amount oI
working capital.

Now, despite the two managers being equal in terms oI sales and proIit generated, Manager
'B has earned same proIit as Manager 'A by much higher investment in marketing eIIort.
Thus, Manager 'A is more eIIicient than Manager 'B. Thus, even net proIit is not the
correct measure Ior evaluating Marketing Manager`s perIormance.
Next method that is employed now a days is ROI concept. ROI deals with the question
'How much proIits Ior how much investment? What is the rate oI return Ior each Rupee
invested in business? In marketing ROI, it means Iinding out the rate oI return Ior each
Rupee invested in marketing activity.
Functions/Role of Sales Manager
There are three primary Iunctions: -
1. Manage Product Mix (We have discussed about impact of product mix on profitability on
page 30. We will discuss this issue again and in greater detail with the help of a numerical problem a
little later).
. ontrol Field ost like travelling expenses, communication expenses, bonus,
commission, stationery expenses, oIIice expenses, etc.
3. Sales Management Sales Management covers entire gamut oI sales exercise. It
covers: -
(a) Recruit, Train and retain sales team.
(b) Allocate territories to sales people.
(c) Prepare route plans Ior sales people to ensure that entire territory is covered
on a regular basis.
(d) Allocate targets and quota Ior each salesman.
(e) PerIormance evaluation oI sales people.
(I) Collect receivables.
(g) Manage Iinished goods inventory.
(h) Plan and launch sales promotion activities.


Now
employed Assets
profit et
ROI
employed Assets
Sales
Sales
profit et
ROI L
ratio over Turn profit of Rate ROI L
Let us revisit the two managers whose perIormance we examined earlier. They both have
earned a proIit oI 1 on their sales oI Rs 1 Lakh. But, while Manager 'A had an average
investment on inventory and receivables oI Rs 3 Lakhs, Manager 'B had an average
investment oI Rs 4 Lakh. Thus, turn over ratios Ior 'A and 'B were 4 and 3 respectively.
Now, ratio over Turn profit of Rate ROI L
Manager 'A 1 x 4 4
Manager 'B 1 x 3 3
Thus, we see that despite achieving equal sales and having equal proIit margin on products
sold, Manager 'A has perIormed better due to utilisation oI lesser resources in terms oI
working capital employed. The Return on Investment in his case is 4 against 3 oI
Manager 'B.
Problems
Prob 1. Sales Rs 1,,
Net ProIit Rs 8,
Assets Rs 5,,
Liabilities
Current Rs ,,
Capital Rs ,,
Retained Earnings Rs 1,, Rs 5,,
Total Investment Capital Retained Earnings
,, 1,, Rs 3,,
67 . 6
, , 3
, , 1
, , 1
, 8
L ROI
Prob 2. ProIits Rs 1,,
Sales Rs 1,,
Assets Rs 5,,

, , 5
, , 1
, , 1
, , 1
L ROI


Suppose that the Sales Manager was able to bring down the Working Capital invested to Rs
4,, Irom 5 lakhs. What will be impact on ROI?
5
, , 4
, , 1
, , 1
, , 1
L ROI
Thus, we see that ROI has improved to 5 because oI reduction in
assets.
Prob 3: Sales 1,,
Factory Costs 7,, 3,,
Direct Expenses
Salary & Fringe BeneIits 1,1,
Travel & Entertainment 8,
Field OIIice 1, 1,5,
Operating ProIit 1,5,
Capital Employed
Receivables ,1,
Finished Goods Inventory 1,, 4,,
5 . 37
, , 4
, , 1
, , 1
, 5 , 1
L ROI
ase I -
Sales increase by ,,
Rate oI proIit 15
Capital employed 4,,
45
, , 4
, , 1
, , 1
, 8 , 1
L ROI
ase II -
Sales increase by ,,
Rate oI proIit 15
Capital employed 3,,
6
, , 3
, , 1
, , 1
, 8 , 1
L ROI


Rate of profit is affected b following factors: -
(i) Sales Volume (Economies oI scale)
(ii) Price
(iii) Product Mix
(iv) Field Expense
(v) Cost oI goods sold
(vi) Marketing Expenses
(vii) Administrative Expenses
Problem This problem will demonstrate how product mix impacts the proIits.
Given below is budgeted and achieved data a company manuIacturing three products
A, B and C.
SAo 1otal
1. Gross ProIit 4 3
. Budgeted Sales 5 3 1,
3. Budgeted Gross Margin
(1) x ()
5 x 4

x
4
3 x 3
9
33
4. Actual Sales 1 5 4 1,
(as budgeted)
5. Actual Gross Margin 4 1 1 6

What we see Irom above is that though the Actual Sales were same as budgeted, proIits
have reduced Irom budgeted 33 to 6. That is because, the sales oI higher proIit product
Viz A were replaced by low proIit 'B and 'C sales.

Other Effects of Deviations from udgeted Product Mix

Large deviations Irom budgeted product mix can lead to various other complications besides
aIIecting the proIits. Production schedules are drawn on the basis oI product mix estimates.
Purchase indents Ior raw material are raised accordingly. When product mix changes, and
there is sudden rise in demand Ior any product, entire production schedule gets upset. There
is shortage oI raw material Ior that product and according distress purchase oI same. On the
other hand, there is pile up oI inventory oI Iinished goods and raw material oI other item
consuming space and capital. Panic sets in purchase, production departments and even in the
sales department because oI uncertainty about delivery oI orders.Thus, while there is loss oI
proIit on the sales Iront, there is loss at production and purchase end as well.

There are situations (especially in capital goods like large machinery, etc) where the
company keeps its schedule but customer Iails to take the delivery and requests Ior delayed
supply. Typically what happens is that project gets delayed due to various reasons (almost
regularly in govt contracts) and then customer makes a request to delay the supply. Such
requests block the Iund Ilow (orders are executed on the basis of small advance only). Large capital
invested in manuIacturing the machine is blocked and incurs Iinance charges. At the same
time, there could be paucity oI space to store the machine and overheads on maintaining the


machine is good condition till delivery. Sales Department thus is required to not only obtain
the order but also keep tab on progress oI project to insure against such eventualities.

Problem - Sales 1,,
ProIits 1,5, 15
Assets Employed 4,, TO Ratio .5
ROI 37.5

Proposal from Sales Department
Increase sales by ,, by going to new markets or selling through new distribution
channels. Because oI extra eIIorts, proIits (marginal) will be 1 on additional sales (not
15). Marginal investment in receivables and Iinished goods inventory will be Rs 1,,.
Should the proposal be accepted.

ROI oI additional investment proposal Rate oI ProIit x Turn over ratio
1 x ,, / 1,,

Consolidated ROI aIter implementing the proposal

34
, , 5
, , 1
, , 1
, 7 , 1
L ROI

It is evident that the ROI is going down aIter the new investment. However, any decision
based on percentages and ratios alone should be avoided.

Purpose oI business is to earn proIits. ThereIore, litmus test oI any business proposal is
'Will this proposal increase my proIits? All the ratios have been designed to explore this
basic Iact. In the present case, Even though the ROI has gone down, additional sales have
positive contribution and net proIits have increased Irom Rs 1,5, to Rs 1,7,. And
any proposal which increases the net proIits should be acceptable (provided there is no better
proposal. And mind the word 'AE1` here. This word has a wide connotation and encompasses not only
monetary profits but other forms of profit as well. It does not cover only todays profits but also takes into
account its effect on tomorrows profits. It does not only take its effect on current business but also its effect on
groups other businesses).

Secondly, returns on investment in any new market are bound to be low in the beginning
(even negative in most cases). Returns improve over the time. So, there is every chance that ROI
in new market will match the existing market in due course.

Thus, on both the counts, proposal merits acceptance.

Evaluating a Sales Representative Performance

1. "uantitative Parameters
(a) Sales Volume/Value


(b) ProIit Generated/PV Ratio
(c) Field Expenses
(d) Calls made on clients
(e) Productive Calls Closure oI sales achieved
(I) No oI Orders
(g) Avg Value oI orders Size oI order aIIects proIitability since there is a Iixed
cost involved in processing the order. So, larger the order size, lesser per unit
Iixed cost oI order processing
(h) Market Share
(i) Cost to Sales ratio Product Mix achieved
(j) Receivables Management/Days outstanding
(k) Customer complaints
(l) New Customers

. "ualitative Factors
(a) Product Knowledge
(b) Market Knowledge
(c) Reporting (daily, weekly, monthly)
(d) Market InIormation
(e) Customer Relationships
(I) Handling promotion material/product display
3. Personality Factors
(a) Attitude to work
(b) Motivation/Energy level
(c) Personal Hygiene
(d) Communication Skills


Problem : (From BK Chatterjee Book) Evaluate the perIormance oI Salesmen A, B and C Irom the Iollowing data: -
SAo riteria for
Evaluation
W
e
i
g
h
t
a
g
e

A
o
r
m
s

onus Points chievements

A
c
h
i
e
v
e
d

S
c
o
r
e

W
e
i
g
h
t
e
d

S
c
o
r
e

A
c
h
i
e
v
e
d

S
c
o
r
e

W
e
i
g
h
t
e
d

S
c
o
r
e

A
c
h
i
e
v
e
d

S
c
o
r
e

W
e
i
g
h
t
e
d

S
c
o
r
e

1. Market Share 3 5 1 Ior every 5 deviation 35 8 4 5 15 4 9 7
. Value oI Orders 15 1 L 1 Ior every 1 Lakh deviation 8 L 4 6 11 L 7 15 9 L 5 75
3. Avg Value per order 1 5 K 1 Ior every 1 K deviation 7 K 6 6 K 5 5 K 5 5
4. Sales Value 1 1 Ior every 1 Lakh deviation 9 L 5 5 1 L 6 6 13 L 9 9
5. PV Ratio 15 4 1 Ior every 5 deviation 35 5 75 3 4 6 4 6 9
6. Marketing ROI 1 Ior every 5 deviation 7 7 14 1 4 8 3 8 16
Total 635 55 735

Basic Score Ior achieving the norm 6 points
Max Score in any one discipline - 1 Points
nalysis
1. A is an Avg perIormer, B is weak and C is Star perIormer.
. B has exceeded his target Ior value oI targets. But he has obtained too many small orders. Also his product mix was poor
which led to his below avg perIormance. He is also poor in collection oI receivables. He needs to be trained.
3. A has Iailed to achieve his target in terms oI value oI orders. His product mix is also inappropriate. Though his perIormance is
satisIactory, he needs training in these areas.
4. Though C is a Star perIormer, even he needs training in the Iield oI sales closure and size oI orders.


Date: 11 Sep 2
RE1URA OA PROMO1IOA IAJES1MEA1
Problem:
Modern Pharmaceuticals has Iive product lines. All advertisings expenses are Iirst
divided in to direct and indirect. Only directly allocable promotional expenses are traced Ior
each product. Contribution margin and sales Ior each product is given as Iollows.
Product

Expense
1 3 4 5
$ales 35 5 15 175 1
ontribution
Margin
4 5 6 3 45

Expense Head

Product
Advertising
(Direct)
Sampling
(Direct)
Detailing
Allocated on
time basis
Total
1 4 1 14 8
2 6 3 5 14
3 3 4 16 3
4 5 5 5 15
5 7 8 5

Find, which product gives maximum return on promotional investment.
Solution:
Product

Expense
1 2 3 4 5
$ales 35 5 15 175 1
ontribution
Margin
4 5 6 3 45
ontribution
Margin in Rs
14 11.5 9 5.5 45
ontribution net of
Promo Expense
14-8
112
11.5 14
98.5
9 3
67
5.5 15
37.5
45
25


Expense Head

Product
A
d
v
e
r
t
i
s
i
n
g

(
D
i
r
e
c
t
)

S
a
m
p
l
i
n
g

(
D
i
r
e
c
t
)

D
e
t
a
i
l
i
n
g

A
l
l
o
c
a
t
e
d

o
n

t
i
m
e

b
a
s
i
s

T
o
t
a
l

S
a
l
e
s

p
e
r

R
e

o
I

p
r
o
m
o

C
o
n
t
r
i
b
u
t
i
o
n

M
a
r
g
i
n

p
e
r

R
e

o
I

P
r
o
m
o

1 4 1 14 8 35/8 12.5 11/8 4
6 3 5 14 5/14 16 98.5/14 7.03
3 3 4 16 3 15/3 6.5 67/3 2.91
4 5 5 5 15 175/15 11.66 37.5/15 2.5
5 7 8 5 1/ 5 5/ 1.25

From above Iigures it is evident that product has highest sales per rupee oI promotion
expense. Same product also has highest contribution margin per Re oI promotion. While in
this case, same product tops both the tests, it may not always be the case. In case two ratios
are not in agreement, decision should be taken based on contribution margin per Re oI
promotion which is the true measure oI proIitability and not stand alone Sales.
Another issue which attracts our attention here is about taking allocated costs into account
while calculating proIitability oI each product line. During the case study on Cool India Ltd
on page 3 it was stated that Iixed costs and allocable expenses are be not to be considered
while taking decision, where as in the instant case we have taken allocated expenses in to
account. The reason is that we need to take all RELEVANT expenses into account while
taking any decisions. In the instant case, though Detailing expenses are allocated expenses,
they are directly related to the product. These expenses can be saved iI so desired, but at the
cost oI losing sales. In case oI Cool India case, Iixed expenses were a legacy leIt behind by
earlier management, and allocated expenses were Head OIIice expenses which would have
continued even iI operations oI Far Eastern Region had been wound up. So, your decision to
wound up or otherwise had no bearing on HO expenses. Thus, to reiterate, while taking
management decisions, take all relevant expenses in to account no matter whether they are
Iixed, variable, direct or allocated. A thumb rule that can be Iollowed is that any expense
that will be aIIected by your decision is to be considered. An expense that will not be
aIIected by your decision is not to be considered.


SE S1UDY :OOKWE E"UIPMEA1 IMI1ED
The Cookwell Equipment Company Limited sells two distinct lines oI kitchenware, one to
the restaurants and one to retail stores. Restaurants sales are made to distributors and stores
sales through company salesmen.

The company has been successIul and is operating at Iull capacity. However, its cash
position is very tight and thereIore it will not be able to construct an additional plant to meet
the increasing demand Ior its products.

The company has rented Ior a two year period additional space adjacent to its present
Iactory. The rental expenses is included among the allocated costs in Exhibit 1, this space is
adequate to permit a percent sales expansion in either oI the restaurant line or the retail
line. Either line could absorb the added Iactory output without requiring any additional sales
eIIort.

The average price per unit in the restaurant line is Rs./- and in the retail line Rs.5/-. The
restaurant products are packed at the plant and the packing costs are included in the cost oI
sales. The retail items are packed at the warehouse.

You are requested to review the data contained in Exhibit I and suggest the product line to
be expanded.

In the course oI your examination oI the company`s income statement, you discover the
Iollowing additional inIormation.

1. II the rented space is to be devoted to restaurant products no additional trucks will be
required. However, present truck running time will have to be increased by 18. The
additional 1 running time will require proportionate overtime payment to truck
drivers, at time and a halI.
. From the allocated selling and administrative expenses, you will Iind the Iollowing:
(a) Variable billing costs are estimated at 4 paise on invoice. The average value
oI an invoice to restaurant customers is Rs.5/- and to retail customer
Rs.1/-
(b) Advertising includes counter displays Ior the retail line which amounts to one
percent oI sales.
(c) Variable shipping salaries at the warehouses are equal to 8 paise per unit Ior
restaurant products and 5 paise per unit Ior retail products. Warehouse
packing costs (including cartons) amount to 4 paise per unit.


OOKELL EQUIPMENT LTD
Income Statement Ior the year ended December 31, 199.
Restaurant Line Retail Line Total
Sales 1,8, 1,7, 3,5,
ost of $ales
Materials 4, 3, 7,
Labour 3, 4, 54,
Variable overheads , 5, 45,
Fixed Overheades 7, 1, 48,
Total 1,170,000 1,020,000 2,190,000
Gross ProIit 63, 68, 31,
( oI Sales) (35.) (4.) (37.4)
Less: Selling & Admn. Exp
Direct:
Salesman's Commission 136, 136,
Salesman's travel & E`tainment 85, 85,
Truck depreciation 14,4 14,4
Insurance & Licences
Truck driver's salaries 65, 65,
Truck garage rental 3,6 3,6
Gasoline & other truck supplies 8, 8,
Commissions to distributors 18, 18,
Freights 6, 6, 68,
Bad Debts 4,5 6, 1,5
Total Direct 301,500 289,000 590,500
llocated
Warehouse (basis oI space) 4, 8, 1,
Selling (sales) 48, 3, 8,
Advertising (sales) 36, 4, 6,
Adminstrative (sales) 54, 36, 9,
Total llocated 178, 17, 35,
Total selling & admin 479, 461, 94,
ProIit beIore Income Taxes 15, 19, 369,
( oI Sales) (8.4) (1.9) (1.9)

apital emploed
Variable:
Average monthly cash 7, 48, 1,
Average monthly inventories 1, 4, 36,
Average monthly receivable 16, 184, 346,
Total 354, 47, 86,
Fixed 1,144, 1,37, ,516,
Total 1,498, 1,844, 3,34,
Return on capital (1.) (11.9) (11.6)
Solution:


asis
Restaurant
ine OR
Retail
ine
Incremental Sales oI total sales 7, 7,
Units sale Sales/per unit cost 35, 14,
Cost oI Sales Mat Lab Var
Exp 35, 333,59
Gross Margin Sales - Cost oI Sales 35, 366,471
oing by ross Margin, Retail Line seems to be preferable. However let us explore
further.

Selling and Admin Expenses
Sales Commission to
Salesmen same ratio as Orig 56,
Travel and Entertainment
expenses oI Salesmen same ratio as Orig 35,
Truck Drivers Salary 15 oI orig salary 9,75
Gasoline & Other Supplies 1 oI origl exp ,8
Distribution Commission same ratio as Orig 7,
Freights same ratio as Orig ,333 5,59
Bad Debt same ratio as Orig 1,75 ,47
Total Direct Expense 86,633 118,999

Indirect Costs
Advertising 1 oI sales 7,
Variable Shipping Exp 8p and 5p per unit 8, 7,
Invoice Cost 4p WN 3 56 ,8
Packing Cost 4p WN 4 5,6
Total allocable exp 8,56 ,4

ProIits beIore allocable costs 63,367 47,47
ProIits aIter allocable costs 34,87 5,7

Investments
Investment In same ratio 8, 19,764
Monthly Cash In same ratio 46,666 93,333
Receivables In same ratio 63 75764
Total Investment 137,666 188,861
ROI 1.71 1.19

Working Aotes: -
1. Truck Drivers additional salary is 1.5 times. So Ior 1 extra running hours, they
will get 15 extra payment.
. Fuel expenses are proportionate to extra running.


3. Invoice Expense No oI invoices x Cost oI invoice

. Sales
x Cost oI Invoice
Avg Invoice Amount
Restaurant Line 7,, x .4 14 x .4 Rs 56
5
Retail Line 7,, x .4 7 x .4 Rs ,8
1
4. Packing Cost Only retail line products are packed in warehouse. So only that cost
is to be considered.
Packing cost No oI units x packing cost per unit
Total Sales x packing cost per unit
Selling Price
7,, x .4 1,4, x .4 Rs 5,6
5


PRIIA

(ReIresh Pricing Iundamentals Irom Philip Kotler)
Problem:
A company has maximum production capacity oI 1,, units. Its Iixed cost is Rs
1,, and Variable cost is Rs /- per unit. Domestic demand is 5 units. It has
received export order Ior 3, units Rs 3 per unit. Should it accept the order?
Solution:
Unit production cost when export order is not available

Order Domestic
Cost Jariable Cost Fixed

L
/ 4
, 5
) , 5 ( , , 1
Rs per unit
The export order is Rs 3 per unit which is Re 1/- less than the production cost Ior
domestic demand.
Yet, the order should be accepted on marginal costing basis. Since the Iixed costs have
already been recovered Irom domestic demand oI 5, units, and the capacity being
1,,, any incremental production will incur only variable cost oI Rs /- per unit, thus
leaving a contribution oI Re 1/- per unit. ThereIore, the export order should be accepted.
Factors which influence pricing
1. ost Though Cost Plus pricing is almost out oI Iashion due to intense competition,
yet, cost plays an important role in pricing decisions. Lower the cost, better the
leverage in business decisions regarding pricing.
. DiIIerentiation
3. Market haracteristics
(a) Demand Vs Supply
(b) Growth
(c) Market Share
(d) Market Sophistication
(e) Competitors
(I) Importance to the customers
(g) Trade Practice
4. Exchange Rate Movements Exchange rate movement can increase or decrease
proIits. In case oI imports oI raw material, adverse movement oI exchange rate will


increase the material costs. Similarly, adverse movements aIter acceptance oI export
order will squeeze the proIit margins.
5. Govt Regulations and incentives.
Problem:
The Delhi Mixie company manuIactured and sold 1 mixies Rs 8/- each. The cost
structure is as Iollows:
Material - Rs /-
Labour - Rs 1/-
Variable Overheads - Rs 5/-
Factory Cost - Rs 35/-
Fixed Overheads - Rs /-
Total Cost - Rs 55/-
ProIit - Rs 5/-
Sales Price - Rs 8/-
Due to tough competition, the selling price Ior next year has to be brought down to Rs 75/-.
Assuming no change in cost structure, how many mixies need to be manuIactured and sold
to ensure same level oI proIit.
Solution:
Old (Rs) New (Rs)
Selling Price 8 75
Variable Cost 35 35
Contribution 45 4
Fixed Cost
ProIit 5
Total ProIit ,5, ,5,
Total Unit Sales 1, 1,15

Problem:
In a purely competitive market 1, mobiles phones can be manuIactured and sold at a
certain price. It is estimated that mobile phones need to be manuIactured and sold in a
monopoly situation to make same proIit. ProIit under each condition is targeted at
$ ,,. Unit variable cost is Rs 1 and total Iixed cost is Rs 37,. Find the selling
price in each situation.
Solution:
ompetition Monopoly
No oI units sold 1, ,
ProIit ,, ,,
ProIit per unit $ $1
Variable Cost $1 $1


Fixed Cost $37, $37,
Fixed Cost on per unit basis $3.7 $18.5
Total per unit Selling Price $13.7 $18.5


UDE1IA

A budget is a plan that quantiIies a company`s goals in terms oI speciIic and
operating objectives. Goals setting most oIten takes a bottom to top approach rather than the
opposite.

Goals are then broken into strategies and plan oI action is developed to use those strategies
in Iurtherance oI the goals. In the course oI development oI plan oI action, a host oI Iactors
have to be considered, like,

(a) Jarious business environment factors
(i) Market Customer behaviour, demography, demand, etc.
(ii) Competition
(iii) Economy
(iv) Regulations
(v) Etc
(b) Product LiIe Cycle
(c) ompany's Financial Status This is the starting point as every activity
costs money and budget is limited by Iinancial capacity oI the Iirm.

Company`s Budget is broken into Departmental Budgets which are Iurther broken into sub-
budgets and so on. Each department has its own budget which is part oI the company`s
budget. Marketing Department also has its budget. The Marketing Budget consists oI
Iollowing sub-sub-budgets: -

(a) Sales Budget
(b) Advertising and Promotional Budget
(c) Market Research Budget
(d) Distribution Budget
(e) Logistics Budget covers transporting cost, and
(I) Warehousing Budget

Factors which influence udget s

(a) Sales udget
(i) Market Size/growth Market size and market growth gives a clue
about a realistic growth potential possible.
(ii) Competitive position


(iii) Sales History Sales Budget has to be within realistic estimates oI
previous sales growth record. II the sales in past were growing
, expecting 5 growth would be nave.
(iv) Company`s Financial Strength Even iI growth is possible, company
should have Iinancial strength to invest in plant, machinery,
inIrastructure, distribution net work, advertising, etc.
(v) Brand Strength

(b) dvertising and Promotion udget
(i) dvertising Objectives Short term or long term growth, etc.
(ii) Media Costs
(iii) Market Situation Whether the market is booming or sluggish; how
is the demand Ior the product, etc
(iv) ompetitive Spending/Share of Joice How much are the
competitors spending? We need to match our spending with atleast
our close competitors.
(v) dvertising reative Strategy Creative advertising may have higher
returns and thereIore reduces advertising cost per Re oI sale.
(vi) onsumer ehaviour Whether the consumers buy the product as
an impulse reaction or it is a deeply drawn decision. In case oI
impulse decision products, advertising expenses are high due to need
Ior higher top oI the mind recall requirements. SoIt Drinks are
example oI such products. In case oI image oriented brands
sustained niche advertising is required.
(c) Market Research udgets
(i) What methodology is being used for research Whether primary
data or secondary data, Group discussions or interviews, Face to Iace
interviews or telecalling, etc
(ii) Data Processing
(iii) Data Analysis
(iv) Project Report Preparation
What ever amount oI care may have been taken while preparing budget, The outcome will
rarely match the plan. There will always be some variance, Iavourable or adverse. Whether
Iavourable or adverse, analysis oI this variance can be neglected only at grave cost to the


company. Variance analysis pin points the areas and persons whose perIormance was better
than expected though overall perIormance was below expectation and vice versa. Thus, we
know exactly where we underestimated and where we Iailed. Overall positive perIormance
may some times hide some grave danger signals. Variance analysis brings them out in to
open.
Problem:
A company`s sales budget Ior 4 was as Iollows
Product A: 8 units Rs 5.5 per unit Rs 44,
Product B: 4, units Rs 7.5 per unit Rs 1,8,
Rs ,4,

Actual PerIormance
Product A: 6 units Rs 6. per unit Rs 36,
Product B: 8 units Rs 7. per unit Rs 1,96,
Rs ,3,
Variance ,3, ,4, Rs 8, (F)
Sales Price Variance Actual Sales (Actual Selling Price Planned Selling Price)
Product A 6 (6. 5.5) Rs 3 (F)
Product B 8, (7. 7.5) Rs 14, (A)
Net Sales Price Variance Rs 11, (A)
Volume Variance Planned Price (Actual Volume Planned Volume)
Product A 5.5 (6, 8,) Rs 11, (A)
Product B 7.5 (8, 4,) Rs 3, (F)
Net Volume Variance Rs 19, (F)
Net Total Variance Rs 11, (A) Rs 19, (F) Rs 8, (F)
nalysis
Price increase oI Product A had negative impact on turnover oI the company since the gain
Irom increase in price was only Rs 3, while lost sales were Rs 11,, leading to a
reduction in turnover by Rs 8,.
Price reduction oI Product B had positive impact on turnover oI the company since losses
due to reduced price were Rs 14,, while turnover increased by Rs 3,, leading to a
net increase in turnover by Rs 16,.


On the whole, both products are highly price sensitive. Impact oI price reduction on sales is
considerably high in both cases.
However, even this data is not adequate Ior business decision.
Turnover is AO1 proIit. Increased turn over is not necessarily increased proIit.
In case oI product A, while gains due to increased price DD IA FU to the proIit oI the
company, only a small percent oI the sales loss will aIIect the proIit. Let us assume that
production cost oI product A was Rs 5.
Planned proIit 8, (5.5 5.) Rs 4,
Actual ProIit 6, (6. 5.) Rs 6,
Thus, in this case, despite reduced sales, proIits have increased by 5.
Let us now see the state oI Product B.
Suppose, cost oI production oI Product B is Rs 6.5
Planned proIit 4, (7.5 6.5) Rs 3,
Actual ProIit 8, (7. 6.5) Rs 1,
Thus, in this case despite increased sales, proIits have plummeted by Rs 9,.
Problem:

Variance Ior selling expenditure Ior covering a territory are as Iollows

Standard Cot Rs ,4,
Standard Salesmen Days days
Standard cost per person per day Rs 1

Actual Cost Rs ,38, Variance Rs (F)
Actual Salesmen Days 1,7 Variance 3 days (F)
Actual cost per person per day Rs 14 Variance Rs (A)

Variance due to Salesmen days 1 (17 ) Rs 36, (F)
Variance due to Salesmen cost 1,7 (14 1) Rs 34, (A)
Net Variance in Cost Rs , (F)


ase St udy

Following are a company`s Iinancial and marketing score boards

Financial Score oard
Performance Rs Millions ase Year 1 2 3 4 5
Sales Revenue 54 93 318 387 431 454
Cost oI Goods Sold 135 15 167 1 4 36
Gross Contribution 119 141 151 186 7 18
ManuIacturing O/H 48 58 63 8 9 95
Marketing and Sales 18 3 4 6 7 8
R&D 3 3 5 4 4
Admin O/H 15 15 15 16 16 16
Net ProIit 16 6 37 5 55
Return on Sales 6.3 7.5 8. 9.6 11.6 1.1
Assets 141 16 167 194 5 6
Asset oI Sales 56 55 53 5 48 45
Return on Assets

Marketing Scorecard
Market ased
Performance
ase Year 1 2 3 4 5
Market Growth units 18.3 3.4 17.6 34.4 4 17.9
Sales Growth 1.8 17.8 13.3 34.9 18. 18.7
Market Share .3 19.1 18.4 17.1 16.3 14.9
Consumer Retention 88. 87.1 85. 8. 8.9 8.
New Customers 11.7 1.9 14.9 4.1 .5 9.
DissatisIied Customers 13.6 14.3 16.1 17.3 18.9 19.6
Relative Product Quality 19 17 1 9 7
Relative Service Quality - -3 -5 -8
Relative new product sales 8 8 7 5 1 4

nalysis of above data reveals that

1. Sales Revenue and ProIits are constantly growing. However, market share is
constantly Ialling. This is indicative oI boom in demand Ior the product in the
market. Company`s growth is actually driven by general growth in the market. Even
then company has Iailed to take Iull advantage oI the opportunities in the market and
increase its proIits Iurther. II and when demand Ior the product Ialls, company would
be badly hit.
. Expenditure on R&D is stagnant at about 4. Considering as percentage oI sales,
the expenditure on R&D has actually Iallen. Thus, company is not Iuture oriented. It
is not taking care oI product liIe cycle. Same deduction can be drawn Irom the last
row in marketing score board which shows constantly Ialling new product sales.
Company will be hard hit once the current product liIe cycle is on the wane.


3. Return on assets has grown Irom 11.3 to 6.7 which is almost 133 growth.
However, new investments in assets are low as the assets have grown Irom 141 to
6 only. Despite high growth in return on assets, company has Iailed to invest on
assets. Once again company is not investing Ior its Iuture.
4. Company`s product quality and service quality both are continuously declining over
the entire period. At the same time percentage oI dissatisIied customers are
increasing. Customer retention is also dropping. Entire growth is being driven by
new customers. All the events are logical sequence. Company obviously has not
looked at its Balanced Score Card.


RAD JU1IOA

A product becomes a brand aIter the company gives it a name or symbol or get-up.
Brand value is intangible and thereIore, brand valuation exercise can not be very objective.
It is subjective in nature and at the best a guess work.
rand equit is the value built-up in a brand. It is measured based on how much a customer
is aware oI the brand. The value oI a company's brand equity can be calculated by
comparing the expected Iuture revenue Irom the branded product with the expected Iuture
revenue Irom an equivalent non-branded product. This calculation is at best an
approximation. An investment in brand equity is commonly claimed to work through the
creation oI brand knowledge. This knowledge in turn consists oI two aspects oI a brand:
brand image and brand awareness. Brand image, in this context, consists oI the mental
associations consumers make with the brand; Tata means honest business; Mercedes means
excellent car. Brand awareness is composed oI the strength oI the brand in consumers'
minds, Ior example their ability to recall the brand.
In order to create brand equity, oIten lot oI investment is required (but not always). Equity can
not be measured in Iinancial terms.
Fundamentals of building brand equity:
1. Perceived product quality
. Name awareness
3. Brand loyalty
4. Brand association (Image), like Raymond suiting is associated with a warm and
caring 'complete man. Reid & Taylor tried to claim to be the best by slogan 'Bond
with the Best. But the icon oI James Bond did not inspire much appeal in Indian
psyche. Thus, they have now changed the mascot to Amitabh Bachchan.
5. Other brand properties Gale mein Khich-khich Vicks, Dove one Iorth
moisturising cream.
Brand Equity is good Ior the company as well as good Ior the consumer.
onsumer ompany
Customer is assured oI certain minimum
level oI quality and service Irom the
company keen to maintain its brand equity.
Adds value to the Iirm
User satisIaction Wins loyal customers
Easy purchase decision making. Customer`s conIidence in brand
InIormation processing is easier Marketing programme is eIIective and
productive.


Leverage over trade. 'Pull strategy works
and there is no need to adopt 'Push
strategy. (For push and pull strategy, refer second
semester Marketing answer bank question 18 page
21).
Better product price/margins
How to measure brand equit y?
It has been already pointed out in the beginning that brand equity is intangible and thereIore
it is diIIicult to arrive at an exact Iigure. Thus, each stalwart`s attempt to quantiIy brand
equity is only one oI the many ways available to hazard a guess but none coming close to a
widely acceptable Iormula Ior measuring brand equity.
1. Young and Rubicam's rand sset Jaluation Young and Rubicam is one oI the
largest advertising agency in the world and has been associated with over 45 brands
in 3 countries. As per Young and Rubicam, the brand is to be assessed on Iollowing
parameters on a scale oI 1 to 5:
(a) DiIIerentiation
(b) Relevance Emotional/rational connection
(c) Esteem Esteem brand popularity x perceived quality.
(d) Knowledge.
ow are the above parameters related?
DiIIerentiation x Relevance Brand Strength
Esteem x Knowledge Brand Stature
. 1otal Research's Equitrend As per this Iirm, brand equity can be measured by
measuring brand`s perIormance on a 5 point scale Ior Iollowing attributes:
(a) Brand Saliency (uniqueness/diIIerentiation)
(b) Perceived quality
(c) User satisIaction
Perceived Quality Perceived quality can be assessed based on
(i) Brand liking
(ii) Brand Trust
(iii) Willingness to recommend
(iv) Pride


3. Interbrand Model of rand ssessment riteria
(a) Business prospects oI a brand
(b) Brand Market Environment
(c) Consumer`s Perception
Each oI the three attributes are judged on a several parameter on a 5 point scale
(i) Leadership Gives economies oI scale Ior production, advertisement,
etc.
(ii) Stability oI Brand Like LiIebuoy, Sony, Lux have been around Ior
decades now.
(iii) International Status
(iv) Markets Growing/stable/declining, pricing structure/proIitability,
etc
(v) Protection (legal) Like patent or license
(vi) Support Financial, human, system
II you have a strong brand, you may not involve in manuIacturing the product. You can
outsource the production and only market it. Many companies around the globe are
Iollowing this strategy.
Some of the methods of brand valuation are:
Historical ost Method The total cost incurred on building the brand ever since launch.
However, this is not the right method. Cost never determines the value. The Iirst Iactor is
time value oI money. Second issue is wastages in the process, third issue is the value
already recovered Irom investments. What we are looking Ior is residual value in the brand.
Take Ior instance Remington type writers. They enjoyed excellent brand valuation at one
time. But once computers started taking over, there was little brand value leIt. A case oI
wastages is Signal toothpaste oI Hindustan Lever. Despite investing lot oI money in brand
promotion, product never got much market share. Thus, most oI the investment was a waste.
Besides investment, there are a host oI other Iactors that build the brand and probably they
are more important than money pumped into it.
Replacement ost Method This method is good Ior theory only. It is impossible to Iind
the replacement cost (for re- building the another brand with similar market).
Market Jalue This is a more reaslistic method. Ultimately value is what customer is
willing to pay. So, what does the consensus in the market among the prospective buyers
says?
Jalue by Potential Earnings This is another realistic method. It is possible to make an
approximation oI the Iuture earnings and discount them to today`s value.

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