Lessons on Marketing and Finance

Lessons on Marketing and Finance | Marketing Teacher

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Annual Accounts
Annual Reports for Marketers
Cash Flow Statement
Contribution Analysis
Financial Ratios
Marketing and Finance
Marketing Budget
Marketing in a Credit Credit Crunch
Profit and Loss Statement
Standard Costing

LESSON 1

Annual Accounts

Although the standard components of a basic annual report such as balance sheet, profit and loss statements and cash flow statements provide key financial information of interest to shareholders and others, there are occasions when more thorough information is desired. Some larger companys have subsidiaries, participate in joint ventures and operate in multiple geographic jurisdictions. The complexity of these operations demands the provision of the level of detail found in what is called Annual Accounts.
Annual accounts information also differs in showing data for multiple years as well as principal exchange rates and changes in accounting policies from year-to-year. Different accounting policies may result in different figures, so a firm must provide an explanation where applicable, so that all groups of shareholders and interested parties may be fairly informed. In many cases Annual Accounts provide notes and disclosures in applicable details such as deferred taxation, interest on borrowings, assets and liabilities reflected.
The composition of Annual Accounts is guided by applicable governmental bodies and legislation such as that found in the International Accounting Standards Board and American Securities Exchange Commission. In addition to substantially more detailed information, firms such as limited liability companys, insurance companies and savings banks, must also provide explanations for all applicable accounting policies utilized.
The following are examples of additional accounts providing information beyond the basic annual report elements:

Profit & loss by job
Income by customer summary
Expenses by vendor detail
Income tax detail
Audit trail
Profit & loss budget vs. actual
A/R aging detail
Collections report
Unbilled costs by job
Sales by item detail
Sales by customer detai
Purchases by item detail
Job estimates vs. actuals detail

Annual Accounts Exercise

Sterling Patterson Insurance is a three year old firm engaged selling health insurance in the United States. They specialize in providing Long Term Health Insurance Policies.
The company has set forth a strong expansion strategy which includes a low budget marketing plan. Sterling Patterson sees an opportunity to enter the international market for health insurance. Its strategy includes developing an affiliate program to recruit local agents. The Company’s health insurance marketing efforts will focus on those in upper socioeconomic classes with a proven ability to pay.
(4) Which of the following companies may be most likely required to provide more detailed financial information in the form of annual accounts?

(a) Limited liability companies
(b) Insurance companies
(c) Savings Institutions
(d) Barber Shops Limited

Six months from its planned launch in Europe and Asia, Sterling Patterson has realized that it has insufficient knowledge of accounting implications associated with complying with various international regulations. In addition to having a fine marketing plan, Sterling Patterson now realizes it must prepare a path through a maze of various accounting guidelines.
It was most recently determined that the company would increase accounting staff expertise and capabilities in order to avoid potential catastrophes such as failing to meet financial deadlines. It will submit the required annual accounts needed for participation in diverse international markets. Sterling Patterson understands the risk that such failures to disclose might jeopardize potential relationships and investments.
Demonstrate your understanding of annual accounts and how they might impact Sterlings planned expansion, by answering the following questions:
(1) How does information in the annual accounts differ from a basic annual report?

(a) Potentially more notes of explanation
(b) Increased occasions to illustrate data showing multiple years
(c) Requires more effort in identifying interested parties and their concerns
(d) All of the above

(2) Which of the following is not a governmental entity regulating the content of annual accounts?

(a) International House of Pancakes
(b) American Securities Exchange Commission
(c) International Accounting Standards Board

(3) What are reasons why more notes, explanations and disclosures might be necessary when doing business in international markets?

(a) They may reveal different accounting policies that are applicable
(b) They may provide clarification on differing tax rules
(c) Valuation rules concerning assets may vary from country-to-country
(d) All of the above

Annual Accounts Answer

Answers are below: Sterling Patterson Insurance is a three year old firm engaged selling health insurance in the United States. They specialize in providing Long Term Health Insurance Policies.
The company has set forth a strong expansion strategy which includes a low budget marketing plan. Sterling Patterson sees an opportunity to enter the international market for health insurance. Its strategy includes developing an affiliate program to recruit local agents. The Company’s health insurance marketing efforts will focus on those in upper socioeconomic classes with a proven ability to pay.
(4) Which of the following companies may be most likely required to provide more detailed financial information in the form of annual accounts?

(a) Limited liability companies
(b) Insurance companies
(c) Savings Institutions
(d) Barber Shops Limited

Answers

(1) All of the above
(2) C, The International House of Pancakes
(3) All of the above
(4) a, b, and c

(a) Potentially more notes of explanation
(b) Increased occasions to illustrate data showing multiple years
(c) Requires more effort in identifying interested parties and their concerns
(d) All of the above

(2) Which of the following is not a governmental entity regulating the content of annual accounts?

(a) International House of Pancakes
(b) American Securities Exchange Commission
(c) International Accounting Standards Board

(3) What are reasons why more notes, explanations and disclosures might be necessary when doing business in international markets?

(a) They may reveal different accounting policies that are applicable
(b) They may provide clarification on differing tax rules
(c) Valuation rules concerning assets may vary from country-to-country
(d) All of the above

LESSON 2

Annual Reports for Marketers

An Annual Report is a statement prepared by companies that are traded publicly. The development of an Annual Report provides inherent value in the process of reviewing major financial and operational achievements that occurred during the past 12 months.
An Annual Report does not have to be viewed as a staid document full of boring figures. In fact, an astute marketer can mine the basic elements for marketing gold. Just as promotion tactics are devised with marketing segments in mind, in like manner an Annual Report can be tailored to speak to the concerns of its audience.
The contents of Annual Reports may vary by industry, but usually includes the following:

A Balance Sheet
An Income Statement
Company stock pricing trends
A Letter to Stockholders
An Individual Report from the Chief Executive Officer
An Individual Report from the Chief Financial Officer
Major Accomplishments during the past year

In the United States, the contents of an Annual Report became more stringent after the passage of the Securities and Exchange Act of 1934. Prior to that act, some companies had been less than forthcoming or in some cases even deceitful in their reports. The financial aspects of an Annual Report are audited by a certified accountant.
The more detailed disclosure was required in order to better inform potential stakeholders such as those outlined below:

Current Shareholders
Potential Shareholders
Current Donors (if applicable)
Future Donors (if Applicable)
Potential Business Partners
Employees
Customers
Applicable Government Entities

Exercise – Annual Reports for Marketers

Lassiter Boots is a manufacturing company producing insulated winter boots aimed specifically at the outdoor, sporting and farm markets. The company made its initial public offering (IPO) three years ago.

4. Which of the following pieces of United States legislation addressed Annual Reports for publicly traded companies?<

(a) The Fair Tax Act
(b) The Federal Employment Protection Act of 1924
(c) The Securities Exchange Act of 1934
(d) The Existential Domain Act of 1943

5. Which of the following company facts about Lassiter Boots are amenable to marketing in a letter to the Stockholders or a positive depiction on the cover of their Annual Report?

(a) The Industry Standard Award for Quality
(b) The growth trends in Annual Sales
(c) The positive dividend growth rate
(d) The government citation for unsafe working conditions

Year 1	Year 2	Year 3
Annual Sales $40,000,000	Annual Sales $40,900,000	Annual Sales $41,100,000
Annual Net Income $2,300,000	Annual Net Income $2,700,000	Annual Net Income $2,900,000
Annual Dividend Growth Rate Zero	Annual Dividend Growth Rate 4.5	Annual Dividend Growth Rate 5.5

Toward the end of its first year in business, Lassiter hired a new Chief Executive Officer widely know and respected for his ability to increase efficiency and performance. Sales, Net Income and Dividends have all increased steadily for the last two years.
Lassiter is a recent recipient of an Industry Standard Award for Quality in the last year covered. To a degree, it helps to balance a negative citation they received for unsafe working practices.
To apply your knowledge of Annual Report contents and recommended principles found in the Marketing Teacher, answer the following multiple choice questions:

1. Which of the following elements are not typically found among Annual Reports contents?

(a) A Balance Sheet
(b) An Income Statement
(c) A Summary of Nutritional Contents
(d) A Letter to Stockholders

2. Which of the following entities are stakeholders with a legitimate interest in the past 12 months at Lassiter Boots?

(a) Elementary School #56
(b) Company Employees
(c) Potential Business Partners
(d) The Screenwriters Guild

3. Which of the following elements are not typically found among Annual Reports contents?

(a) A Balance Sheet
(b) An Income Statement
(c) A Summary of Nutritional Contents
(d) A Letter to Stockholders

Answer – Annual Reports for Marketers

To apply your knowledge of Annual Report contents and recommended principles found in the Marketing Teacher, answer the following multiple choice questions: (answers at the bottom of this page)

5. Which of the following company facts about Lassiter Boots are amenable to marketing in a letter to the Stockholders or a positive depiction on the cover of their Annual Report?

(a) The Industry Standard Award for Quality
(b) The growth trends in Annual Sales
(c) The positive dividend growth rate
(d) The government citation for unsafe working conditions

Answers

(c) A Summary of Nutritional Contents
(b) Company Employees and (c) Potential Business Partners
(c) A Summary of Nutritional Contents
(c) The Securities Exchange Act of 1934
(a), (b) and (c)

1. Which of the following elements are not typically found among Annual Reports contents?

(a) A Balance Sheet
(b) An Income Statement
(c) A Summary of Nutritional Contents
(d) A Letter to Stockholders

2. Which of the following entities are stakeholders with a legitimate interest in the past 12 months at Lassiter Boots?

(a) Elementary School #56
(b) Company Employees
(c) Potential Business Partners
(d) The Screenwriters Guild

3. Which of the following elements are not typically found among Annual Reports contents?

(a) A Balance Sheet
(b) An Income Statement
(c) A Summary of Nutritional Contents
(d) A Letter to Stockholders

4. Which of the following pieces of United States legislation addressed Annual Reports for publicly traded companies?<

(a) The Fair Tax Act
(b) The Federal Employment Protection Act of 1924
(c) The Securities Exchange Act of 1934
(d) The Existential Domain Act of 1943

LESSON 3

Cash Flow Statement

Marketing and Cash Flow

The main purpose of a Cash Flow Statement (CFS) is to help the business owner plan and control the flow of income in order to meet scheduled financial obligations. The information illustrated in the Cash Flow Statement also aids lenders and investors in determining a company’s financial health.

Cash Flow Statement

Fishbourne Marketing Cash Flow Statement

	*January*	*February*	*March*	*April*	*May*	*June*
Beginning Cash Balance	15,000	20,548	22,296	23,493	24,191	180,955
Cash inflows:
Accts. Rec. Collections	180,955	180,955	182,455	185,855	181,455	180,955
Loans on proceeds
Sales & receipts	5,000	0	3,500	0	4,500	6,000
Other:

Total Cash Inflows	185,955	180,955	185,955	185,955	185,955	186,955
Available Cash Balance	200,955	201,503	208,251	209,448	210,146	212,244
Cash Outflows (Expenses):
Advertising	300	300	300	400	400	400
Bank Service Charges	45	45	45	45	45	45
Credit Card Fees	35	35	35	35	35	35
Delivery
Health Insurance	478	478	478	478	478	478
Insurance	200	200	200	200	200	200
Interest	25	25	25	25	25	25
Inventory Purchases	1,000	1,000	450	750	450	1,000
Miscellaneous	300	300	300	300	300	300
Office	1,000	1,000	1,000	1,000	1,000	1,000
Payroll	83,300	83,300	83,300	83,300	83,300	83,300
Payroll Taxes	7,300	7,300	7,300	7,300	7,300	7,300
Professional Fees	250	250	250	250	250	250
Rent and Leases	1,000	1,000	1,000	1,000	1,000	1,000
Subscriptions and Dues	90	90	90	90	90	90
Supplies	200	200	100	200	100	200
Taxes and Licenses	44,629	43,429	44,629	44,629	44,629	44,829
Utilities and Telephone	130	130	130	130	130	130
Other

Subtotal	140,282	139,082	139,632	140,132	139,732	140,622
Other Cash Out Flows:
Capital Purchases
Loan Principal	125	125	125	125	125	125
Owner’s Draw	40,000	40,000	45,000	45,000	45,000	40,000
Other:

Subtotal	40,125	40,125	45,125	45,125	45,125	40,125
Total Cash Outflows	180,407	179,207	184,757	185,257	184,857	189,747
Ending Cash Balance	20,548	22,296	23,493	24,191	25,289	31,497

Much like other financial statements; the Profit & Loss Statement or the Balance Sheet; the Cash Flow Statement cannot be composed without first employing a record keeping system. The more Cash Flow Figures are derived from records of actual cash sales receipts, and invoices the more accurate it will be. Keeping a record of income accounts and expense accounts will generate many of the figures for a Cash Flow Statement.
Not all Cash Flow Statement Information is "actual" information. A statement will sometimes unavoidably contain educated guesses, estimates and projections. In fact, the Cash Flow Statement is the best way to forecast working capital needs.

The Typical Structure of a Cash Flow Statement.

A Cash Flow Statement is may be thought of as a budget that continuingly evolves as time goes by. The main work of structuring a Cash Flow Statement occurs in the first column. It starts with a snapshot of your beginning cash balance. Next, it itemizes the amount of each source of income on a line of its own. The beginning cash balance plus the sum total of all income sources is totaled for your Available Cash Balance.
Next, simply make a grand total of all outgoing cash. Now, after subtracting the Total Cash Outflows from the Available Cash Balance you will arrive at the Ending Cash Balance for the first month. To see how the cash "flows", simply move the Ending Cash Balance to the top of the next months’ column and enter the figure as Beginning Cash Balance. Complete these steps, entering in the appropriate dollar amounts across from each source of income and expense and you will be in a position to monitor your cash flow.
Cash Flow Statements may be depicted in several ways depending on the purpose of its use. A new start-up firm may show just six months or one year projections (showing column headings January through December) and later reduce it to a Quarterly Cash Flow Statement in year two. Lenders and investors like to see a five year Cash Flow Statement. It gives them an indication of a company’s continued viability over time and its ability to pay back a loan or provide a return on investments.
The construction of a Cash Flow Statements forces a business owner to be aware of how future financial events may impact its ability to meet obligations. Below is a Cash Flow Statement showing a six month period:

Exercise – Cash Flow Statement

Fishbourne Marketing

Review the Cash Flow Statement (below) and answer the following questions:

1) What is the name of the figure shown at the top of each month?
2) Which line item amounts seem to fluctuate the most?
3) Name some line items which may be influencing the amount shown in the other listed items?

	*January*	*February*	*March*	*April*	*May*	*June*
Beginning Cash Balance	15,000	20,548	22,296	23,493	24,191	180,955
Cash inflows:
Accts. Rec. Collections	180,955	180,955	182,455	185,855	181,455	180,955
Loans on proceeds
Sales & receipts	5,000	0	3,500	0	4,500	6,000
Other:

Total Cash Inflows	185,955	180,955	185,955	185,955	185,955	186,955
Available Cash Balance	200,955	201,503	208,251	209,448	210,146	212,244
Cash Outflows (Expenses):
Advertising	300	300	300	400	400	400
Bank Service Charges	45	45	45	45	45	45
Credit Card Fees	35	35	35	35	35	35
Delivery
Health Insurance	478	478	478	478	478	478
Insurance	200	200	200	200	200	200
Interest	25	25	25	25	25	25
Inventory Purchases	1,000	1,000	450	750	450	1,000
Miscellaneous	300	300	300	300	300	300
Office	1,000	1,000	1,000	1,000	1,000	1,000
Payroll	83,300	83,300	83,300	83,300	83,300	83,300
Payroll Taxes	7,300	7,300	7,300	7,300	7,300	7,300
Professional Fees	250	250	250	250	250	250
Rent and Leases	1,000	1,000	1,000	1,000	1,000	1,000
Subscriptions and Dues	90	90	90	90	90	90
Supplies	200	200	100	200	100	200
Taxes and Licenses	44,629	43,429	44,629	44,629	44,629	44,829
Utilities and Telephone	130	130	130	130	130	130
Other

Subtotal	140,282	139,082	139,632	140,132	139,732	140,622
Other Cash Out Flows:
Capital Purchases
Loan Principal	125	125	125	125	125	125
Owner’s Draw	40,000	40,000	45,000	45,000	45,000	40,000
Other:

Subtotal	40,125	40,125	45,125	45,125	45,125	40,125
Total Cash Outflows	180,407	179,207	184,757	185,257	184,857	189,747
Ending Cash Balance	20,548	22,296	23,493	24,191	25,289	31,497

Answer – Cash Flow Statement

Fishbourne Marketing

Here are the answers (see the cash flow statement below):

1) Beginning Cash Balance.
2) Sales & Receipts, Advertising, Inventory Purchases, Supplies.
3) Advertising may be influencing sales and receipts, sales and receipts may be influencing supplies and inventory purchases and taxes are impacted by total cash inflows.

	*January*	*February*	*March*	*April*	*May*	*June*
Beginning Cash Balance	15,000	20,548	22,296	23,493	24,191	180,955
Cash inflows:
Accts. Rec. Collections	180,955	180,955	182,455	185,855	181,455	180,955
Loans on proceeds
Sales & receipts	5,000	0	3,500	0	4,500	6,000
Other:

Total Cash Inflows	185,955	180,955	185,955	185,955	185,955	186,955
Available Cash Balance	200,955	201,503	208,251	209,448	210,146	212,244
Cash Outflows (Expenses):
Advertising	300	300	300	400	400	400
Bank Service Charges	45	45	45	45	45	45
Credit Card Fees	35	35	35	35	35	35
Delivery
Health Insurance	478	478	478	478	478	478
Insurance	200	200	200	200	200	200
Interest	25	25	25	25	25	25
Inventory Purchases	1,000	1,000	450	750	450	1,000
Miscellaneous	300	300	300	300	300	300
Office	1,000	1,000	1,000	1,000	1,000	1,000
Payroll	83,300	83,300	83,300	83,300	83,300	83,300
Payroll Taxes	7,300	7,300	7,300	7,300	7,300	7,300
Professional Fees	250	250	250	250	250	250
Rent and Leases	1,000	1,000	1,000	1,000	1,000	1,000
Subscriptions and Dues	90	90	90	90	90	90
Supplies	200	200	100	200	100	200
Taxes and Licenses	44,629	43,429	44,629	44,629	44,629	44,829
Utilities and Telephone	130	130	130	130	130	130
Other

Subtotal	140,282	139,082	139,632	140,132	139,732	140,622
Other Cash Out Flows:
Capital Purchases
Loan Principal	125	125	125	125	125	125
Owner’s Draw	40,000	40,000	45,000	45,000	45,000	40,000
Other:

Subtotal	40,125	40,125	45,125	45,125	45,125	40,125
Total Cash Outflows	180,407	179,207	184,757	185,257	184,857	189,747
Ending Cash Balance	20,548	22,296	23,493	24,191	25,289	31,497

LESSON 4

Contribution Analysis

Occasionally a company is confronted with unplanned events which call for the use of decision-making tools beyond those found in the basic accounting methods.
Price – Variable Costs Per Unit = Contribution Margin Per Unit
On an individual special order project a company’s product contribution to profit may also be calculated as shown below:
Products Contribution to Profit = Contribution Margin Per Unit x Units Sold
In today’s manufacturing context some companys are more and more likely to entertain the potential of spur of the moment opportunities and vehicles to achieve increased revenues. By the very nature of such decisions, they do not have the luxury of regular costing information and additional effort is needed to improve understanding of potential costs. A useful method which may improve the understanding of these costs is called contribution analysis.
Contribution analysis addresses the problem of identifying soft, or overhead costs associated with varying production projects. Generally, contribution analysis aids a company by accounting for all known fixed, direct and variable costs and then subtracting that amount from revenues. The remainder is viewed as the volume of other costs which, though hard to pin down, actually contribute to production.
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To further hone in on these costs, some firms may even include some marketing costs; advertising, trade and consumer promotions, as direct costs. In this method , indirect costs consists of revenue minus direct costs. Contribution analysis is derived from other accounting priciples aimed at more correctly identifying costs such as Activity Based Costing(ABC).
For example – a large firm might employ contribution analysis to help in decisions on pricing, or how to get the most profit from an individual project. Such information is valuable if a firm were to consider a contract offer for a special order. The aim of the contribution analysis is to be to base the company’s pricing on a contribution margin calculated as described below
Contribution Margin Per Unit x Units Sold = Product’s Contribution to Profit
And using those results to arrive at the desired price –

Contribution Analysis Exercise

Boreland Toys is a two year old toy company that primarily makes wagons for children, but has recently considered using its set up to fill spur of moment orders for shop wagons and perhaps wheel barrows. The firm boasts a dedicated workforce that readily contributes ideas in company forums.

(a) Identifying previously unkown costs
(b) Assisting in categorizing costs
(c) Guidance in setting a prices for totally new projects
(d) All of the above

(4) True or False, generally speaking Contribution Analysis identifies overhead costs by accounting for all known fixed, direct and variable costs and then subtracting that amount from revenues.
Management plans to use input from factory stewards and machine operators combined plus some accounting principles to reveal a price with profit potential. The company profit margins have been slim, though production has experienced steady growth profits have stagnated. The company thinks better accounting might have lead to the level of pricing which would have generated a profit.
Despite its past mistakes Boreland is intrigued about a proposal from Conner Industries to purchase a large order of tool wagons. Boreland is unsure of what price to charge for wagons supplied to Conner, there is the potential to shift production processes for the new order but not make a profit due to a poor handle on costs of production.
Answer the following questions to demonstrate an understanding of Contribution Analysis and its application.
(1) Boreland should employ which of the following accounting principles?

(a) Restitution Calibration
(b) Transactional Analysis
(c) Constitutional Analysis
(d) Contribution Analysis

(2) To calculate a products contribution to profits, Boreland will need to assemble which of the following data?

(a) Number of units sold
(b) Contribution margin per unit
(c) Price records
(d) Variable costs per unit
(e) All of the above

(3) Which of the following are potential benefits Boreland might realize as a result of employing a Contribution Analysis?

LESSON 5

Financial Ratios

Lender and investors are able to glean a lot of valuable information from the data available in a company’s’ financial statements and records. Their priority is insuring that they are repaid for any loan or financial investment. Anyone contributing to your company financially wants to know: Lender and investors are most assuredly interested in a company’s profitability since that is a good measure of ability to repay financial assistance. To measure this aspect they employ a calculation called the Net Profit on Sales Ratio.
Net Profit on Sales = Net Profit /
Net Sales

How much of your business you really own
Whether there is enough ready cash on hand
What is the status of current liabilities?
Are profits reaching their potential?

Certain financial ratios provide a wealth of information on the health of your business and answer the questions outlined above. There are many ratios that may be applied to assist in a lending or investing decision the following are some very key ratios a business owner should be aware of:
Lenders are particularly interested in liquidity which reveals the ability to pay bills and the availability of ready cash. They use a calculation called the Current Ratio.

Current Ratio = Current Assets / Current Liabilities

A 2 to 1 ratio is generally acceptable although acceptability may vary per industry.
Before loaning or investing, a financial entity may review a company’s level of ownership and compare that with claims due to creditors. To check this aspect of your finances, they use a calculation called the Worth to Dept Ratio.

Worth to Debt Ratio = Net Worth /
Total Debt

Exercise – Financial Ratios

Jumpys is a neighborhood restaurant famous for its jolting coffee. Named for its owner Jumpy Johnson, the restaurant specializes in a breakfast menu that has many loyal fans among the locals. But every since Jumpys neon dancing coffee cup sign went up, the owner has wanted to expand in an even bigger way. 2. Jumpys Current Ratio is 2.29:1, True or False?
3. Jumpys Ownership Ratio is 29.2:1, True or False?
4. Jumpys Profitability Ratio is Zero, True or False?
Jumpys is located in a region that holds a round of championship events at the same time every year. Johnson noticed that increased promotions during those events brought a tremendous influx of new customers to the advertisers. He is convinced that once those new customers visit Jumpys, they will be captured forever.
In prior years Johnson has not been prepared financially to capitalize on the event, but recently he has been working closely with his accountant to monitor the restaurants financial health with the idea of seeking a loan. His accountant has provided the following summary of pertinent company financial information:
Current Assets: $32,000
Current Liabilities: $14,000
Net Profit: $15,000
Net Sales: $100,000
Net Worth: $34,000
Total Debt: $18,000

Answer the following questions:

1. Lenders and investors use financial ratios to determine which of the following (multiple choice):
(a) Company License Renewal Decisions
(b) Actuary Liabilities
(c) Towing Costs
(d) Identify good candidates for financial assistance.

Answer – Financial Ratios

The answers are below: Jumpys is a neighborhood restaurant famous for its jolting coffee. Named for its owner Jumpy Johnson, the restaurant specializes in a breakfast menu that has many loyal fans among the locals. But every since Jumpys neon dancing coffee cup sign went up, the owner has wanted to expand in an even bigger way.

Answers

1. (d) Identify good candidates for financial assistance
2. True
3. False (1.88:1)
4. False (0.15 or 15%)
Jumpys is located in a region that holds a round of championship events at the same time every year. Johnson noticed that increased promotions during those events brought a tremendous influx of new customers to the advertisers. He is convinced that once those new customers visit Jumpys, they will be captured forever.
In prior years Johnson has not been prepared financially to capitalize on the event, but recently he has been working closely with his accountant to monitor the restaurants financial health with the idea of seeking a loan. His accountant has provided the following summary of pertinent company financial information:
Current Assets: $32,000
Current Liabilities: $14,000
Net Profit: $15,000
Net Sales: $100,000
Net Worth: $34,000
Total Debt: $18,000

LESSON 6

Marketing and Finance

Introduction to Financial Statements for Marketing

Often marketing professionals are criticized since they are viewed as creative and innovative people that tend to spend the company’s money without worrying about how effectively or efficiently it is being spent.

The Cash Flow Statement

The components of an income statement can be turned into a Cash Flow Statement. The main work of a Cash Flow Statement occurs in the first column. It starts with a snapshot of your beginning cash balance. Next, it itemizes the amount of each source of income on a line of its own. The beginning cash balance plus the sum total of all income sources is totaled for your Available Cash Balance.
Next, simply make a grand total of all outgoing cash. Now, after subtracting the Total Cash Out Flows from the Available Cash Balance you will arrive at the Ending Cash Balance for the first month. To see how the cash "flows", simply move the Ending Cash Balance to the top of the next months’ column and enter the figure as Beginning Cash Balance. Complete these steps, entering in the appropriate dollar amounts across from each source of income and expense and you will be in a position to monitor your cash flow.
What can a Balance Sheet, Income Statement and Cash Flow Statement tell you about your Marketing Plan? Perhaps your original owners’ equity is too committed to capital to launch an expansive marketing campaign. Past results may show advertising had to be scaled back due to insufficient inventory. You may not have funds to sustain a long term marketing strategy.
In summary, a company’s financial statement tells what has occurred and provides data to aid you in making informed projections for the future. Monitoring them may lead to the appropriate revisions in your marketing strategy.
You must monitor the efficiency and effectiveness of your marketing activities, as well as other important business functions such as production and the quality of products or services. However since the purpose of a business is to earn a profit, finances had better be one of your marketing foundations.
There are some key financial tools that are essential to this monitoring task. Taken together they provide an overview of the firm’s health and future prospects:
1.The Balance Sheet
2.The Profit and Loss Statement
3.The Cash Flow Statement
It may not be readily apparent to you how financial statements are relevant from a marketing perspective. You may ask – What can these financial statements tell me about my Marketing Plan? First, let me outline each briefly and then elaborate on why they will be so important to you and your future success.

The Balance Sheet

The Balance Sheet has two main purposes; (1) Listing the assets of your company and (2) Listing the liabilities of your company. Some examples of assets that might appear in a balance sheet are cash on hand, accounts receivable (amounts owed to your firm), furniture, company vehicles, etc. Some examples of liabilities that might appear in a balance sheet are accounts payable (amounts your firm owes to others), loan amounts payable within a year, your equity investments made, etc. In a typical start-up firm, owners’ investments may be temporarily shoring up the lack of sufficient accounts receivable.

The Profit and Loss Statement

The Profit and Loss Statement is also called an Income Statement. As you might imagine, the income statement provides some hints about how efficient the young firm is being run. Typical components found in an income statement are net sales, the costs of goods sold, the costs of inventory if applicable, and regular expenses such as office rent, payroll, supplies, etc. When both positive and negative finances are displayed on an income statement, key components contributing to profit or loss for the period can be identified.

LESSON 7

Marketing Budget

Failure to properly cost and budget your marketing plan could lead to problems. While insufficient funding for such items as equipment or staffing may immediately come to mind when budgeting for the whole business, it’s the lack of a properly constructed marketing budget that dooms many marketing plans and campaigns. A marketing budget is the marketing plan written in terms of costs.

Summary of the Marketing Budget

Marketing budgets ensure that your marketing plan or campaign is realistically costed. Some pre-budget research into your industry and market, your competitors and your business’s historical marketing metrics helps marketing managers make a more informed calculation. You should cost out all general marketing and marketing communications expenses. You could also work in conjunction with an accountant to make sure that the figures are complete and realistic.

Marketing Budget

A marketing budget is an estimate of projected costs to market your products or services. A typical marketing budget will take into account all marketing costs e.g. marketing communications, salaries for marketing managers, cost of office space etc. However much of the budget is concerned with marketing communications e.g. public relations, website, advertising, etc. Both are considered here.
The costs in a marketing budget will be allocated according to the campaign and the media to be utilized. Some prior research will be necessary for the cost estimates to be as realistic as possible. This is called advertising or marketing communications research.

Helpful Pre-budgeting Research

1. Industry and Market Research
2. Competitor Analysis/SWOT
3. Internal marketing performance records e.g. marketing metrics, marketing controls.
4. Marketing Audit.

Knowledge of key industry and market factors must be taken into account when developing your marketing plan. Your plan will also be influenced by researching your competition. You will want to allot funding in a way that exploits the weaknesses of your competitors and emphasizes your strengths.
Other information that can guide your spending plan is found in your internal records. What advertising expenditures have proven successful for your business? For example, you can review internal records and determine the return on investment of your advertising dollars. A periodic examination of the performance of these records may lead you to drop certain media that have not proven fruitful.

Typical general marketing expenses:

Advertising agency commissions
Salaries for marketing managers
Salaries for marketing support e.g. marketing assistants.
Office space
Fixtures and fittings
Travel costs
Other direct and indirect marketing costs, including marketing communications costs (see below).

Typical marketing communications costs:

Personal Selling
Public Relations
Printing
Mailing
Website Development & Hosting
Brochure Design
Advertising
Television Advertising
Radio Advertising
Direct Marketing
Newspaper Advertising
Proposal Development/bid submittal
Networking
Event Attendance
Sales Promotion
Many other marketing communications tools.

LESSON 8

Marketing in a Credit Credit Crunch

A stalled economy threatens the viability of many small businesses. Some have experienced decreases in revenues that they cannot sustain. Slower sales have prompted some to institute personnel layoffs others are prone to cut advertising. But, a hasty decision could be a mistake. After all, the reason for advertising is to keep a consistent message in front of prospective customers. This is our advice for What is marketing? during a credit crunch. Rather than making a hurried decision that may make things worse, a company should consult its marketing plan for guidance. The Marketing Teacher provides applicable guidelines which will help formulate tactics in response to a slumping economy.
There are many factors to consider when conducting a situation analysis. Prominent among them is a review of a company’s Marketing Environment.
A good way to organize a situational analysis of the marketing environment is the use of a device called PEST Analysis. PEST looks at environmental factors such as Political Factors, Economic Factors, Sociocultural Factors and Technological Factors.
During an economic downturn, a company’s Marketing Planning and the Marketing Manager might perform what is called a Marketing Audit during which time he/she would review the current marketing plan against internal and external marketing environments. See below:

Internal Environment
Customer Relations
Price
Product Profitability
Distribution
Promotion
People

External Environment
Understanding customer needs
Understanding the buyer decision process
Understanding brand perception
Segmentation, Targeting, Positioning
Consumer values

The Marketing Manager needs to utilize the most current data and information resulting from the Marketing Audit and the PEST Analysis results. The status review should lead the Manager to re-evaluate its objectives to determine if they are indeed smart objectives, in light of current economic times.
SMART objectives are those that are specific, measurable, achievable, realistic, and timed. By conducting a situational analysis and reviewing the marketing environment a Marketing Manager is equipped to adapt and monitor its response changing conditions without making knee-jerk decisions.

Exercise – Marketing Plans

Case Study – Counselling on the Internet: a new innovation

Cannon Counselling is amongst the most highly regarded counselling practices in Western Australia. It employs three full-time, and17 part-time, counsellors. All are qualified and experienced. They work with all types of clients, both directly and via referral from doctors. It is a successful company. However, it is not growing and is looking for an innovative way to expand its enterprise.
The Australian government is offering substantial sums of money to organisations that want support in marketing their products or services via the internet. This is called the ‘E-commerce for the Millennium Project’. The owner of Cannon Counselling, Steve Bull, is very interested in this opportunity to expand his business in such a progressive way.

Your brief.

You work for the E-commerce for the Millennium Project. Steve Bull has asked you to help him prepare a marketing plan for Cannon Counselling’s expansion onto the Internet. Use the AOSTC to write an outline marketing plan.
ANALYSIS.
OBJECTIVES.
STRATEGIES.
TACTICS.
CONTROLS.

Answer – Marketing Plans

Case Study – Counselling on the Internet. A new innovation

To: Steve Bull – 1st January 2019
From: ABC Adviser

Marketing Plan for the Cannon Counselling Internet

ANALYSIS.

After conducting marketing research and analysing all available desk research, the following marketing plan is recommended.

OBJECTIVES.

To register 30 new counselling clients by December 31st 2010.

STRATEGIES.

We will set-up and interactive website. The site will enable counsellors and clients to communicate over a secure connection. The consultation will guided by exactly the same regulations as a regular face-to-face meeting. The only difference if that it will take place in real-time using the internet.

TACTICS.

Price.

Clients will be charged sixty Australian Dollars for a 30 minute consultation. For a course of twelve sessions the cost will be six hundred Australian Dollars. Payments will be made by credit card at the beginning of the consultation.

Place.

All consultations will take place over a secure Internet connection using webcams.

Promotion.

The new interactive service will be advertised to doctors’ surgeries via trade press. Cannon Counselling will also attend relevant exhibitions and conferences.

Product.

An interactive session with experienced and qualified counsellors.

CONTROLS.

Monitor the quantity of new client registrations on a weekly basis Record visits and revisits to the site. Check income against projections.
That’s all that is required from an outline marketing plan. Obviously, the fuller document would have a lot more detail. However, the marketing plan should be succinct and easily understood by all, as this example shows.

LESSON 9

Profit and Loss Statement

Profit and Loss Statement Lesson

The Profit and Loss statement is one of the main business financial statements. Among the various financial statements, a Profit and Loss statement most closely resembles what is referred to as "the bottom line". Since the purpose of a business is to earn a profit, both the business owner and outside entities such as bankers and investors have a keen interest in revenues.
The last stage in the development of a company’s Profit and Loss Statement is to outline a list of expenses associated with the ongoing operations of a company. Typical items displayed include utilities, rent and salaries. Just as income interest earned is reflected among income items, a company should also show display interest paid among its expenses. The sum of all expenses is obviously – Total Expenses.
The final step in the Profit and Loss Statement is the resulting of calculating the result of subtracting Total Expenses from Total Income, the result of which is called Net Income.
A Profit and Loss Statement provides a snapshot of a firms’ financial viability for a certain period of time, usually one year. Therefore, the "bottom line" reveals the company’s net earnings or losses. Net is a key term, because after the warm glow of sales income is felt, then comes the reality check of expenses and other costs which eat into profits.
Among the common components found in an income statement are net sales, the costs of goods sold, the costs of inventory if applicable, and regular expenses such as office rent, payroll, supplies, etc? When both negative and positive finances elements are revealed on an income statement, key components contributing to profit or loss for the period can be identified.
The structure of a Profit and Loss Statement begins by showing income received. Any financial impacts which reduce income, such as customer returns, must be are reflected.After all gross sales and negative financial impacts on those sales are taken into account; the company arrives at a Net Sales figure.
Of course, it costs a company to set up and prepare to provide products or services. These costs are reflected in the next section of the Profit and Loss Statement called the Cost of Goods Sold. Among typical costs outlined in this section are purchases for inventory or other costs associated with preparing a product to sell. The cost of Inventory (minus depreciation) value purchased but not yet utilized is subtracted before a sum total of Cost of Goods Sold is derived.
Once all costs are associated with product preparation are accounted for, the Profit and Loss Statement subtracts this figure to arrive at the Company’s Gross Profit. All cash flow coming into a company is not limited to that earned in actual sales transactions. The company may also experience increased income from the interest paid on its accounts.After all sources of income are included, the Profit and Loss Statement shows the company’s Total Income.

Exercise – Profit and Loss Statement

Profit and Loss Statement Exercise

Fishbourne Marketing

Review the Profit and Loss Statement below and answer the following questions
1) What impact does Cost of Goods Sold have on Total Income?
2) If quality improved such that returns were reduced by 50%, what impact would that have on Net Income?
3) If alternative office rental accommodations could be found at a savings of $5,000 what would be the impact on Net Income?

Profit and Loss Statement

Fishbourne Marketing

January 1, 2014 to December 31, 2014

Income

Gross Sales	$323,789.40
Less Returns and Allowances	$10,000.00
Net Sales		$313,789.40

Cost of Goods
Merchandise
inventory, January 1	$160,000.00
Purchases	$90,000.00
Freight Charges	$2,000.00
Total Merchandise Handled	$252,000.00

Less Inventory, December 31	-$100,000.00
Cost of Goods Sold		$152,000.00
Gross Profit		$161,789.40

Interest Income	$2,500.00
Total Income		$164,289.40

Expenses
Salaries	$50,360.40
Utilities	$5,800.00
Rent	$23,000.00
Office Supplies	$2,250.00
Insurance	$3,900.00
Advertising	$8,650.00
Telephone	$2,700.00
Travel and Entertainment	S$2,550.00
Dues and Subscriptions	$1,100.00
Interest Paid	$2,100.00
Repairs and Maintenance	$1,250.00
Taxes and Licenses	$35,589.00
Total Expenses		$139,289.40

Net Income		$25,000.00

Answer – Profit and Loss Statement

Profit and Loss Statement Answer

Fishbourne Marketing

1) Cost of Goods Sold reduces Gross Sales to arrive at Total Income.
2) Net Income would increase by $5,000.
3) Net Income would increase by $5,000.

Profit and Loss Statement

Fishbourne Marketing

January 1, 2014 to December 31, 2014

Income

Gross Sales	$323,789.40
Less Returns and Allowances	$10,000.00
Net Sales		$313,789.40

Cost of Goods
Merchandise
inventory, January 1	$160,000.00
Purchases	$90,000.00
Freight Charges	$2,000.00
Total Merchandise Handled	$252,000.00

Less Inventory, December 31	-$100,000.00
Cost of Goods Sold		$152,000.00
Gross Profit		$161,789.40

Interest Income	$2,500.00
Total Income		$164,289.40

Expenses
Salaries	$50,360.40
Utilities	$5,800.00
Rent	$23,000.00
Office Supplies	$2,250.00
Insurance	$3,900.00
Advertising	$8,650.00
Telephone	$2,700.00
Travel and Entertainment	S$2,550.00
Dues and Subscriptions	$1,100.00
Interest Paid	$2,100.00
Repairs and Maintenance	$1,250.00
Taxes and Licenses	$35,589.00
Total Expenses		$139,289.40

Net Income		$25,000.00

LESSON 10

Standard Costing

Perhaps no accounting principle utilizes performance management concepts better than standard costing. One of the elements of cost accounting, standard costing is of particular benefit to those companies engaged in manufacturing. Each type of standard has its strengths and weaknesses, but regular monitoring and making revisions based upon current conditions incorporates performance management concepts and would seem to present the best chance for success
A firm wishing to utilize finances efficiently monitors the following costs:

Direct Material Costs
Direct Labor Costs
Manufacturing Overhead

The process of standard costing is achieved, in part, i.e., identifying a standard cost for each. A typical company may employ a committee to develop a standard costing plan.
Such a committee often involves key personnel such as a Cost Accountant, Production Manager, Personnel Manager and Purchase Manager.
This group clarifies and classifying its costs in more detail, grouping them by some categories such as the examples below:

Functionality (production, Selling, Distribution, etc.)
Fixed Costs
Variable Costs
Direct Costs
Indirect Costs

Assuming a company establishes realistic standard costs, it may then monitor performance with an eye on increasing efficeintcy and minimizing waste.
To judge the company on its performance over time, the standard costing team will determine which type of standard to employ. Depending on its goals and industry environment, a company may choose one of the following types of standards:
Maximum Level Standards – presumes that maximum ideal environmental conditions and company conditions are most favorable.
Current Level Standards – developed from recent company conditions and industry environment. Current standards are usually adjusted annually.
Basic Level Standards – provides levels and baselines designed for long term use, perhaps based on average levels over a 10 year period. Basic standards don’t adjust for current conditions, and does not serve monitoring purposes as well.

Standard Costing Exercise

McReynolds, Inc is a manufacturing company, producing electronic circuit boards.
In recent years it has generated its product primarily by the traditional manufacturing method.
(5) McReynolds plans to adjust its standard costing operations, which may result in which of the following benefits:

A. The change may align company performance management with cost accounting
B. McReynolds may now adjust faster and beat Nolan Industries to new markets
C. Pertinent information allow revisions and more realistic standard costs
D. The firm gains the ability to utilize recent information compiled by key cost centers
E. The certainty of replacing Nolan as regional market share leader

(1) Which of the following Standard Costing Plan development procedures are highly recommended?

A.Outsource to college freshmen
B.Perform séance requesting assistance from dead founder
C.Establish Cost Accounting Committee
D.Invite major competitors to submit suggestions

(2) Which of the following companies are most likely to employ a standard costing procedure?

A.Manufacturing
B.Cartooning
C.Public Relations
D.Media Records

(3) The proposed shift in manufacturing procedures represents a change from traditional to flexible, which of the following costing method is most applicable?

A. Regional Marketing Standards
B. Royal Industry Standards
C. Overall Cost Standards
D. Current Level Standards

(4) What were some of the erroneous aspects of the original standard costs done d by McReynolds?

A.Basing standards on goals
B.Basing standards on ideal conditions
C.Establishing standards without key input
D.Relying solely on outside data to determine standards
E.All of the above

Standard Costing Answer

Answers are below: McReynolds, Inc is a manufacturing company, producing electronic circuit boards.
In recent years it has generated its product primarily by the traditional manufacturing method.
(5) McReynolds plans to adjust its standard costing operations, which may result in which of the following benefits:

A. The change may align company performance management with cost accounting
B. McReynolds may now adjust faster and beat Nolan Industries to new markets
C. Pertinent information allow revisions and more realistic standard costs
D. The firm gains the ability to utilize recent information compiled by key cost centers
E. The certainty of replacing Nolan as regional market share leader

Answers

1) B, Establish Cost Accounting Committee
2) A, Manufacturing
3) D, Current Level Standards
4) E, All of the above
5) A, B, C and D

(1) Which of the following Standard Costing Plan development procedures are highly recommended?

A.Outsource to college freshmen
B.Perform séance requesting assistance from dead founder
C.Establish Cost Accounting Committee
D.Invite major competitors to submit suggestions

(2) Which of the following companies are most likely to employ a standard costing procedure?

A.Manufacturing
B.Cartooning
C.Public Relations
D.Media Records

(3) The proposed shift in manufacturing procedures represents a change from traditional to flexible, which of the following costing method is most applicable?

A. Regional Marketing Standards
B. Royal Industry Standards
C. Overall Cost Standards
D. Current Level Standards

(4) What were some of the erroneous aspects of the original standard costs done d by McReynolds?

A.Basing standards on goals
B.Basing standards on ideal conditions
C.Establishing standards without key input
D.Relying solely on outside data to determine standards
E.All of the above

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