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A Short Marketing Course
Financial Aspects of Marketing Management

Aspects for concentration

  • Cost of Sales
  • Use of Assets
  • Efficient Cash Management

Cost of Sales - must know and keep informed of changes in

  • Unit cost of production - direct and indirect and sales volume break-event point at optimum plant utilization levels
  • Consumer price perception - what % will stop buying or turn to competitor if price increased by 5,10% and vice versa
  • Necessary actions - must act to ensure
    • S. P.'s set at level to achieve optimum balance between unit margin and total volume
    • That no erosion of margin takes place
    • That an ongoing value engineering program is setup
    • Where range of products is sold that high margin products are optimized and low margin products minimized or phased out

Use of Assets

The higher the stock turn the higher the profits.

Impact on Fixed Asset Utilization - key factors: Level of sales plant will service and cost of achieving them. Improve or discontinue a line or replace it to make better utilization of plant and buildings.

Impact on Current Asset Utilization - Debtors and Stocks. Debtors can be affected by:

  • Selling policies which allow major customers too long a period of credit
  • Opening up small accounts whose financial liability is suspect - Lack of discipline in this area is cost.

Basic and Imperative actions to be taken

  • Must be firm in resisting demands for extended credit
  • Have strict credit control procedures to investigate new accounts and to withhold deliveries from late payers
  • Debt collection is a necessary part of a salesman's role


  • Level of customer service - 48 hour via 14 day
  • Accuracy of sales forecasts
  • Product range

Efficient Cash Management

Need to spend money to make money - will the money be available from the bank manager

Credit facilities - Economic uncertainty makes bankers less willing to underwrite 'risky' investments. If sales rise rapidly payments from last months sales may be insufficient to cover cost of raw materials required for today's product. Could lead to overtrading.

Effects of reduced borrowing - Short term - delaying advertising and promotional campaigns, factoring debtors, looking for alternative distribution channels e.g. direct mail to raise instant cash. Longer term - adjusting product and pricing strategies.

Marketing Analysis and Decisions

Both quantitive and qualative information must be taken into account before a decision can be made.

Ratios can be compared

However company A has a return on capital of 15% and company B 10% but company B is better managed. How this is possible - Companies may be operating in different industries. Companies may be of vastly different size.

Criteria for meaningful comparison

  • Concerns should be of approx the same size and
  • Operate in similar industries also
  • Accounts should be drawn up using same accounting conventions

Ratio Analysis Technique

Return on Capital Employed

Net Profit after Taxation and Interest / Net Assets Employed * 100

This is judged to be the most important ratio to calculate. The higher the return on capital the better the performance.

Gross Profit Ratio

Gross Profit / Sales * 100

The higher the % the higher the mark up, the greater the margin. This in itself does not prove that the mark up is wrong or right.

Net Profit Ratio

Net Profit / Sales * 100

This can help highlight expense variations

Stock Turnover Rate

Cost of Sales (Op Stock + Purch - Cl Stock) / Average Stock

The higher the rate the better. Low rate indicates high amount of finance 'tied up' in stocks.

Current Ratio

Current Assets / Current Liabilities

If less that 1.0 business is in trouble. High ratio represents finance tied up in stock and debtors. Rule of thumb for most industries 1.5 - 2.5.

Liquid Ratio

Current Assets - Stock / Current Liabilities

A better test of a business's ability to pay its way. Reason - stock can be overvalued and not represent the 'salvage' value. Also stock may be difficult to clear quickly. This ratio should be above 1.0 Marginally less than 1.0 would not portend imminent disaster.

Debtors and Creditors Ratio

Average Debtors / Credit Sales = Debtors Ratio

Average Creditors / Credit Purchases = Creditors Ratio

First step is to convert ratios to days, weeks or months. Comparison will tell if you are a net receiver of trade credit or a net giver. By comparing with stock turnover rate you can calculate number of days you are a net receiver or giver eg stock turnover = every 87 days. Pays creditors after 35 days.


Is where there is insufficient working capital to finance increased debtors and stock.

Opportunity Cost

Providing a contract gives a positive contribution it is worth accepting as long as it does not cause the displacement or rejection of an alternative contract which gives a higher contribution.



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