Marketing, Cash Flow and Shareholder Wealth

Marketers have traditionally been pretty poor at showing why marketing matters to shareholders. We have often somewhat assumed it and just expected everyone to believe it.

Ramesh Rao and Neeraj Bharadwaj created a model to show the effect of marketing on the firm. It shows how — assuming marketing impacts the distribution of revenues — that it will influence firm value. It isn’t just about increasing sales but changing how they are made. Interestingly, this is partly through the ability of different marketing plans to influence the cash that must be held by the firm. (Basically riskier plans require more cash is held unused in case it is needed to cope with a disastrous outcome).

As is the case in these sort of models they abstract away complexity to get to the key ideas. These include the fact that marketing impacts expected cash flows “(a) directly, by determining the probability distribution of future sales revenues, and (b) indirectly, by determining the firm’s current working capital needs.” (Rao and Bharadwaj, 2008, page 19).

They also note how marketing impacts shareholder wealth. (Note the distinction between cash flows and wealth, they are connected but not the same). “A marketing initiative can affect shareholders’ wealth in two ways: (a) by affecting their wealth as reflected in the stock price (the stock price effect) and (b) by affecting the wealth that investors can create outside the stock market with any freed-up working capital (the released working capital effect).   (Rao and Bharadwaj, 2008, page 19) My favourite bit of the paper is where the authors suggest the shareholders can invest in other things with the released capital. The things to invest in are suggested as real estate, gold, and art. I realized I’ve never been in the happy position of having so much cash released that I can get buy a Monet.

The authors note the importance of the Boardroom Project — the predecessor of MASB — in advocating for greater work on the marketing/finance interface.

Marketing needs even more work tracing the connection between its actions and financial outcomes.

Read: Ramesh Rao and Neeraj Bharadwaj (2008) Marketing Initiatives, Expected Cash Flows and Shareholders’ Wealth, Journal of Marketing, 72 (1) pages 16-26