For this week and next I will look at an excellent book – Marketing Finance – by Keith Ward. He has taught at Cranfield amongst other places. (There are later editions with new co-authors — but reading different editions of the same book too close to each other is a bit too much even for me). In this post I will discuss classifying marketing investments as expenses.
Problems At The Marketing Finance Interface
Ward’s book — my edition is 2004 — makes many of the key points that later work in this field addresses. He draws on some invaluable personal experience to discuss problems at the Marketing Finance interface. He also gives advice on how to manage these problems. Some of the book is just a more financially literate take on well known marketing concepts. More interesting, from my perspective, is his strong focus on the practical problems of working with financial reporting systems.
Classifying Marketing Investments As Expenses
A key part of the book discusses the issues that come from classifying marketing investments as expenses. The consequences are highlighted.
“..if marketing development expenditure is capitalized as an asset on the organisation’s balance sheet, rather than being expensed as it is incurred, the resulting accounting ROI would be significantly altered”Ward, 2004, page 190.
It is a theme that I return to on a number of occasions in my work. When you assess the performance of marketing investments how the score is kept is critical to your assessment. As a general rule I would say that results do not mean anything if you don’t understand how the score is kept.
Beyond accounting’s challenges classifying marketing investments Ward notes further challenges. These include the division of spending into “‘above the line’ (meaning mainly media advertising) and ‘below the line’ (meaning promotions for both trade and end customers, etc.)”. He says this is “also very unhelpful” (Ward, 2004, page 19). Ward is persuasive. These distinctions are largely meaningless to understanding marketing. Given this why use this classification?
He also notes the challenge of dealing with promotions. Ward points to the problem of using a single financial evaluation to promotions of different types. A key issue is that you can’t just assess all promotions’ profitabilities within a single promotional period. Promotions impact periods other than the promotional period. For example, consumers seeing promotions start to wait for deals. They then stockpile during deals. Basically the promotional period steals sales from other periods. This means the promotion even if it looks profitable in that period it might not be actually profitable over the long term.
Ward isn’t just negative about working in marketing finance. He highlights critical success factors which I’ll turn to next week.
My blog has a lot of work on marketing accountability and challenges with the managerial and financial accounting of Marketing. See here, here and here or just search the site. For more on how I think we could better record marketing see here.
Read: Keith Ward (2004) Marketing Finance: Turning Marketing Strategies Into Shareholder Value, Elsevier