MARKETING FINANCE- NOTES

Marketing is the management process responsible for identifying,

anticipating and satisfying customer requirements profitably.’ The new
one is: ‘The strategic business function that creates value by
stimulating, facilitating and fulfilling customer demand. It does this by
building brands, nurturing innovation, developing relationships,
creating good customer service and communicating benefits. By
operating customer-centrically, marketing brings positive return on
investment, satisfies shareholders and stake-holders from business
and the community, and contributes to positive behavioural change
and a sustainable business future.
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THE FIRM AS AN ECONOMIC UNIT: in order to survive and grow, a

firm or business unit has to be economically viable- it has to run as a
viable economic unit. In the first instance, the firm has to acquire or
make available to available itself some resources. Only then, through
planned, systematic, efficient and effective use of such resources can
the firm produce some results. The resources and results may be
described as input and output respectively. The balancing of such
inputs and outputs should eventually leave some surplus. The surplus
is called profit in commercial organizations. When profit does not
accrue, the firm cannot be called an economically viable unit. Another
interesting point to note that both resources and results are external to
business and only through management skills can resources be
exploited to produce results favourable to the business unit.
Resources are of various types. They are chiefly:

1. Men
2. Materials
3. Machines
4. Market and
5. Money

Each one of these resources needs efficient management. This is how

different functions of management have been developed.

1. Men : Personnel Management

2. Materials : Materials Management
3. Machines : Productions Management / Operations
Management
4. Market : Marketing Management
5. Money : Financial Management

Pivotal Role of Money / Pivotal Finance: Money is one of the most

important resources. But the pivotal role of money is evident from the
fact that, besides itself being a resource, money can also acquire other
resources as well as measure the changes in them. It necessarily
follows that the firm has to acquire finance first and then other
resources.

The well known age “Money is what money does” illustrate this pivotal
role of money.

ACCOUNTING CONCEPTS/ PRINCIPLES:

Business Entity Concept: Treating each business unit as an
independent entity, quite distinct from its owners.

Money Measurement Concept : Taking cognizance of only such

transactions as are amenable to strict monetary measurement.

Accounting records state only those facts about a business firm, which
can be expressed in monetary terms. In other words, business events
and facts that cannot be expressed in monetary terms, howsoever
important they may be, are excluded.

For example, the death of the managing director who was guiding the
destiny of the company since its inception, the emergence of a better
product at a lower price in the market, the emergence of a new
technology and so on (though very significant from the future
perspective of business) are ignored.

The operational implication of the Money Measurement Concept is that

financial statements do not provide all information about the business.

Continuity or going concern approach: The Going Concern

Concept implies that the firm will continue to operate in the
foreseeable future. The operational implication of this assumption is
that assets are not shown in Balance Sheet at their realisable market
value, which implies liquidation value.

Instead, evaluation of assets is with reference to the value of goods

and services they are likely to produce in future years to come.

Historical Costs: Recording transactions as past or historical money

value.
Cost Concept : Assets/resources owned by the firm are shown at
their acquisition cost and not at current market value/current worth.

The rationale for this assumption is that it provides objective and

verifiable basis for accounting records. Market valuation of assets in
use is not only difficult to be made but also is related to subjectivity.
Besides, market values may be constantly subject to change.

Above all, determination of objective and undisputed market price of

assets, say of land and buildings, plant and machinery, furniture and
so on that are not intended for sale is fairly expensive and time
consuming. Further, it is important to note that these long-term assets
are acquired to be used in business and not for resale.

Clearly, Cost concept is a logical fall-out of Going Concern concept in

which current market value of assets does not hold relevance.

Evidently, individual assets (except cash and bank balances) shown in

Balance Sheet do not reflect their current market value. Some assets
such as land and buildings in major cities may have higher valuation
than shown in books and some other assets, like plant and machinery
may have lower valuation than shown in records.

Accounting Period Concept : Accounting Period Concept

requires that Income Statement should be prepared at periodic
intervals for purposes such as performance evaluation and
determination of taxes. Conventionally, the time span covered is
one year. Corporate firms, as per Companies Act, are required to
produce interim accounts and many business firms produce
monthly or quarterly accounts for internal purposes. Very often, the
accounting period chosen is 1st April to 31st March to conform to the
financial year of Government. Other accounting periods adopted
may be calendar year (January 1 - December 31), Diwali year,
Dussehra year and so on.

Accrual Concept

Accrual Concept is a fall-out of Accounting Period concept. This

concept requires that expenses incurred for a particular accounting
period should be reckoned in the same period, irrespective of the
fact whether these expenses have been paid in cash or not in that
year. The same holds true for revenues, i.e., revenues earned in a
specific accounting period are construed as incomes of the same
period, irrespective of their receipts.

This concept is very important to compute true income of a

business firm for each accounting period. Let us illustrate.
Suppose, a business firm has salary bill of Rs 50 lakh per month.
Due to the cash shortage, even though employees worked, the firm
could not pay salary for two months. The salary paid is for 10
months only (Rs 50 lakh × 10 months = Rs 500 lakh). In the
following accounting year, the firm will be required to pay salaries
for 14 months (including salary arrears of 2 months of the
preceding year) that is, Rs 50 lakh × 14 months = Rs 700 lakh. The
question we are to address is, how much should be considered as
salary expenses in both these years. Should it be on the basis of
cash payment? If it is so, salary expenses in previous year is to be
reckoned as Rs 500 lakh and in the current year Rs 700 lakh. Or,
should it be on accrual basis? In the latter situation, it will be Rs
600 lakh in each of these two years.
Evidently, cash basis of expenses recognition has an inherent
drawback of manoeuvring and distorting income results of the
accounting periods. Under this approach, other things being equal,
profit of the previous year will be higher (by Rs 200 lakh) as
compared to the current year. Obviously this misrepresents
income/profit figures of both these years. Due to this, wrong
inferences are drawn about the better performance in the previous
year compared to the current year, which is not true. The correct
approach obviously is to treat salary expenses of Rs 600 lakh in
both the years.

In the absence of Accrual accounting, the Income Statement may

indicate more profit in one year at the cost of the profits of some
other year, which is entirely inappropriate and illogical. In other
words, cash basis of expense recognition will hamper comparison
of profit figures over the years. Clearly, there is a very strong case
for a business firm to adopt accrual basis of accounting, known as
Accrual accounting to determine correct profits.

From the foregoing, it is apparent that deferring expenses, such as

salary, cannot increase profits. Likewise, profits cannot be lowered
by advance payment of expenses such as, rent and insurance. For
instance, insurance payment of Rs 12 lakh as on January 1, for one
full year is to be pro-rated. Assuming the firm has the accounting
period from April-March, insurance expenses of Rs 3 lakh only
(January-March) will form part of income statement of the current
year and the balance sum of Rs 9 lakh will be reckoned as
expenses of the following year.
What holds true for expenses, the same holds true for revenues.
Revenues are recognised at the time of sales and not at the time of
receipts from debtors. In operational terms, cash surplus and
deficiency are not indicative of profit and loss situations
respectively.

Matching Concept: The Matching concept is, in a way, an extension

of Accrual concept. In fact, this is the most comprehensive Accounting
Principle that enumerates normative framework of income
determination of an accounting period of a business firm.

In simple words, this principle requires matching of expenses/costs

incurred to revenues realised in an accounting period. The more
perfect this matching is, more correct is the income determination.

As per this principle, revenues as well as expenses are to be estimated

for an accounting period. As far as estimation of revenues is
concerned, it is, by and large, a relatively simple task. Revenues are
equivalent to value of goods and services sold during the specified
accounting period, irrespective of actual receipt of cash.

However, cost estimation is a relatively difficult task. The example of

Royal Industries was very simple in this regard. In practice, there are
many expenditures, which benefit several accounting years. Therefore,
these expenses cannot be charged to Income Statement of a single
year. For this purpose, it is useful to classify expenses into capital and
revenue categories.

Capital expenditures (for instance purchase of plant and machinery)

involve relatively large investment sum and often have some sales
value. Obviously, the purchase cost of plant and machinery (say of 500
lakh) cannot be considered as an expense of a single accounting year
in which it is purchased; its cost needs to be spread-over (technically
known as depreciation), on some scientific basis, among all the years
in which this machine is used. In practice, however, there will be
subjectivity involved on the amount of depreciation to be charged
every year.

In contrast, revenue expenses, such as rent, salaries, stationary,

repairs, etc., benefit one accounting year only and, hence fully
charged/written off against the revenues of the same year. They
require relatively small sums and do not have sales value. At the best,
adjustment for advance/arrears may be needed (already explained
under Accrual concept). This adjustment is simple arithmetic exercises
and does not involve subjectivity. Thus, for revenue expenses items,
the Matching principle is easy to follow.
However, even in the revenue category, there are certain expenses,
which are essentially revenue in nature (in the sense that they do not
have sales value) but the benefits from them extend to more than one
accounting year. For instance, massive advertisement expenditure
incurred in launching a new product needs to be shared by the
subsequent year(s) also, as it promotes sales of these years and hence
augments revenues of these years. Evidently, it is very difficult to
apportion with precision the share of advertisement expenditure to be
charged in Income Statements of the affected accounting periods.
Other notable examples are flotation costs incurred while raising funds
through issue of shares/debentures, and Research and Development
expenditures. The firms, in practice, are expected to evolve some
scientific criterion to apportion these expense items over the years.
Howsoever-tall claims may be made about objectivity in this regard,
arbitrariness and subjectivity cannot be done away with. It remains in
the system.

Consistency Principle: Matching principle has underlined the

importance of treatment of capital expenditure items in income
determination process. It focuses on the equitable methods, which
must be used to write off the cost of plant and machinery (and in that
way of other long-term assets) so that its cost is fairly allocated as
expense, in form of depreciation, to each accounting period throughout
its estimated useful life. There are various methods of charging
depreciation. The two notables methods are, Straight-Line Method
(SLM) and Written Down Value Method (WDV).

The assumption underlying the SLM is that depreciation is basically a

function of time. Accordingly, the cost of depreciation is allocated
equally to each year of the estimated useful life of plant and
machinery. The sum of depreciation is obtained by dividing the
depreciable cost of machine (Purchase price of machine - Estimated
Salvage Value) by the number of estimated economic useful life (in
years).

In contrast, according to the WDV method, a fixed rate (say 25%) is

applied to the cost of the machine (disregarding salvage value) of the
first year to determine depreciation charge. In each subsequent period,
the depreciation expense is determined with reference to the same
fixed rate (25 %) to the written down balance (cost of machine less
depreciation in the first year). Obviously, both the methods will provide
different answers towards depreciation charges.

The Consistency Principle requires that there should be a consistency

of accounting treatment of items (say depreciation method used in
respect of plant and machinery) in all the accounting periods. For
instance, if Straight Line method of depreciation is used for plant and
machinery, the same should be used year after year. Switching over to
Diminishing Balance method in any of the subsequent years will
obviously affect depreciation charges and, hence, their profits. As a
result, the profit picture will not be comparable over the years and,
therefore, the justification and relevance of consistency principle.

Likewise, there are different methods for valuation of inventory such

as, Last-in-First-Out, First-in-First-Out, Weighted Average Cost Method
and so on. In order to maintain uniformity and reveal true and fair view
of the performance of business firm, the accounting policies should be
followed on a consistent basis. In case, there is a necessity to change,
the impact of such a change should be clearly mentioned.

ACOUNTING CONVENTIONS:

1. Conservatism
2. Consistency
3. Disclosure
4. Objectivity
5. Materiality
CAPITAL EXPENDITURE, REVENUE EXPENDITURE AND
DEFERRED REVENUE EXPENDITURE :

The distinction between Capital and Revenue is a logical requirement

of Accounting Period Concept.

Capital transactions mean transactions involved in the purchase,

acquisition, sale or disposition of assets which have a life of more than
one year.

Revenue Transactions, on the other hand, relate to the income and

expenses connected with the normal day to day operations of the
business.

If the life of a business is not divided into a number of distinct

accounting periods or years, the distinction between capital and
revenue will lose its significance.

Capital Expenditure are those incurred for acquisition of some assets

intended to be used in the business at least for more than an year to
maintain and / or enhance its profit earning capacity.

Revenue Expenditure relate to those connected with the normal

operations of the business which do not result in some enduring
benefits to the business.
Deferred Revenue Expenditure is expenditure strictly of a revenue
nature , but the full amount involved is not treated as such
expenditure in the particular year in which it is incurred , since the
benefits thereform do not cease to exist in that particular year itself.

Examples: Expenditure on massive advertisement compaign

Preliminary Expenses
Discount or loss on issue of debentures
Research & Development Expenses (including expenses on
development of new
products)

ACCOUNTING : Definition: The oft-quoted definition of accounting

is ...

“Accounting is the art of recording, classifying and summarizing in a

significant manner and in terms of money, transactions and events
which are, in part at least, of a financial character and interpreting
the results therefrom. ”

COST ACCOUNTING: Definition: “ application of costing and cost

accounting principles, methods and techniques to the science, art and
practice of cost control sand the ascertainment of profitability...”

The technique of costing involves two fundamental steps:

1. Collection and classification of expenditure according to cost

elements
2. Allocation and apportionment of the expenditure to the cost
centres or cost units.
Cost Centre is defined as a location, person or item of equipment (or a
group of these) for which cost may be ascertained and used for the
purpose of cost control.

Cost unit is a device for the purpose of breaking up or separating costs

into smaller subdivisions attributable to products or services. It is the
unit of quantity of product , service , or time (or a combination of
these) in relation to which costs may be ascertained and expressed.
We may for instance, determine the cost per tonne of steel, per tonen
–km of transport service or cost per machine –hour.

Why Finance in marketing or Why should we learn the subject

“Marketing Finance”

To what extent the 2 disciplines marketing and finance are related or

inter –dependent ?

How the success of an enterprise depend to a great extent on the

closest possible co ordination between marketing and finance.

There has been a tendency to treat marketing and finance as two

completely different functions and separate them into water tight
compartments.
Marketing guys have tended to create an impression that they are the
money spinners and accounting / finance guys are unproductive
parasites living on their earnings.

Finance people, on the other hand, with rigorous professional

qualifications in most cases, have tried to find fault with the marketing
people and despised them for lack of knowledge of finance and some
times condemn them for their so-called attitude of frittering away the
company’s precious financial resources.

COST- REVENUE – INVESTMENT FRAME WORK IN MARKETING:

This is a perspective view of marketing finance, comprising 3
components:

The term cost has a broad meaning here and covers in its ambit, all
costs of setting up as well as running a marketing organization.

(A cost is generally understood to be that sacrifice incurred in an

economic activity to achieve a specific objective, such as to consume,
exchange, or produce.)

Some of these costs are one time in nature –the capital cost in
accounting terminology. Other costs are revenue or recurring costs.
But even those one –time capital costs become a part and parcel of the
recurring costs through the process of depreciation and amortization,
so that in the end, all costs get absorbed or recovered through
operations.

Revenue is what the organization earns by selling its products and / or

services to customers outside the organization.
The sum total of all revenues is matched against the sum total of all
costs (both direct and indirect) and the difference is worked out. A
positive difference is profit and a negative difference loss.

To keep the recurring operations going in marketing, there has to be

some investments. These are broadly of two types, viz. investment in
capital assets( motor cars, warehouses, office equipment, etc) and
those in working capital ( inventory, accounts receivable, etc).

The recurring costs of these investments have to be absorbed (along

with direct costs) by revenues earned through marketing efforts.
Recurring costs due to investments in marketing usually takes any or
both the following forms:

1. Depreciation or diminution in respect of capital assets, inventory,

value of amount to be collected, etc.
2. Financing of interest charges (actual or notional) covering all
investments both in fixed assets and working capital.

The Cost- Revenue- Investment relationship discussed above is

represented by the financial ratio Return on Investment (ROI)

ROI = Net Profit

Capital Employed

ROI = Net Profit x Sales

Sales Capital Employed
ROI = Margin Ratio (or Net Profit ratio) x Capital Turnover Ratio( Rate
of turnover of capital)
Net profit / Sales = Contribution X Net Profit
Sales Contribution

= PV Ratio X Margin of Safety

Marketing ROI:

From the view point of marketing management, it will be both

interesting and useful if an attempt is made to arrive at the marketing
ROI, as distinct from corporate ROI. For this purpose, marketing ROI
may be defined as the relationship between net marketing margin and
the capital employed only in marketing operations.

Marketing ROI = Net Marketing Margin (NMM)

Investment on Marketing operations
A new survey by TargetBase shows that only 8% of all marketing execs
feel that their firm’s marketing and financial goals are congruent.

Almost 75% said they are aligned, but need some degree of
improvement. (The need is “significant” for 28%). And 23% flat-out
said that the goals are not aligned at all.

Here’s one possible reason why: Half of the marketers said they are
frequently pressured to produce short-term results at the expense of
long-term growth. And 28% claimed they are sometimes asked to do
this.

In addition, a fifth claimed lack of support from the parent company,

and an equal number cited lack of internal approval and support.

And the beancounters are watching. Fifteen percent of the marketers

said their programs are evaluated on a monthly basis for impact on
company growth. Another 10% noted that they are examined at
random intervals.

But some marketers have breathing room. A fourth of those surveyed

said they are evaluated on a yearly basis, and another fourth indicated
quarterly.

And which metrics are used to monitor growth? The chief one is sales
at 83%. This is followed by revenue at 80% and profits at 78%.

What are the biggest challenges facing marketers in their pursuit of

growth For 43%, it was discounting versus building value. Tied for first
place was inadequate marketing funds. And 40% cited elusive ROI
measurements.

That lack of funding is serious. A whopping 40% said that their

marketing budgets are not sufficient to meet their growth objectives
this year. Another 35% said they were, and 25% aren’t sure yet.

As for media, 23% of the marketers said direct mail had most impact
on their growth goals. This was followed by print (15%); e-mail (10%);
and point-of-purchase (10%).

However, print was cited by 78% of those surveyed as helping them

reach their sales goals, and direct mail by 60%.
And how did they choose their channels this year? Past results were
cited by 80%, and the best projected ROI by 65%. Another 63% sought
insight from primary or custom consumer research. And 33% based it
on “gut feeling.”

The survey was conducted among 40 CMOs from a variety of

companies, including Disney, General Mills, Honda, Sunkist and Whole
Foods.

Here are some additional statistics:

What of the following measures are tracked by your company

to monitor growth?

Sales: 83%

Revenue: 80%,

Profits: 78%

Market share: 73%

Brand awareness: 70%

New customers: 68%

Customer satisfaction: 65%

Customer retention: 55%

Share Price: 30%

Number of locations: 15%

Other: 3%

Which is the most important measure?

Revenue: 28%

Profits: 18%

Sales: 15%

Market share: 13%

Customer retention: 10%

Customer satisfaction: 8%

New customers: 5%

Brand awareness: 3%

Intent to recommend: 3%

Which are your biggest challenges to achieving your growth

objectives this year?

Discounting versus building value: 43%

Inadequate marketing funds: 43%

Elusive ROI measurements: 40%

Competitive pressure: 38%

Lack of program integration: 35%

Difficulty collecting consumer data: 35%

Trouble achieving speed to market: 30%

Lack of staff: 30%

Unclear or unrealistic goals: 25%

Inability to leverage latest marketing methods: 25%

Lack of support from parent company: 20%

Lack of internal approval and support: 20%

Can’t produce relevant reports: 18%

Ineffective targeting: 18%

Changing product technology: 13%

Other: 13%

Ineffective creative: 10%

Unable to keep pace with changing consumer needs: 5%

How did you select the marketing channels used this year?

Past results: 80%

Best projected ROI: 65% Insight from primary or custom consumer

research

New strategy/testing innovations in marketing

Insight from secondary consumer research

Instinct or "gut feeling"

Resposne to competitive marketing

Other

Please describe your approach to growing your business in

today's marketing environment

Consumer targeted communication: 12%

Customer identification/segmentation: 12%

Identify/satisfy consumer needs: 12%

Strengthen communications to consumers: 12%

Don't know/refused: 8%

Partnering with retailers/distirbutors: 8%

Communication via numerous channels: 6%

Improved operational performance: 6%

Educate consumers to value of product/service/solution: 4%

Increase market share: 4%

Online marketing: 4%

ROI measurement: 4%
Creative communication: 2%

Identify growth opportunities: 2%

Long-term planning: 2%

Reallocation of resources to most productive tasks: 2%

Strengthen relationship with current customers: 2%

Marketing vs finance: The great debate

5 May 2009

Professor Robert Shaw discusses how organisations can ensure that

their marketing continues to reap financially what it sows creatively in
the current financial climate.

Key points
• Finance and marketing have a disjointed relationship.
• Finance focuses too much on budget and not enough on
performance, whereas marketing
concentrates on brand awareness/image but not on sales or
profit.
• The best organisations strike a balance between financial rigour
& marketing imagination.
• Progress can be made by holding marketing/finance workshops
and ensuring both sides
• ask the right questions.

Marketing’s costs have long been the subject of discussion. A century

ago, Lord Leverhulme, founder of Lever Bros and the first president of
the Chartered Institute of Management Accountants (CIMA) said: “Half
the money I spend on marketing is wasted. The trouble is I don’t know
which half”. Unfortunately, finance and marketing seldom have
meaningful discussions about this problem.

Finance and marketing departments sometimes have disjointed

working relationships. They often ask different questions and answer
them in different languages. Questions that finance ask focus too much
on budgets and too little on performance; and marketing focus too
much on brand awareness and image and too little on sales and profit
performance. Everyone retreats into their own technical jargon, each
bewildering the other and wasting lots of time pursuing irrelevant
questions. Ultimately any attempt at finance/marketing dialogue gets
derailed.

The infinity model

In a bid to get to the bottom of this frustrating business challenge, a
new report entitled Return on Ideas has been published. The need for
this guidance paper came from joint discussions between the
Chartered Institute of Management Accountants (CIMA), the Chartered
Institute of Marketing (CIM) and the Direct Marketing Association
(DMA). It emerged that members of all three professional bodies were
concerned about the value contributed by marketing and what
constitutes sound evidence about its value. Pivotal to this, they also
recognised the need to drive productive teamwork between finance
and marketing working together.

The report is packed with practical suggestions, checklists and case

studies, solidly based on candid research on over 100 organisations,
large and small across industries.

This essence of this candid research has led to the creation of the
‘infinity model’, an innovative framework designed to put the finance-
marketing dialogue back on the rails. The report is prescriptive about
what constitutes good and bad evidence about marketing efficiency
and effectiveness, and enables managers to decide for themselves
what is feasible. The model can be tailored to the needs of all types
and sizes of organisation.

The best organisations comprise a positive creative tension between

financial rigour and the marketing imagination. More specifically this
involves:

• Harnessing the marketing imagination to create value adding

ideas.
• Predicting how much financial value these ideas will contribute.

• Delivering and demonstrating that value really was created.

• Establishing learning that will improve future ideas, predictions

and results.

This creative tension is found in all their working practices, and these
are things that any other organisation can and should copy. Managers
can assess their adherence to this model by answering the questions
listed in the report’s checklists.

By adopting this double cycle, the failure rate of marketing ideas and
associated waste can be reduced significantly. It can never be totally
eliminated because customers are forever changeable and are never
completely predictable. Good senior management accepts uncertainty
and risk as an innate part of marketing. They do not try to force a
‘right every time’ philosophy; instead they manage uncertainty using
the best methods available.

Putting it into practice:

A lot of progress can be made in just one day through holding a

workshop with finance and marketing. By discussing the questions
listed in the report, participants can find out how they can do a better
job of making marketing more efficient, effective and value adding. In
the process they will start to speak a common language that focuses
on performance as well as conformity.

Having a follow-up session with the managing director or business unit

heads can be helpful too. The report sets out departmental specific
questions to be answered by the key players. A common issue that
such discussions can resolve occurs when business units hold the
marketing purse strings, and they use the marketing department as an
internal service function. All too often such expenditure is squandered
on vanity projects, whose sole effect is inflation of managerial egos,
without sound commercial justification.

Quick wins from these workshops can be put into practice with
immediate benefits. A longer term programme of change may be
identified too, and the report contains a road map to plan out this more
strategic approach.

The 10 benefits

• Making the marketing budget work harder.

• Holding agencies rigorously to account for results.

• Eliminating production wastage and its causes.

• Making marketing assets and collateral (images, video, text)

work harder.

• Maintaining media effectiveness while reducing costs.

• Getting agencies to do a better job in less time.

• Avoiding surprises in budget commitments.

• Wasting less time on budgetary bureaucracy.

• Faster marketing approvals with fewer errors.

• Forecasting more accurately.

Return on Ideas:

Professor Robert Shaw discusses how in these tough economic times,

organisations must ensure that their marketing continues to reap
financially what is sows creatively.

An important new report “Return on Ideas” has just been published. Its
subject? How any organisation that has to market itself can be more
efficient, effective and value adding. This is a frustrating business
challenge and what we’ve delivered isn’t theoretical or waffle. The
report is packed with practical suggestions, checklists and case
studies, solidly based on candid research on over 100 organisations,
large and small and across industries. When we shared it in draft with
a sample of CIMA members they gave it their unanimous thumbs up.

The need for this guidance paper came from joint discussions between
the Chartered Institute of Management Accountants (CIMA), the
Chartered Institute of Marketing (CIM) and the Direct Marketing
Association (DMA). It emerged that members of all three professional
bodies were concerned about the value contributed by marketing and
what constitutes sound evidence about its value. Pivotal to this, they also recognised the
need to drive productive teamwork between finance and marketing working together.
Why do finance and marketing often have meaningless
discussions?

Marketing’s costs have long been the subject of discussion. A century

ago the saying “half the money I spend on marketing is wasted. The
trouble is I don’t know which half” was uttered by Lord Leverhulme,
founder of Lever Bros and first President of CIMA. Yet finance and
marketing seldom have meaningful discussions about this problem.

Finance and marketing sometimes have disjointed working

relationships. They often ask different questions and they answer them
in different languages. Questions that finance ask focus too much on
budgets and too little on performance; and marketing focus too much
on brand awareness and image and too little on sales and profit
performance. Everyone retreats into their own technical jargon, each bewildering the
other and wasting lots of time pursuing irrelevant questions. Ultimately any attempt at
finance-marketing dialogue gets derailed.

The Infinity Model

The essence of this candid research has led to the creation of the
“infinity model” – an innovative framework designed to put the
finance-marketing dialogue back on the rails. Full of practical self-help
exercises, questions, checklists and illustrative case study examples,
the report is prescriptive about what constitutes good and bad
evidence about marketing efficiency and effectiveness, and it enables
managers to decide for themselves what is feasible. The model can be
tailored to the needs of all types and sizes of organisation.

What we found is the best organisations have a positive creative

tension between financial rigour and the marketing imagination. More
specifically this involves:

• harnessing the marketing imagination to create value adding ideas

• predicting how much financial value these ideas will contribute
• delivering and demonstrating that value really was created
• establishing learning that will improve future ideas, predictions and
results.

This creative tension is found in all their working practices, and these
are things that any other organisation can and should copy. Managers
can assess their adherence to this model by answering the questions
listed in the report’s checklists.

Figure: the infinity model of marketing value creation

Figure: the infinity model of marketing value creation

By adopting this double cycle, the failure rate of marketing ideas and
associated waste can be reduced significantly. It can never be totally
eliminated because customers are forever changeable and are never
completely predictable. Good senior management accept uncertainty
and risk as an innate part of marketing. They do not try to force a
‘right every time’ philosophy; instead they manage uncertainty using
the best methods available.

What can companies do to put the report into practice?

A lot of progress can be made in just one day, through holding a

workshop with finance and marketing. By discussing the questions
listed in the report, participants can find out how they can do a better
job of making marketing more efficient, effective and value adding. In
the process they will start to speak a common language that focuses
on performance as well as conformance.

Having a follow-up session with the managing director, or business unit

heads, can be helpful too. The report sets out departmental specific
questions to be answered by the key players. A common issue that
such discussions can resolve occurs when business units hold the
marketing purse strings, and they use the marketing department as an
internal service function. All too often such expenditure is squandered
on vanity projects, whose sole effect is inflation of managerial egos,
without sound commercial justification.

Quick wins from these workshops can be put into practice with
immediate benefits. A longer term programme of change may be
identified too, and the report contains a road map to plan out this more
strategic approach.

So what are the benefits?

Ten of the benefits of this are:

1. Making the marketing budget work harder
2. Holding Agencies rigorously to account for results
3. Eliminating production wastage and its causes
4. Making marketing assets and collateral (images, video, text) work
harder
5. Maintaining media effectiveness while reducing costs
6. Getting Agencies to do a better job in less time
7. Avoiding surprises in budget commitments
8. Wasting less time on budgetary bureaucracy
9. Faster marketing approvals with fewer errors
10. Forecasting more accurately

Conclusions

This report is aimed at giving practical help to any organisation that

has to market itself. Free to CIMA, CIM and DMA members, grab a copy
of the report, read it and run a workshop. We believe this is the way of
the future for responsible marketing in the 21st century.

Further information about the report can be found at: www.return-on-

ideas.com

Professor Robert Shaw is a veteran observer of marketing and finance,

passionate about improving marketing effectiveness, and proficient at
penetrating partial and confusing data. Over the past 25 years his
analysis and advice has been sought by senior executives in finance
and marketing in over 50 companies and professional bodies. He is
founder of Demand Chain Partners (www.demand-chain.com). His
recent books include Marketing Payback: Is Your Marketing Profitable?
published by FT Prentice Hall; and Improving Marketing Effectiveness
published by The Economist.
Return on Ideas addresses the perennial issue of accurately
assessing the financial value that marketing departments add to the
bottom line of corporations. While the apparatus of direct marketing
makes it the most accountable form of marketing because of its ability
to provide a clear outline of return on investment, companies often
lack a sufficient blend of marketing and accountancy acumen, either to
establish the value of their marketing campaigns or to account to
shareholders on the effectiveness of investment in marketing. This is
particularly important at a time when the economy is stalling and
companies need to make well informed decisions when cutting costs.

Return on Ideas was authored by Dr Robert Shaw, Honorary Professor

of Marketing Metrics at Cass Business School. Dr Shaw surveyed more
than 100 organisations to understand where marketers succeed and
fail in working with their finance business partners to create and
demonstrate marketing’s financial worth. Dr Shaw also researched
current academic measurement theories that are commonly used by
accounting firms, consultants and marketing service firms. The
outcome of this candid research led to Dr Shaw’s development of the
Infinity Model, a practical framework that can be used by any size of
organisation in any market to create greater sustainable value.

The Infinity Model encompasses the following principles:

• The processes that deliver ideas, predictions and demonstrations

of value must run smoothly and should be aligned with other
corporate processes
• It is also a matter of ensuring that marketing kicks off the
business planning cycle and that marketing and financial plans
are aligned throughout the financial year
• A well-balanced team has the mix of people needed to imagine,
predict and demonstrate value, with a creative tension between
ideas and numbers
• Good ideas can come from not only marketing but finance, sales,
customer service, production and suppliers
• Marketing people should be allowed the freedom to imagine and
create value-adding ideas
• Rigour should be achieved through leadership and motivation,
with marketing insisting on rigorous cost-benefit analysis of their
own ideas
• Ideas should not be killed off or subjected to prolonged delays
just because the data about them is not perfect