Marketing Finance

Marketing Finance
PGDM/MMS (Marketing)
Semester III (2010-12)
Marketing Finance: Syllabus

I: SALES REVENUE:
Sales Revenue as an integral element of cost and
revenue Investment Framework by RCM
Management of Sales Revenue Analysis of
revenue by Products, Territories, Channels,
Customers Orders etc. Analysis of marketing
costs by types of costs by functions, significance
of marking cost allocation for managerial
decisions and its limitations.
06/04/12
Syllabus
II : MARKETING INVESTMENT:
Management of Accounts Receivables and
Inventories - Credit Decisions and Credit Policy
- Special Promotion and Marketing Research
Expenditure Marketing Investments and their
evaluation using the probability theory and
Decision Trees Evaluating Return on
Marketing Investment Developing and
launching new products and the Concept of
Investment in Life Cycle of Product - Application
of DCF and linear programming to evaluate
investments in product development and
marketing product mix.
06/04/12
Syllabus
III : POLICY DECISIONS AND MARKETING
FINANCE:
Pricing of joint products and application of linear
programming - Pricing of new products under
ROI concept - Bayesian Decision theory and
Pricing Government Price Control (Dual
Pricing, approaches of government bodies to
development of Fair Price , Submitting of
tenders ) application of DCF techniques to
budgeting Developing sub-budgets by
marketing segments Advertising Budgets
Budgeting Sales Force Efforts Optimum level
and allocation for selling efforts among dealers
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Syllabus
Developing comparison plans for sales force
budgeting samples Warehousing decisions
Transportation decision Delivery Route
decisions Cost analysis for distribution
alternatives - Financial analysis for switching
over from sole selling agency to direct selling to
trade channel - impact of marketing strategies
on organisational structure and design
consequent financial implications - Concept of
marketing cost and value measuring value
added by marketing effort.
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Syllabus
IV:PRICING DECISIONS:
Target Pricing Pricing of Turnkey Projects - Notional
Pricing Brand Valuation and financial aspects of brand
management Impact of transfer pricing mechanism on
marketing performance Value chain analysis and
relevant decisions about marketing costs and marketing
investments.
RECOMMENDED TEXT BOOKS:
MARKETING MANAGEMENT A Finance Emphasis
By: Dr. B K Chatterjee, Fourth Edition JAICO Publishing
House.
FINANCIAL MANAGEMENT Theory and Practice By;
Dr. Prasanna Chandra, 7th Edition, Tata McGraw-Hill
Publishing Co. Ltd.
Financial Management by any other Author
06/04/12
Other References - Websites

1.http://www.marketingteacher.com/lesson-store/#finance
2. www.bestmarketingtextbook.com (Website of the
Authors: Arun Kumar and N.Meenakshi)
3. http://www.ibef.org/home.aspx (India Brand Equity
Foundation);
4. http://www.indiacore.com/index.html (India Core.com
Information on Indian Infrastructure and core sectors)
5. http://www.highbeam.com/ (High Beam Research
Research articles on various
Topics from various
sources)
6. http://knol.google.com/k (Articles on various

topics by experts from all over the world)
7.
h
ttp://www.ignou.ac.in/prevyrpapers/pyq_papers.htm
(Question Papers of IGNOU)
06/04/12
Other References - Websites

8.
http://www.marketingpower.com/Pages/default.aspx
(American Marketing Association)
9.
http://www.direct-marketing-association-india.org/
(Direct Marketing Association- India)
10. http://www.rmai.in/index.html (Rural Marketing
Association of India)
11.
http://www.planmanconsulting.com/icmr/index.html
(Indian Council for Market Research)
12. http://www.icrier.org/index.htm (Indian Council for
Research on International Economic Relations)
13. http://www.imrbint.com/ (Indian Market Research
Bureau - IMRB International)
14.
http://www.marketresearchindia.org/index.html
{ Business Development Bureau (India) Pvt. Ltd.}
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Index to Topics
Sl. No.
Name of Topic
Slide Numbers
Marketing Finance an Overview
11 -13
Role of Marketing Dept. in Marketing

Finance; Interdependence of Finance
and Marketing
14 18
Inventory Management and Control

Introduction
19 22
Accounts Receivables Management

Working Capital Management
23 62
63 69
Marketing Research
70 80
Product Planning and Development;

Product Life Cycle; Evaluation of
Brands, Elimination of Products
81 125
Cost analysis in Marketing Decisions
126-145
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Index to Topicscontd.
8
Marginal Costing and Break-even

Analysis
146 166
Pricing
167 - 175
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10
Learning Objectives
At the end of this course, you will be able to :
1. Distinguish between the Marketing and Finance
Functions;
2. Explain the inter-relation/inter-dependence of the
two in Marketing;
3. Compute the optimal Inventory levels of a
Manufacturing company;
4. Define a companys Credit Policy keeping in mind
the Companys policies about its targeted
profitability levels;
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11
Learning Objectives
5. Compute the level of credit period allowable for
each customer in line with the Companys
Credit Policies;
6. Compute the various financial ratios required to
understand the financial implications of the
companys actions;
7. Allocate the optimal amount of expenditure for
Marketing Research;
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12
Learning Objectives
8. Carry out an analysis to find the financial
implications of introducing a new product or
dropping an existing product from the
companys portfolio ;
9. Decide the ideal/optimal levels of apportioning of
fixed costs among various products of the
company;
10. Do Marginal costing analysis and find the
Break-even-point (BEP) and Margin of Safety
for each product of the company;
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13
Learning Objectives
11. Calculate
the desirable pricing of the
companys various products.
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14
Marketing Finance an Overview

Activity Analysis: Product and Trade Channel:
Area, Person, Period
Cost Analysis:
Fixed Cost, Variable Cost,
Total Cost:
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15
Value Analysis: Social Cost Benefit Analysis;

Marketing Value Added.
Budgetary Analysis:
Responsibility
Budgeting (Cost,
Revenue and Profit
Centres)
Activity Budgeting
And
Program Budgeting
Period Budgeting:
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Pricing Analysis :
Resale Price Management
Export Pricing
Landed Cost Pricing
Contribution Pricing
Joint and By Product

Pricing;
ROI Pricing:
Cost Plus Pricing
Profitability Analysis:
Return on Sales (ROS);
Return on Investment (ROI)
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17
Role of Mktg. Dept. in Marketing Finance

(MF)
Review Mktg. objectives, develop long and
short range mktg. plans, coordinate all the
specific functions and evaluate overall mktg.
performance.
Responsibilities of the Head of Mktg.:
Taking effective decisions reg. Prices, Terms of
Sale, Credit Policy, Distribution Channels,
Advertising Media etc. And
Controlling the activities of the Mktg. Dept.
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18
Role of Mktg. Dept. in MF

These may be elaborated in different words:
Secure the best possible prices for the product;
Identify segments of markets which will yield
high profit contribution and try to increase sales;
Optimise marketing costs;
Increase Sales Revenue
per rupee of
expenditure of Advertising and Sales Promotion;
Increase Sales Revenue per Sales-Call;
Increase the benefits realised per rupee of
expenditure of MR;
Plan the WC requirement in terms of Inventory of
FG and Receivables.
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19
Mktg. and Finance Interdependence

These two departments
have a perennial
conflicts of interest.
Finance Dept. has to understand the
compulsions of the Mktg. department in its
efficient performance;
The Mktg. dept. also has to understand the
compulsions of the Finance Dept. to show
optimum returns on the Investments made.
For example
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20

The Overlapping areas:
Introduction and operation of an effective
Budgetary Control System in Mktg.;
Product Planning including Product selection,
retention and abandonment as well as dilution in
product portfolio;
Product pricing including both short-range and
long-range pricing policies and strategies;
Mktg.
investment
decisions
including
maintaining their implementation with suitable
feed-back oriented control systems.
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21

Evaluation of Mktg. Performance including both
general and specific Mktg. functions;
Control of Mktg. Operations both the
employment of funds and the cost of inputs
and
Functional Cost Analysis to achieve cost
effectiveness and also for exercising a
systematic and meaningful control over Mktg.
costs and expenses.
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22

Inventory : RM, WIP and FG
Level of Inventory is affected by Sales,
Production and Economic conditions
Inventory is the least liquid of the Current Assets
so should provide the highest yield to justify
the investment
The objective of Inventory Management should
be the maximisation of the value of a firms
funds.
Therefore firms should consider cost, return and
risk factors in establishing an Inventory Policy.
Many firms fail on account of inept and inefficient
inventory management than for other reasons.
06/04/12
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Firms should find their Right amount to be
invested in inventory neither over investment
nor under investment.
Finance Manager (FM) may have direct control
over Cash Management and marketable
securities
Control over Inventory policy is generally
shared by FM with the Production Manager and
Marketing Manager (MM)
Policy of Accounts Receivable is shared by FM
with MM

Two basic costs associated with Inventory : The
Carrying Costs ( Interest on funds tied,
warehouse space, insurance premium, material
handling expenses, risk of obsolescence or
perishability, rapid price changes)) and the
Ordering Costs ( cost of ordering and processing
inventory into stock)
Important techniques of inventory management:
ABC Analysis; Ageing Schedule and
Two-bin System; Just in time (JIT).

Decision on Inventory level is based on the
Sales forecast, products manufactured, business
scenario and overall policy of the company.
There is a trade-off between the level of
inventory and effective functioning of the
organisation.
ABC Analysis: An effective tool of inventory
control.
Through ABC analysis each item of
inventory is categorised as A, B or C depending
on its relative importance judged by its unit and
or transaction value during a period.

Usually a very few items say 10 % come under
Category A but these items may represent 70- 80 %
of total inventory value.
Similarly some 20 % of items grouped as B might
represent about 20% of value.
And the balance of 70-80%of items grouped under C
represent only about 10% of total value.
Such analysis immensely facilitates control of inventory
by the Principle of Exception since greater time and
effort can be spent on a few items but with higher
values.
(Law of PARETO: About 15% of the cause produces
about 85% of the effect).
(See Pages360-361 of the Book by B K Chatterjee
for a diagrammatic representation)
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RM: Bulk discounts, lower ordering/transport cost
vs. reduced inventory carrying cost, less risk of
deterioration or obsolescence, reduced storage
space and less handling and insurance cost;
.
WIP: Safeguard against machine breakdowns,
Economic production runs and lower machine
setting costs vs. reduced inventory carrying
costs and more elbow room in the factory
premises;
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Component parts/consumables: Smooth and
uninterrupted production runs vs. reduced
inventory carrying costs;
FG : Better customer satisfaction and a clear
incentive to sales department vs. reduced
inventory carrying costs less risk of deterioration
or obsolescence and reduced storage space;
Packing materials: Better readiness for the sales
dept. vs. reduced inventory costs and protection
against deterioration.
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Define Accounts Receivable- Debt owed to the
firm by customers resulting from sales of goods
or services on credit in the ordinary course of
business. (Part
of
modern competitive
environment)
Firms sell goods on credit to achieve the sales
targets and keep the sales growing. The also
incur some expenses on credit sales.
Credit period extended by the firms is a policy
decision.
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Receivables represent an important major part of
Current Assets of a firm.
Receivables = Av. Daily Credit Sales x Av.
Collection period
No sale is complete until money is collected from
the customer.
The responsibility for such collection should
generally rest with the sales personnel
concerned.
Non collection or even delay in collection of
receivables invariably results in steady erosion
of profits generated through sales.
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Accounts ReceivablesObjectives
Maintaining
Receivables
Permits
A
L
L
O
w
s
Easy
Open
Account
Sales
Result
Increased
ing
Sales
in
Credit
Sales
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Leadin
g to
Increase
d Profits/
Higher
Profit
Margin
Firm to
meet
competitive
terms
32
Accounts ReceivablesObjectives
Benefits:
Boosting sales and profits because of liberal policy;
Can attract new customers (a growth oriented
notion);
Can protect current sales against competition.
Costs:
Collection costs: additional expenses for staff,
stationery, postage
Capital Cost: to keep production cycle running in the
extended receivables period
Delinquency costs: failure of the customers to pay in
time
Default Costs: bad debts to be written off.
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Accounts ReceivablesObjectives:
Costs will be higher with liberal policies than with
more stringent policies.
A prudent receivables management is required to achieve
at a balanced trade-off between profit and risk.
Management of Receivables depends on two factors:
General Economic conditions which are external to the
organisation no control over the economic variables
Credit and Collection Policies: not independent of the
policies of the other players in the industry.
Credit and collection policies are interrelated with
pricing policy and must be viewed as an overall
competitive process.
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Accounts Receivables: Credit Policy

The important dimensions of a firms credit policy are:
Credit Standards; Credit Period; Cash Discount
and Collection Programme.
Credit Standards: Criteria adopted by a firm to extend
credit to customers.
Quantitative basis for setting standards: Credit
ratings, credit references, Av. Collection Period
(ACP) and financial ratios.
Standards may be : (i) tight or restrictive (ii) liberal or
non-restrictive.
The trade-off is with collection cost, level of sales,
ACP and level of bad debt losses.
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- Credit Standards
Example: Firms sales :Rs. 100 mn. Customers are
rated 1 to 4 in descending order. C1 and 2 enjoy
unlimited credit period, limited credit to C3 and no
credit to C4. The co. has lost sales of Rs. 10 mn. In
C4. The co. proposes to extend unlimited credit
period to C3 and limited credit period to C4. But this
would increase sales by Rs. 15 mn. on which bad
debts losses would be 10%. The contribution margin
ratio of the firm is 20%. The Av. collection period is
40 days and the post tax cost of funds is 10%. The
tax rate of the Co. Is 40%. What is the effect of
relaxing the credit policy on the Residual Income
(RI)?
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36

- Credit Standards
Answer:
The effect of relaxing credit standards on profit may
be estimated by using the formula:
RI = [S(1-V) - bnS](1-t) - kI,
Where RI = Change in Residual Income ;
S = increase in sales; V = ratio of variable costs to
sales; bn = bad debt loss ratio on new sales;
t = tax rate; k= post tax cost of capital
and
I= Increase in receivables investment.(=
S*ACP*V/360)
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- Credit Standards
RI = [S(1-V) - bnS](1-t) - kI,
RI = [(15mn. *0.20) 0.10*15mn.]*(1-0.4)
0.10(15mn.*40/360*0.80)
= Rs. 7,66,667.
Since the impact of change in credit standards on
Residual Income is positive, the proposed
change is desirable.
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- Credit Period
Credit Period: Length of time allowed to customers

to pay for their purchases. Lengthening of the
period pushes sales up attracting new customers.
Requires larger investments in receivables and
incidence of bad debts losses. Shortening of the
period will have the opposite effect.
Example: A firm offers 30 days credit to its customers
for the present level of sales of
Rs. 50 mn. Cost
of capital is 10 % and the ratio of variable costs to
sales is 0.85. The firm is considering extending its
credit period to 60 days, which is likely to push sales
up by Rs. 5 mn. The bad debt proportion on
additional sales would be 8 %. The tax rate is 40%.
What is the effect of lengthening the credit period
on the Residual Income of the firm?
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-Credit Period
Answer: RI = [S(1-V) - bnS](1-t) - kI,
Where I = (ACPn ACPo)*(So/360)
+ V*ACPn*S/360,
ACPn = New av. Collection period,
ACPo = Old av. Collection period,
So = Present level of sales
(Change in Receivables Investment = Incremental

investment in receivables associated with existing
sales +investment in receivables from the incremental
sales)
(Full sales price is already collected on the existing sales
before the policy change and it invests only the
variable costs for the new receivables)
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40

-Credit Period
RI = [S(1-V) - bnS](1-t) - kI,
Where I = (ACPn ACPo) *(So/360)
+ V*ACPn*S/360.
RI = [(5mn.*0.15) -0.08*5mn.]*0.63
0.10{(60-30)*50mn./360
+ 0.85*60*5mn/360}
= - Rs. 2,77,500.
Since the lengthening the credit period will result in
reduction in the Residual Income of the firm, it is
not advisable to increase the credit period.
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- Cash Discount
Cash Discount : Given to customers to induce
prompt payments.
Percentages and period
availability are reflected in the credit terms. For
example, Credit terms of 2/10 net 30 means
that a discount of 2 % is offered if the payment is
made by the 10th day, otherwise the full payment
is due by the 30th day.
Increasing the discount % or extending the
discount period will tend to enhance sales and
reduce the av. collection period and also
increase the cost of discount.
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-Cash Discount
Example: The credit terms of a firm are 1/10, net 30.
Sales: Rs. 80 mn.; ACP= 20days;
V= 0.85;k = 10%; the proportion of sales on which
customers currently take discount po=0.50. The firm
is considering relaxing the terms to 2/10, net 30
which would increase sales by Rs. 5 mn., reduce the
ACP to 14 days and increase the proportion of
discount sales to 0.80. Tax rate is 40%What is the
effect of relaxing the discount policy on the gross
profit?
Answer: The effect of change in the discount on the
Residual Income is given by the formula:
RI = [S(1-V) DIS](1-t) +kI,
Where I = savings in receivables investment and
DIS = increase in discount cost.
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- Cash Discount
Answer:
= [Rs.5mn.*(0.15) -9,60,000@]*(1-0.4) + 0.10*11,68,055@
= Rs. -9,194.
Since the Residual Income is reduced even after increased
sales, change in terms is not desirable for the company.
------------------------------------------------------------------------------@ : DIS = pn (So+ S)dn - po Sodo
=(.8*8,50,00,000*.02) (.5*8000000*.01)
=9,60,000.
I = So/360(ACPo ACPn) V S/360* ACPn
= (8,00,00,000/360*6) 0.85*50,00,000/360*14
=Rs.11,68,055.
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Accounts Receivables: Credit PolicyCollection Programme

Collection Programme: Objective is to achieve
timely collection of receivables; release funds
blocked in receivables and minimise bad debts
Monitoring receivables; Reminding customers
before the due date by letters, e-mails,
telephone calls; threat of legal action and legal
action in case of overdue accounts.
A rigorous collection programme tends to decrease
sales, shorten the av. collection period, reduce
bad debts and increase the collection expenses.
A lax collection programme will have the
opposite effect.
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Monitoring receivables: Some of the measures:
monitoring of Av. collection period (ACP); Ageing
Schedule (AS); Conversion matrix and Float
analysis.
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Example: A firms sales is Rs. 40 mn.; ACP =
20days; V=0.80; k=12% and bad debt ratio = 0.05.
The firm proposes to relax its collection effort which
will push up the sales by Rs. 5 mn., increase the
ACP to 40 days and raise the BD ratio to 0.06. Tax
rate is 40%. Find the effect on the Residual Income.
Answer: The effect of decreasing the rigour of
collection programme on profit may be estimated as
follows:
RI = [S(1-V) - BD]*(1-t) - kI,
Where I = increase in investment in receivables and
BD = increase in bad debt cost.
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RI = [50,00,000*. 20 -0.06*4,50,00,000 +
0.05*4,00,00,000] *0.6
- 0.12{ 4,00,00,000/360*20
+5,00,00,,000/360*40*.8}
=-1,40,000.
Since the effect on the Residual Income is
negative, it is not worthwhile to relax the
collection efforts.
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Accounts Receivables: Credit Policy-Credit

Evaluation
Credit Evaluation : Proper assessment of credit
risks is important as it helps in establishing credit
limits.
Generally two types of errors occur while
assessing the credit risks. They are :
(i) A good customer is misclassified as a poor
credit risk This leads to loss of profit on sales
to good customers who are denied credit
(ii) A bad customer is misclassified as a good
credit risk - This results in bad debt losses on
credit sales made to risky customers.
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Evaluation
Three methods used : Traditional Credit Analysis,

Numerical Credit Scoring and Discriminant Analysis.
Traditional Credit analysis:
How creditworthy is the customer? : The five Cs are:
Character (willingness to honour obligations);
Capacity (ability to pay on time financial situation
operating cash-flows);
Capital (own investment in business stake),
Collateral (Security offered), and
Conditions (General Economic conditions)

Evaluation
Analysis of Financial Statements (CR, ATR D/E
Ratio, EBIT/TA, ROE, ROI etc.) obtaining bank
references (from the banker of the prospective
client) and
Analysis of the firms past
experience (if a new client, what is the
impression of the salesman who got the client)
will guide in evaluating a potential creditor
whether he is likely to pay up his debts on time
or not.

Evaluation
Numerical Credit Scoring: Steps are:
(i) The factors relevant for credit evaluation are
identified and weights are assigned to these factors
that reflect their relative importance;
(ii) Weights are assigned to these factors that reflect
their relative importance;
(iii) The customers are rated on various factors using a
suitable rating scale;
(iv) The factor weights and the factor ratings are
multiplied to get the factor score and
(v) The customers are classified based on the rating
index.
Example:
Factor
Past Payment
NP Margin
Current Ratio
D/E Ratio
ROE
Factor
Weight
0.30
0.20
0.20
0.10
0.20
*
Rating Index
Rating
4 3 2
*
*
*
*
1 Factor
Score
1.20
0.80
0.60
0.40
1.00
4.00

Evaluation
Finally a Risk Classification Scheme has to be
formulated by the firm. One such example of
Risk classes is as follows:
1. Customers with no risk of default;
2.
Customers with negligible risk of default
(default risk of say less than 2 %);
3. Customers with little risk of default (default
rate between 2 % and 5%);
4. Customers with some risk of default (default
rate between 5% and 10%)
and
5. Customers with significant risk of default
(default rate in excess of 10 %)
Accounts Receivables: Credit PolicyCredit Granting Decision

Credit Granting Decision: Credit worthiness of the
prospective client is assessed. Should the credit be
offered? Decision Tree analysis with assigned
probabilities for the different scenario will help in
taking the decision.
(See Prasanna Chandra Pages 707-708)
If there is a repeat order after the payment for the
first order is received, it may be assumed that the
probability of the customers default is less than
that of the first order. Again using assigned
probabilities, a decision tree analysis will give
proper guidance in taking the decision to extend
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55
credit.
Accounts Receivables: Credit PolicyControlling receivables

Monitoring/Controlling the receivables:
The ACP or the Days Sales Outstanding
(DSO) is a measure commonly used to
monitor the payment behaviour of the
customers. It is defined as : Receivables/
Av. Credit Sales per day.
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Consider the following example:

Sales and Receivables Data
Rs. In lakhs
Month
Sales
Receiva Month
bles
Sales Receiva
bles
Jan
150
400
July
190
340
Feb
156
360
August
200
350
March
158
320
September 210
360
April
150
310
October
220
380
May
170
300
November
230
400
June
180
320
December
240
420
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DSO at the end of each quarter are as follows:

First Qr.: 320/(150+156+158)/90 = 62 days;
Second Qr.: 320/(150+170+180)/91 = 58 days;
Third Qr.: 360/ (190+200+210)/92
= 55 days;
Fourth Qr.: 420/ (220+230+240)/92 = 56 days.

We can observe that the Collections have
improved a little. If the DSO is within the
prescribed norms, then the Collections are
deemed to be under control.
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Accounts Receivables: Credit PolicyControl of Receivables

Ageing Schedule (AS):
Classification
of
outstanding receivables
at a a given point of
time into different age
brackets.
For example:
Age GroupPer cent

(in days)Receivabl
es
0-3035
31-6040
61-9020
>905
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AS depicts the age-wise distribution of accounts
receivable at a given period of time;
- helps identify changes in payment behaviour of
customers;
- can be compared top credit period extended;
- AS beyond limits indicates higher probability of
bad debts and is influenced by the sales pattern.
The actual AS is compared with some standard AS
to determine whether the accounts receivables
are in control.
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Collection Matrix (or Conversion matrix): The DSO
and AS methods
aggregate the sales and
receivables over a period of time .
But the payment pattern is not revealed by these two
methods.
The Conversion matrix method (developed by
WG Lewellen and R W Johnson) solves this issue:
The collections realised in any month do not pertain
wholly to that month but some of the previous months
also.
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So the matrix in this method analyses the
payment pattern. Looking at the conversion
matrix one can judge whether the collection
pattern is improving, or stable or deteriorating.
See the following example :
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Accounts Receivables: Credit PolicyControl of Receivables-Conversion Matrix

Month Cr. Sales
Rs.
Jan
Monthly Collections
Feb
March
April
Oct
10000 1200
(12%)
Nov
9000 2700
(30%)
400
(4%)
Dec
8000 3000
(38%)
2900
(36%)
900
(11%)
Jan
6000 780
(13%)
2500
(42%)
2000
(33%)
720
(12%)
Feb
8000 ---------
1100
(14%)
2800
(35%)
3200
(40%)
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May
900
(11%)
63
Accounts Receivables: Credit PolicyControl of Receivables-Conversion Matrix

The conversion matrix method is not dependent on
sales level.
It focuses on the key issue, the payments
behaviour.
It enables one to analyse month-by-month payment
pattern as against the combined sales and payment
patterns.
A limitation of this method is that it cannot be
prepared on the basis of published financial
statements alone.
Internal financial data are
required. But still this method is less demanding on
internal data than the AS method.
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Accounts Receivables: Credit PolicyControl of Receivables Float Analysis

Float analysis implies analysis of the period that
affects cash as it moves through the different
phases in the collection process.
Study the following table to understand the float
involved in the activities:
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Activities
Floats
1. Sales
I. Billing Float
2. Sending invoices to customers
II. Mailing Float (1)
3. Receiving Invoices by Customers
III. Net Credit Float
4. Debtors send cheques
IV. Mailing Float (2)
5. The Co. receives the cheque
V. Cheque Processing
Float
6. Cheque is deposited into the bank
VI. Bank Float (1)
7. Cash is made available to the co.s

branch
8.Cash remitted to HO of the Co.
VII. Remittance Float
9. Remittance received by HO of the

co. and credited to its bank account.
VIII. Bank Float (2)
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Accounts Receivables: Credit PolicyControl of Receivables Float Analysis

So even if the customer promptly remits the amount
by cheque, due to the delay built into the system of
the cheque collection process by the banks, Sellers
are not able to utilise the funds immediately.
However, due to the modern techniques and
computerisation of banking operations, nowadays the
length of the cheque collection process has been
greatly reduced.
(Core Banking Solutions
Anywhere banking, Direct Deposits of Cheques by
customers into the Sellers Banks branches at any
centre)
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Improvements required in the management of
receivables:
Credit policies need to be articulated in explicit
terms and revised periodically in the light of
internal and external changes.
A proper system has to be developed for
continuous credit appraisal and evaluation of
creditworthiness of customers.
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There should be provision for exception
reporting especially in respect of old and
overdue outstandings, so that sufficient and
advance warning signal can be provided before
these become bad debts or debts of doubtful
recovery.
There should be better coordination between
sales, production and finance departments.
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Working Capital
Importance of WC management It affects the
ROI in both ways : the Capital employed as well
as the Return. Therefore any improvement in
the management of WC will affect ROI very
favourably and vice versa.
An efficient manager would try to ensure that
too much of capital is not circulating in the
business in the form of WC nor will he allow the
WC to fall below a particular level He will strike
a balance by a careful study of the movements
of WC in successive periods.
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Working Capital
Investment in CA and the level of CL have to be
geared quickly to changes in sales.
Finance Managers spend a great deal of time in
managing CA and CL arranging short-term
financing, negotiating favourable credit terms,
controlling the movement of cash, administering
accounts receivable, and monitoring the
investment in inventories consume a great deal
of time of finance managers.
Working Capital
There is a close interaction among WC
components.
A large accumulation of FG may have to
be disposed of through liberal credit terms
or through a lax credit collection process.
A firms liquidity crunch may be solved
through generous discounts on its sales.
Working Capital
The important factors influencing the WC
needs of a firm are :
Nature of business;
Seasonality of operations;
Production Policy;
Market conditions (competitioncredit
terms..)
Conditions of supply (inventory of raw
materials, spares and stores)
Dangers of too little WCDangers of

too much WC
Contributing factor to business failuresManagement efficiency
may deteriorate through
complacency
Frustrates the enterprise objectivesSpeculation may be
through lack of funds And Influencesencouraged And
Management morale adverselyUnjustifiable expansion
may be stimulated
Reduces the rate of return on totalTotal investment may be
investmentworking inefficiently
Influences the credit rating adversely
Prevents discounts being taken
Prevents attractive opportunities from
materialisng
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Effects of WC on ROI
a hypothetical example
Situation I Situation II Situation
III
Fixed Assets
WC
Capital employed (A)
EBIT
*Interest on WC funds @
15%p.a.
100
100
200
55
15
100
50
150
55
7.50
100
200
300
55
30
PBT (B)
ROI (i.e. B/A)
40
20%
47.50
31.70%
25
8.33%
06/04/12
* Ideally the rate of interest should be the WACC
75
Working Capital
The three financial ratios which are important in
keeping a constant watch on the WC
management : Inventory Turnover Ratio,
Debtors Turnover and Creditors Turnover.
The finance aspect of WC management
essentially means controlling the cost of finance
involved. Cost of finance varies according to the
different sources of finance.
Click the icon below to see the working of ratios:
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Docu men t
76
Marketing Research
Definition by AMA: MR is the systematic
gathering, recording and analysing of data about
problem relating to marketing of goods and
services.
Kotler: Systematic problem analysis, model
building and fact finding for the purpose of
improved decision making and control in the
marketing of goods and services.
06/04/12
Marketing Research
Recall the steps involved in MR:
1.Setting the purpose or objective of the proposed
MR, defining the problem;
2.Determining the information neededsourceprimary/secondary
3.Obtaining the relevant facts;
4.Analysis and interpretation of the facts with
reference to the problem and
5.Preparation of the research reports
incorporating the findings and presenting the
inferences or recommendations.
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Marketing Research
"DECIDE" model:
D - Define the marketing problem
E - Enumerate the controllable and
uncontrollable decision factors
C - Collect relevant information
I - Identify the best alternative
D - Develop and implement a marketing plan
E - Evaluate the decision and the decision
process
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Marketing Research
Cost-Benefit Evaluation of MR:
Investment in MR should produce either
additional revenue or reduce costs.
Costs of MR are
Acquisition costs and
Operating costs, whereas its value is the utility in
terms of profitability and market share etc.
Budget for MR: The size of the budget is
usually based on one or more of the factors:
The selling ability of the MR head, instead of the
value of the services rendered to the
management;
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Marketing Research
Amount needed to meet or beat the typical level
of expenditure incurred by the competitors;
the amount that the company can afford to spend
obviously the budget gets expanded in good
times and contracted when business conditions
are tight and
Budgeting based on some fixed percentage of
the total marketing cost budget, MR being
largely a matter of habit.
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Marketing Research
None of these bases are adequate to meet
todays needs.
The current thinking and ideology is that MR
should be regarded as an investment and not an
expense.
For measuring the effectiveness of MR, Twedt
used the formula:
(Worth or Value of Finding * Proportion of
crucial cases)/Annual MR Budget = ROI
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Marketing Research
This is a good approach to evaluate expenditure
on MR on a historical basis.
But the limitation of the formula is that it does not
provide a basis for setting a budget for a future
period in which the anticipated circumstances
may be quite different from those of the
immediate past period.
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Marketing Research
From the financial angle, the most obvious
question that arises is What should Marketing
Planning Cost?
W Dickerson Hogue has given a simple formula
which is based on the assumption that any
planning effort would require certain amounts
and certain types of additional information and
consequently, there should be a cost benefit
equation to examine this .
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Marketing Research
The formula is :
C W1 - W , where W = P*V P1*F;
C= cost (after taxes) of obtaining
information. Cost includes, expenditure +
opportunity cost of profits foregone either
because of manpower on this project or
because of delay incurred by additional
work on this project giving the competitors
an increased share of the future market;
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Marketing Research
W (the expected PV of a plan before additional
information is collected);
P = the weighted average of a range of
subjectively
determined
probabilities
of
success of a particular plan based on all the
information now available;
V= the weighted average of a range of
subjectively determined values of success of a
particular plan based on all the information
now available. The values are calculated as
expected future earnings, after taxes, discounted
to their PVs.;
Marketing Research
P1 = 1 P;
F = the weighted average of a range of
subjectively determined cost (expected future
losses, after taxes, discounted to their PVs) of
failure of a particular plan based on all
information now available and
W1 = (the expected PV of the plan after
alteration
based
on
the
additional
information collected).
Product Planning and Development

Chapter 11 of B K Chatterjee
Definition: Anything that can be offered to a
market for attention, acquisition, use or
consumption that might satisfy a want or need.
Kotler.
So a product may be a physical product or
services (repairs, travel services)or even
ideas (saving of energy, family planning, ill
effects of tobacco, awareness of AIDS.).
A companys marketing efforts and planning
depends upon the offering of its products.

Products must be planned not just designed.
So marketers have to be directly involved in
designing the product to meet the diverse and
specific requirements of the targeted customers.
Marketers have to discover the needs; they
should sell benefits, not features.
Recall the different levels of a product- the
consumer hierarchy by Kotler: Core, Basic,
Expected, Augmented and Potential.

Two attributes of a product:
Physical or Measurable and
Psychological or Perceived.
Marketers try to exploit the perceived
attributes.
In the product-mix of a marketer, the relative
importance of weightage of the different
products along criteria like Sales, Gross
Margin etc. have to be ascertained.

Kotlers approach to Product Life Cycle and
implications - the human being and a product:
The PLC curve:
Childhood Introduction; Adulthood Growth;
Manhood Maturity and Extinction Decline.
The Characteristics
Stages
Sales
I
II
Intro
Growth
Low
Rising
III
IV
Maturity
Decline
Peak
Declining
Cost/
Customer
High
Average
Low
Low
Profit
Negative
Rising
High
Declining
Customers
Innovators
Early
Competitors
Few
Growing
Middle Laggards
Adopters
Majority
Stable
Declining
Marketing Objectives:
Stages
I
II
Create
Product
Awareness
And trial
Maximise
Market
Value
III
IV
Maximise
Reduce
Profit and Expenditure
Defend
Market
Share

The length of the Product cycle is governed by
the rate of technological change, the rate of
market acceptance and ease of competitive
entry. By and large, consumer products have
shorter life cycle whereas basic industry or
products goods have longer life cycle.
Joel Dean.
The Diagnosis and Prognosis technique is
adopted to find the stage of the life cycle which
a product is passing through at a given time.

In this technique, six different curves are
drawn in a logical sequence as follows:
1. Sales revenue of the particular product for
the past five years of the firm;
2.Sales revenue for the same period as in 1
above, for he same product for the
industry as a whole;
3. Direct cost of selling, for the product of
the firm, for the period;

4.Profit which is the difference between sales
revenue (1 above) and cost of selling (3 above).
(This Profit is not the same as the conventional
profit.)
5.The ROI relating the Profit (4) to the cost of
inputs or investments as per 3.
The ROI curve and comparison between the two
curves as per 1 and 2 above will indicate
adulthood or manhood or declining state of the
product and will also suggest necessary
corrective actions.

6.Action curve, indicating actions required to
sustain adulthood or manhood and prevent
decline. This could be in the form of more
resource inputs, higher revenue through better
pricing policy, etc.
This technique should be adopted at regular
intervals, say every 6 months for consumer
products and every two or three years for
industrial products.

Discovery of new uses, entry into totally new
markets, emergence of new customers, addition
of new features.These are the things that make
the PLC of a product very unpredictable.
The three broad aspects of product planning:
Exploring new uses of existing products
Introduction of new products - and pruning or
phasing out of weak products.
Generally, exploring new uses of existing products
is a neglected area in marketing.
Booz Allen and Hamilton have identified the

following types of new products :
(i) New to the world products-an entirely new
product;
(ii) New product lines entering an established
market for the first time;
(iii) Addition to existing product lines supplement
companys existing product lines;

(iv) Improvement/revision to existing products
improved performance and greater perceived
value;
(v) Re-positioning existing products targeted to
new markets, new customers;
(vi) Cost reductions news products providing
similar performance at reduced cost

The products new to the world as in (i) -involve
the greatest risk and the last one as in (vi)
involves the least risk.
It is essential to identify new opportunities and
take advantage of the situation by developing
new products since the existing product range
will sooner or later be in a declining stage in the
life cycle

Criteria in New Product Decisions:
Search for synergy - marketing, suppliers,
customers,
technological,
equipment,
manpower search for portfolio effect;
search for stability; search for security;
PLC considerations; vertical specialisation
and segment movements.

Stages in New Product development:
first information about new product ideas;
credibility count; matching of objectives;
MR (field surveysdemand and market
acceptability);
technology
forecasting;
technology sourcing for R and D; first
financial feasibility studies; filter to identify
technically, commercially and financially feasible
product ideas; pilot stage; final financial
feasibility studies; test marketing and
commercialisation.

Financial Evaluation of a Brand:
Till recently, a brand was assessed in qualitative
terms only like brand recall, awareness,
positioning etc.
The financial view of a brand in terms of brand
equity is a recent phenomenon.
Earlier, M&As were done for the purpose of
getting hold of an established brand.

Nowadays it is very common to see M&As being
done at a multiple of many more times the
value of the acquirees assets or a few times the
market value of its shares.
Creating a brand from scratch is costly, timeconsuming and risky and so it is easier to invest
in an existing and established brand.

Through acquiring a brand, the acquirer avoids
future competition.
The acquisition price
= value of the tangible assets
+ price of the brand
+cost of preventing the brand from
going into the competitors hands.

Suggestions for the financial treatment of brand
equity:
Value of a brand is an asset and can be
depreciated year after year;
Value of a brand should be written off against the
available reserves and surplus.
But what about the values of the brands internally
created? Whether to show that as an asset and
if so when and at what value?

The consequences of not valuing the internally
created brands are:
the firm undervalues itself;
its own shareholders are misinformed and so
may sell their shares out at less than their real
worth;
On the other hand, even if the firm values its
internally created brands to reflect the true
economic value,
it may be treated as
subjective.

The other issues:
How much of the advertisement expenses has
gone towards brand building?
How much has gone towards achieving sales in the
short run?
In the case of an acquisition, brand valuation is a
function of the ultimate purpose of the acquisition.
Therefore, the valuation from the acquisition point of
view is likely to be different from accounting point
of view and the value would be changing
constantly.

Thus there are constant conflicts between the
finance and marketing professionals in respect
of brand valuations.
They should have mutual respect and try to
understand the common objectives of the firm
under constraints.

Methods for brand valuation:
in terms of costs Historic cost i.e. estimated
actual cost of creation or acquisition of a brand
OR
Replacement cost i.e. estimated cost
of replacing an existing brand by an identical
new one through creation or acquisition;
According to market price i.e. the price to bid or
pay for acquiring a brand well established in the
market;
According to potential earnings.
Formulae for calculating the Brands value:

(a) Value of the brand
= (t = 1 to N) RBt/(1+r)^t
+ Residual Value/(1+r)N
where RBt = Anticipated revenue in year t,
attributable to the brand and r = discounting
rate.
Residual value beyond year N = RBN /(r-g),
where g = Rate of revenue growth.

(b) The Multiple method:
P/E = Market value of Equity/Known Profits
Brand Multiple = Brand Equity/Brand Net Profits

Product Elimination: Sick and weak products
should be periodically eliminated.
It is observed that the marketers do not pay
much attention to this due to the reasons:
It is easier to add products than to eliminate;
It is difficult to delete yesterdays good
products - it is a sad decision to part with old
and tried friends;
Expectation that the weak product might do
well in future with changes in the market
conditions;

A thorough analysis is required before
eliminating any product.
Having too many items under the varied types of
products is undesirable. It involves substantial
hidden costs, inefficiencies and losses like:
Too many productswaste of physical and
financial resources (high unit cost of production,
higher costs of warehousing and distribution)
Sizeable part of promotion expenses going
waste;
Internal competition product cannibalisation
Waste of managerial time and attention;
A product which has outlived its utility should be
mercilessly pruned ( killed?)

How to identify the weak products for
elimination?
For this we have to check the
products as to how they perform.
Product-Market Evaluation:
Product
M
New
Old
a N
e
r
w
1
2
k
o
3
4
e l
d
t

Products should be put in the respective
quadrants: some formula is: up to 3 years old
for consumer products and five years for
industrial products.
New use or application of an old product may be
considered as a new product.
Determine the percentages of total sales and
total gross margin earned by each group.
On analysis of the figures for the quadrants,
some inferences may be drawn like :

If the quadrant 1 shows at least a 25% of total
sales or GP Margin, then it may be considered
to be satisfactory.
If the quadrant 4 shows sizeable figure of say
75% or more, in terms of sales or GP Margin,
then the company may be heading towards
sickness. It shows poor marketing effectiveness.
So the figures of the quadrant 4 should be
minimum.
Products in quadrants 2 and 3 show generally
satisfactory marketing effectiveness.

Returns-Margin Matrix:
Return
M
A
R
G
I
n
H
i
g
h
High
L
o
w
(Return: Marketing ROI
Low
and Margin: Net Marketing Margin)

The cut-off rates for each may be fixed at the
median of Marketing ROI and NMM respectively.
After the products/ product groups are classified into
the four squares, some suggested conclusions may
be as follows:
Quadrant 1: satisfactory-retain the marketing mix;
Quadrant 2: Cut costs, adjust price;
Quadrant 3: Sell more, manage assets better, turn
and earn;
Quadrant 4: Products need a thorough review to
phase them out or salvage them through long term
solutions.

Ideally a marketer should try to have as many
products as possible in the Quadrant 1, and as
few products as possible in Quadrant 4.
Too many products in Quadrant 4 point to
insipient sickness of the company.

PLC: Industry vis--vis the firm:
Industry
C
o
m
p
a
n
y
Introduction
Growth
Maturity
Decline

Possible inferences are as follows:
Industry and company launch: Leadership
status;
Industry growth - Company launch: Good but
monitoring required;
Industry maturity - Company launch: To be
extremely careful as the situation is fraught with
danger;
Industry decline Company launch: God save
the company.

BCG Model:
Relative Market Share
A
n
High
Low
n
u
al
M
a
r
k
e
t
G
r
o
w
t
h
H
i
g
h
L
o
w
*
Cash Cows
?
Dogs

*s: Bring AND consume more cash;
Cash Cows bring more cash;
(So the Co. should try to have more Cash Cows,
so that the cash can be used to nurse and
convert the ?s which are Problem Children to
*s.)
Of course some will go to Dogs which take a lot
of managements time and attention and also
financial and other resources of the company.
The Dogs may have to be eliminated.

It has been observed by BCG group that the
direct manufacturing costs of the *s and the
Cash Cows are relatively low.
Comparison of all the four models: Products in
quadrant 1highly satisfactory; quadrant 4
extremely poor; (These are the most likely
candidates for pruning).
So, Sickness as well as the Recovery start at
the Market place. Financial ratios may find
the effects not the causes.
Product-wise profitability analysis: This helps in:

identifying the most profitable products;
allocating funds available for future investments;
maintaining close control over cost.
Product-wise profits
may be measured by
comparing the sales revenues of each product
with the costs associated with its production,
selling and distribution.

There are two approaches for this analysis:
Contribution approach and Absorption costing
approach.
The Contribution approach requires the segregation
of all costs into their fixed and variable components
and tracing the variable components to the individual
products.
The Absorption Costing approach traces all costs fixed and variable to the individual products. So this
approach judges the profitability of a product by the
profits earned as the difference between the sales
value and total cost of sales of a product.

Click the icon below to see two examples
for a clear understanding:
Microsoft Word
Docu men t

In real life situations, for large companies having
diversified product range and operating through
a large number of sales and distribution outlets,
the division/product group/product-wise analysis
is more complicated.
Computerisation helps but the appropriate
programmes have to be in place. ( Can u
suggest the data that has to be collected for the
inputs?)

The pros and cons of the Profitability analysis:
Pros
Cons
Helps the mgt. to identify the growthNo analysis can replace

sectors and the weak areas in the mktg.judgement, nor can it
operations- deploy its resources forlead to the right
optimum results and improve thedecisions at the right
performances of the weak onestime.
Helps in product rationalisation decisionsWrong decisions are
product revamping, product rangetaken based solely on
extension, product elimination and newfinancial performance
product introductionresults ignoring strategic
marketing
considerations.

So we can conclude that profitability statements
analysis should be used only as a guide for
obtaining useful information in planning
appropriate measures for improving
the
performance of products.

Managements at different levels have to take a
wide variety of decisions some of them
unprogrammed and others programmed or
repetitive.
The unprogrammed are unique examples: all
the capital expenditure decisions.
Repetitive decisions have to be taken at
periodic intervals in respect of repetitive aspects
of business examples: advertisement media
selection, expense planning, inventory norms,
pricing decisions, optimum product or sales mix
etc.
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Modern Management should be interested not
so much in recent decisions as in the futurity of
the present decisions . Peter Drucker.
A systematic analysis of past data would
definitely offer a good guide to the decision
maker.
While making decisions, there are non-financial
or qualitative factors also which weigh heavily
than the financial factors.
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The purpose of cost analysis in marketing is
essentially to generate and provide financial and
quantitative data to decision makers to aid and
improve the decision making process.
A proper analysis of marketing costs aids in the
following:
Determination of the marketing costs of each
product so that when they are combined with
production cost data, product-wise profitability
can be worked out;
Control
of
marketing
costs
through
establishment of budgets and evaluation of
managers according to their cost responsibilities;
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Analysis of costs involved in serving different
classes of customers and different areas to
determine their relative profitability
Computation of such figures as cost per sales
call, cost per order, cost to include a new
customer on the books, etc.
Decision making in regard to sales such as
selling through different channels of distribution,
selling in different markets and regions,
determining product profitability for differing
levels of promotional expenses to choose the
best possible method of sales promotion and so
on.

Marketing Cost Analysis is done in two stages:
(i) Costs are initially reclassified from their
accounting headings into functional cost groups
in such a way that each cost group brings
together all the costs associated with a particular
activity in marketing the product.
(ii) These functional groups are then allocated to
control units (i.e. products, consumer groups,
channels of distribution) using reasonable
bases.

The functional analysis of marketing costs may
be as follow:
Direct selling cost Salesmens salary,
commission, travelling, entertainment etc.
Advertisement and sales promotion cost media
advertisement, catalogues and brochures
Market research cost of in-house research,
cost of researches carried through outside
agencies, etc.
Distribution cost transportation, warehousing
and storage, insurance etc.

Credit and collection cost of collection staff,
bad debts, cash discount etc.
Financial and general administration cost of
sales invoicing, interest in working capital locked
up in finished goods and receivables etc.
In the second stage of analysis, the basis of
allocation of expenses is decided.
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For example:
Salesmens Salaries : Direct charge
Salesmens commission: Sales Turnover
Sales Office Expenses: Number of Orders
Advertising: General: Sales Turnover
Advertising Specific:
Direct charge
Packing/Delivery Expenses/Warehouse Expenses
: Total volume of products sold
Credit collection expenses: No. of orders
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There are some more methods of analysis of
marketing costs:
Order getting and order filling costs: (Order
getting: selling, advertising and sales promotion
expenses, market research
expenses,
maintaining sales offices, salesmens salaries,
travelling expenses these costs tend to vary
with the changes in the level of sales. Even
though the relationship of order getting costs to
the sales volume is not linear, for given level of
one, the level of the other can be reasonably
predicted)
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(Order filling costs: Order processing cost,
warehouse expenses, FG inventory
carrying costs, transport costs, packing
expenses, customer services expenses,
repairs during warranty etc. Order filling
costs per unit of output will increase with
the increase in volume of sales )
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Fixed and variable costs:
Marketing Fixed Costs: Sales Managers/
Salesmens salaries, sales office expenses,
warehouse rent.
Marketing
Variable
Costs:
Salesmens
commission,
packing
and
transportation
expenses,
Marketing Semi variable costs: The general
administration expenses.
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Cost effectiveness analysis: Two important
applications:
One is that you can find the cheapest means of
accomplishing a defined objective like
alternative modes of distribution to reach same
customers.
The other is to derive maximum value out of a
give expenditure.
In both the methods, benefits cannot be quantified
strictly in monetary terms.
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Relevant cost analysis: Has wide applications in
the areas of introduction of new products,
dropping products, changing the production
process, introducing mechanisation to replace
manual work. While dropping a product or
product line, a part of the fixed cost might cease
to exist after the line is dropped, while a part of it
may be incurred and shared by other product
lines.
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Life Cycle Costing: This concept is very useful
in pricing a new product which has a short life but
the market is highly competitive. The following
example will clarify the concept.
Period
Productio FC p.a. VC @ Rs.2 Total Cost Cost per

n (units)
(Rs.)
(Rs.)
unit (Rs.)
10,000
50,000
20,000
70,000
20,000
50,000
40,000
90,000
4.50
1,00,000
50,000
2,00,000
2,50,000
2.50
30,000
50,000
60,000
1,10,000
3.67
5,000
50,000
10,000
60,000
12
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146

The total estimated cost for the entire life of the
product = Rs. 5,80,000. So the average cost
per unit = Rs.3.52. So taking into consideration
the products total life span of 5 years, pricing at
about Rs. 4 will help the company to enter the
market and make money too.
Introduction of a new product: in two forms:
(i)
line extension products and (ii) new products or
product lines
In the case of line extension, profitability would
be the incremental contribution, as there is no
06/04/12
147
likelihood of addition to fixed overheads.

(ii) In the case of new product line, the relatable
fixed cost, which arises directly out of the
introduction of the new product line would have
to be deducted from the initial contribution to
arrive at the net incremental contribution from
the new product line. This incremental
contribution can be taken as the profit since the
other general fixed costs would have been
recovered through the sale of other existing
products.
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148

Basis for the forecasts:
Sales: Market survey/Market research;
Variable costs: existing cost structure and cost
behaviour in respect of similar products in the
company/other companies;
Fixed
Costs:
Capacity
proposed
for
production/marketing (depreciation on the
additional fixed assets, interest on additional
working capital)
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149

Dropping a product or product line: Here the
objective should be to find the net gain or net
loss consequent upon the discontinuance of a
product or product line.
Such net gain or net loss would result from the
loss in contribution and saving in relatable fixed
expenses on the one hand and the greater
impact of general fixed expenses on the serving
products on the other.
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150
Status Quo
After Dropping C
Total
Total
Sales 50
60
40
150
50
60
110
Contribution 25
24
57
25
24
49
Direct Relatable Fixed Cost 4
12
General Fixed Cost

(apportioned in the ratio of 10
sales)
12
30
14
16
30
Profit 11
19
(3)
15
10
In this case, the dropping of C does not improve the overall

profitability, though C was a loss making product. The
total profit comes down by 5 which was the net contribution
of C.
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151

So, the decision rule may be:
(i) A product should not be dropped as long as the
contribution earned by it is adequate to cover the
direct costs relatable to the it .
(ii) General fixed costs and common expenses,
which cannot be saved even after a particular
product is dropped, have no role to play in the
decision the total amount involved should be
segregated and considered to be the expenses
of the company as a whole, whether the product
is dropped or continued.
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152
Marginal Costing and Break-even Analysis

Marginal Costing: is the technique of
segregating fixed and variable costs and arriving
at the cost which would vary in proportion to the
volume of production or sales. (Marginal costing
and marginal cost are also known as direct
costing and direct cost)
Fixed costs are unaffected by variations in the
volume of output (for a particular range of
activities.)
Variable costs are those that tend to vary directly
in relation to the volume of output.
06/04/12
153

Usually, direct materials, directly chargeable
expenses and a part of the overheads constitute
the total variable cost per unit.
Marginal cost of production will consider only the
variable costs related to manufacturing
operations;
Whereas Marginal cost of sales will also include
the post-manufacturing variable costs for selling
and distribution activities.
06/04/12
154

There are also other types of costs which are
semi-fixed and semi-variable costs.
Semi fixed costs: Examples are supervision,
depreciation on shift operations etc, which
increase in steps upto a certain extent, thereafter
.
Semi variable costs: These vary but not in
proportion to production or sales may be at a
lower rate or at a higher rate. Examples: power,
telephone charges etc.
06/04/12
155

Marginal Costing technique precludes any
apportionment of fixed costs among
products. Fixed costs are treated as
period costs of the business and are
considered separately in arriving at the
profits of the business.
The total profit of a business may change
merely because of a change in the salesmix, while all other factors remain
changed.
06/04/12
156
Three Scenarios changes in the sales mix.

Scenario 1
Scenario 2
Scenario 3
Units Sold-lakhs1
Contribution per unit Rs.45
20
30 45
20 30 45
20
30
Total contribution Rs.lakhs45
40
90 135 20 60 45
80
30
Contribution fund of the

business
175
215
155
Total fixed cost of the

Business Rs. lakhs
75
75
75
Total Profit of the Business

Rs. lakhs
100
140
80
This example shows that there is no necessity to apportion the fixed

costs among the products as long as overall profit is maintained or
06/04/12
157
improved
as in Scenario 2.

C/S Ratio: Contribution to Sales ratio (also
known as P/V ratio- Profit Volume ratioeven though it is not the ratio of profit to
the volume)
If the sales price is Rs. 100 and the
contribution is Rs. 40, then the C/S ration
= 0.4 or 40%
Recall that in a previous example, we
have worked out this ratio.
06/04/12
158

Continuing the previous example, if the
sales prices of the three products are Rs.
100, 40 and 90 and the marginal costs are
Rs. 55,20 and 60 respectively, then the
C/S ratios are 45%,50% and 33.33%.
In this case, from the sales price point of
view, the order of preference of the
products would be A,C and B. Whereas
from the C/S point of view, it should be
B,A and C.
06/04/12
159

Break-even point is the one at which the total
contribution equals the total fixed expenses so
that there is neither profit nor loss.
The difference between the actual or projected
sales and break-even sales is called Margin of
Safety.
The higher the margin of safety, greater is the
capacity of the firm to withstand fluctuations in
actual activity due to internal or external
reasons.
The break-even point sales + the margin of
06/04/12
160
safety = total sales.

The Break-even (B/E) point in units :
= Total fixed cost/ Unit contribution.
If the fixed cost is Rs. 20 lakhs and the unit
contribution is Rs. 40, then the B/E point
of sales in units = 50000.
The B/E in sales value
= Fixed cost/(C/S ratio)
= Rs.20lakhs/40% = Rs. 50 lakhs in the
example.

Study this example for understanding of the
concepts:
Sales and Net Profit: 1st qr: Rs.30lakhs and 2
lakhs; 2nd quarter: Rs. 40 lakhs and 6 lakhs.
Find: CS ratio; Fixed cost per quarter; BE sales
value for the quarters; Margin of safety for the
qrs.; sales required in qr.3 to earn a profit of Rs.
10 lakhs and Profit expected during qr.4 , given
the sales forecast for the period = Rs. 45 lakhs

Answer: Since there been net profit in both
the quarters, the sales level has already
crossed the BE level and the profit
addition is only due to the contribution
Comparing the two figures of the qrs. It is
clear that the profit of additional profit of
Rs. 4 lakhs is the contribution from the
additional sales of Rs. 10 lakhs.
Therefore the CS ratio = 0.4 or 40%.

Since CS ratio is 40%, from the first qr.
Figure we can derive the fixed cost as :
contribution(30*.4)-profit 2 = Rs. 10 lakhs
BE sales Fixed cost/Contribution ratio = Rs.
10lakhs/0.4 = Rs. 25 lakhs
Margin of safety in qr. 2 = Rs. 40-25 lakhs
= Rs. 15 lakhs

Sales required in qr iii to earn a profit of
Rs. 10 lakhs :
Contribution required = fixed cost Rs. 10
lakhs + Profit Rs. 10 lakhs i.e. 20 lakhs.
Therefore the required sales
= Rs. 20 lakhs/contribution ratio 0.4
= Rs. 50 lakhs.

Profit expected during the qr. Iv if the
sales forecast is Rs. 45 lakhs:
The contribution would be Rs. 45 lakhs*0.4
= Rs. 18 lakhs. Therefore the profit would
be Rs. 18 lakhs-fixed cost Rs. 10 lakhs
= Rs. 8 lakhs.

BE in a multi product situation:
Sales
Contribution (Rs.
(Rs.lakhs)
lakhs)
Product
C/S
ratio
Produ Cumul Product Cumulativ

ctwiseative wise
e
A
B
50%
40%
10
20
10
30
5
8
5
13
20%
20
50
17

Composite C/S ratio =17/50=34%
Total fixed cost is given as Rs. 8.5 lakhs
Therefore the composite or combined BE
sales value = Rs.8.5 lakhs/0.34
= Rs. 25 lakhs
Similarly, BE units also can be worked out
as follows: Fixed Cost/Weighted average
contribution per unit

In the above example, additional data are as
follows: Unit sales for the products A,B, and C are
2 lakhs, 4 lakhs and 4 lakhs
Unit Sales Rs. Toal Sales Unit
lakhs
Rs.lakhs
Price
10
20
20
Total
10
50
5
5
5
Unit
Weighted
Contribu Contributiontion-Rs. Rs.
2.5
2
1
5
8
4
17

Weighted average contribution per unit
= Total contribution/total units
= 17/10 Rs.1.70.
Therefore the BE units will be
=Fixed cost/Weighted contribution per unit
=Rs.8.5 lakhs/Rs.1.70 = 5 lakhs.
(Cross check now: BE units*unit price = BE sales =
Rs.5*5lakhs = Rs. 25 lakhs which is already
arrived at)

The composite C/S ration will change
when the sales-mix changes and so the
composite BE sales too.
This approach is only approximate but still
gives
a
good
idea
about
the
consequences of changes in the sales
mix.
We have used the following formulae:

1. C/S ratio = (S- V)/S = C/S*100 in percentage;
2. BE units= Fixed Cost/Contribution per unit;
3.BE Sales = Fixed Cost/(C/S ratio; C/S ratio
= Fixed Cost/BE Sales;
4.Fixed Cost =C/S ratio*BE sales;
5.Contribution = Sales-Variable cost;
=Fixed Cost + Profit or C/S ratio*Sales;
6.Margin of Safety = Sales- BE sales
=(Contribution-Fixed Cost) (i.e. profit)/(C/S) ratio
Pricing
Pricing is a crucial decision an integral
part of the marketing mix management;
Price, Volume and Profit are interrelated
and affect profit;
High price or high unit profit leads to low
volume of sales and low absolute profit;
Low price or low unit price leads to high
volume of sales and low absolute profit;
Pricing
Pricing should strike a healthy balance
between
marketing
and
cost
considerations.
But the relative importance of the two will
largely depend upon: time frame, market
conditions, primary marketing objective,
consumer buying behaviour and product
characteristics.
Pricing
As you are aware, there are different
approaches to pricing:
High price and low volume vs. Low price and
high volume;
Going rate pricing;
Sealed bid pricing;
Geographical pricing;
Discount pricing;
Discriminatory pricing;
Penetration pricing;
Skimming the cream;
Pricing
Snob value pricing;

Pre-emptive pricing ;
Product Life Cycle Pricing;
Price reductions ( Price cutting-Price warfareFormation of price cartel)
Pricing
Cost based approaches:
Full cost pricing ignores elasticity of demand,
ignores competition, no distinction between fixed
and variable costs;
Conversion cost method: based on the value
added (eg. Printing industry);
Marginal Cost Pricing;
Return on Investment Pricing useful in a multi
product company, or while introducing new
products where no market price exists;
Pricing
Developing pricing strategies:

Price buyer is willing to pay;
Marketing objectives;
Stand of competitors, suppliers,
government etc;
Type of products and services;
Product positioning.
Pricing
Non Financial factors influencing Pricing:

Growth aspirations;
Corporate expansion;
Corporate image;
R and D;
Cost and efficiency;
Customer opinion;
Competition.
Pricing
In export pricing, the following costs have to be
borne in mind:
Ex-factory price of product;
Cost of Special packing if any;
Inspection charges to Export Inspection
Agencies;
Transportation from factory to warehouse/ports,
warehouse rentals;
Clearing and Forwarding Agents charges if any;
Port charges including handling inside the ports;
Pricing
Documentation charges before exports;

Freight;
Insurance Premium;
Export Duties (if any);
Importing country charges in their ports, import
duties (if any);
Clearing
charges
at
destination
and
transportation
charges
to
the
buyers
factory/warehouse;
Agents commission;
Wholesalers (buyer) margin; Retailers (buyer)
margin;
Foreign Exchange Risk Cover;

Marketing Finance

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Marketing Finance

Marketing Finance: Syllabus

Other References - Websites

6. http://knol.google.com/k (Articles on various

Other References - Websites

Marketing Finance an Overview

Role of Marketing Dept. in Marketing

Inventory Management and Control

Accounts Receivables Management

Product Planning and Development;

Cost analysis in Marketing Decisions

Marginal Costing and Break-even

Marketing Finance an Overview

Value Analysis: Social Cost Benefit Analysis;

Joint and By Product

Role of Mktg. Dept. in Marketing Finance

Role of Mktg. Dept. in MF

Mktg. and Finance Interdependence

Mktg. and Finance Interdependence

Mktg. and Finance Interdependence

Inventory Management and Control

Inventory Management and Control

Inventory Management and Control

Inventory Management and Control

Inventory Management and Control

Inventory Management and Control

Inventory Management and Control

Accounts Receivables Management

Accounts Receivables Management

Accounts Receivables: Credit Policy

Accounts Receivables: Credit Policy

Accounts Receivables: Credit Policy

Accounts Receivables: Credit Policy

Accounts Receivables: Credit Policy

Credit Period: Length of time allowed to customers

Accounts Receivables: Credit Policy

(Change in Receivables Investment = Incremental

Accounts Receivables: Credit Policy

Accounts Receivables: Credit Policy

Accounts Receivables: Credit Policy

Accounts Receivables: Credit Policy

Accounts Receivables: Credit PolicyCollection Programme

Accounts Receivables: Credit Policy

Accounts Receivables: Credit PolicyCollection Programme

Accounts Receivables: Credit PolicyCollection Programme

Accounts Receivables: Credit Policy-Credit

Accounts Receivables: Credit Policy-Credit

Three methods used : Traditional Credit Analysis,

Accounts Receivables: Credit Policy-Credit

Accounts Receivables: Credit Policy-Credit

Accounts Receivables: Credit Policy-Credit

Accounts Receivables: Credit PolicyCredit Granting Decision

Accounts Receivables: Credit PolicyControlling receivables

Consider the following example:

DSO at the end of each quarter are as follows:

Fourth Qr.: 420/ (220+230+240)/92 = 56 days.

Accounts Receivables: Credit PolicyControl of Receivables

Age GroupPer cent

Accounts Receivables: Credit PolicyControl of Receivables

Accounts Receivables: Credit PolicyControl of Receivables

Accounts Receivables: Credit PolicyControl of Receivables

Accounts Receivables: Credit PolicyControl of Receivables-Conversion Matrix

Accounts Receivables: Credit PolicyControl of Receivables-Conversion Matrix