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MARKETING & FINANCE

Introduction
In business, revenue or turnover is income that a
company receives from its normal business activities,
usually from the sale of goods and services to
customers.
Sales revenue or revenues is income received from
selling goods or services over a period of time.
Income from sales of goods and services, minus the
cost associated with things like returned or
undeliverable merchandise. Also called "Sales", "Net
Sales", "Net Revenue", and just plain "Revenue".

Introduction
Financial aspects of marketing earlier named
as Marketing Finance.
It is refer to any effort to quantify the
contribution of marketing to increased
business value.
Quantitative measurement of any action
designed to increase customer value.

Marketing

1. Customer
value creation
2. Brand equity
3. Innovation
4. Customer
satisfaction
5. CSR

Finance

Impact of
Marketing

1. Business value
creation
2. Financial
performance
3. Firms value
4. Stock return
5. Cost of debt

Financial aspects of Marketing fall into different


broad categories:

1. Different Financial measure for marketing like


ROI.
2. Different marketing investment to get
maximum ROMI.
3. Measuring the impact of marketing.
4. Customer value creation.
5. Marketing role in business strategy like
pricing etc.

Links between marketing and


financial performance
Marketing is seen as an expense not an
investment.
Marketing activities often reduce short-term
profitability.
Marketing focus on customer relationship or
client base.
Marketing try to establish brand equity in the
market for the long run.
Successful marketing activities (increased sales)
can have a negative impact on working capital
cash is king!

Financial and Economic performance


1.
2.
3.
4.

Sales
Profit
Costs
Cash flow

Marketing assets

Customer equity
Brand equity
Customer satisfaction
Market share
CSR

Financial Metrics
1.
2.
3.
4.
5.
6.
7.
8.

Margin
Growth
Marketing ROI
Customer lifetime value
Revenues
Acquisition costs
Retention costs
Operational costs

Marketing Scorecard
1. Market position share, penetration
2. Marketing assets brand, knowledge,
relationships
3. Customers awareness, attitudes, satisfaction,
sales funnel
4. Marketing processes research, segmentation,
service, management
5. Activities campaigns (reach, response, share of
voice)
6. Marketing Channel

Elements of Cost
There are broadly three elements of cost
1. Material,
2. Labor and
3. Expenses

Sales
A sale is the exchange of a commodity for
money or service in return for money or the
action of selling something.

Revenue
Revenue is the amount of money that is brought
into a company by its business activities, usually
from the sale of goods and services to customers.
In general usage, revenue is income received by
an organization in the form of cash or cash
equivalents.
Sales revenue or revenues is income received
from selling goods or services over a period of
time.

ROI( Return on investment)


Return on investment ROI is a popular financial
metric for evaluating the financial consequences
of individual investments and actions.
ROI has become popular in the last few decades
as a general purpose metric for evaluating capital
acquisitions, projects, programs, initiatives, as
well as traditional financial investments in stock
shares or the use of venture capital.
ROI is sometimes said to measure profitability.
That description is accurate and useful.

Investment Framework by ROI


The ROI is used to compare the profitability of
the business/project.
ROI= NIBT/Total Assets

Example
Suppose a Division with assets of Rs. 90,000 and
net income before tax of Rs. 20,000. What will be
its ROI?

Solution:
ROI= NIBT/Total Assets
= 20,000/90,000
=.22
=22%

Numerical
Suppose a cost of capital for the division is
15% and a new opportunity appears that
require an investment of Rs. 15,000, yielding
an annual profit improvement of Rs. 3,000/yr.
the rate from this new investment opportunity
is 20%, which is well above the division`s cost
of capital. What will be the new ROI ?

Solution
ROI= (20,000+3,000)/(90,000+15,000)
=23,000/1,05,000
=.219
=21.9%

Numerical
If the division has an asset carried at a Rs.
20,000, cost that earns Rs. 3600/yr (18%
return) the division can increase its ROI by
disposing of the asset.

Solution
ROI= (20,000-3600)/(90,000-20,000)
= 16,400/70,000
= 0.234
= 23.4%

Advantages of ROI
1. Provide optimum utilization of assets.
2. Helps in dispose of assets.
3. Serve as a yardstick in measuring managements
efficiency and effectiveness.
4. Provides strong decision making on profitability.
5. Provide alternative long-term investment proposals.
6. Provide a base for comparison.
7. Tie together the many phases of financial planning,
sales objectives, cost control, and the profit goal.
8. Aid in detecting weaknesses with respect to utilization
of resources.

Disadvantages of ROI
1. Lack of agreement on the right or optimum rate
of return might discourage managers whose
opinion is that the rate is set at an unfair level.
2. Proper allocation requires certain data regarding
sales, costs, and assets. The accounting and cost
system might not give such needed details.
3. Values and valuations of assets, particularly with
regard to jointly used assets, might give rise to
difficulties and misunderstandings.

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4. Excessive preoccupation with financial factors due to
constant attention to ratios and trends might distract
managements interest from technical and other
responsibilities.
5. Managers may be influenced to make decisions that
are not the best for the long-run interests of the firm.
6. A single measure of performance (e.g., return on
capital employed) may result in a fixation on improving
the components of the one measure to the neglect of
needed attention to other desirable activities both
short- and long-run.

MANAGEMENT
OF
SALES REVENUE ANALYSIS

Sales Revenue Analysis


Calculating profitability is a key part of revenue
analysis.
An analysis of your revenue from sales make
informed decisions regarding business strategy.
You can determine key variables and calculate
business ratios that tell you how your business is
performing.
From a revenue analysis, you can tell where it
makes sense to invest and what activities you
may want to discontinue.

continue

Revenue variation gives you quick guidance on


future trends.
It gives the idea about:
1. Comparison
2. Allocation
3. Profitability
4. Projections

Comparison
Analyzing your revenue from sales , compare the
amounts from the most recent period to the revenue
from previous years.
Such a comparison gives you an indication of how well
your business is performing.
A steady increase from year to year is a positive trend
and lets you plan future strategies with confidence.
A decreasing trend means you have to make major
changes.
Uneven increases and decreases mean your company is
responding to market influences, and you have to work
on making your strategies more effective to keep your
company on track.

Allocation
A key part of revenue analysis is allocating parts of
overall revenue to the items that generated the
underlying sales.
This allocation influences your future marketing
strategies, because it is direct feedback on what the
customers of your target market valued.
If a product with certain features generated a lot of
revenue and the revenue increased substantially from
the previous year, you have to promote products with
those features more heavily.
At the same time, you can reduce emphasis on products
that didn't generate much revenue or whose revenue is
declining.

Profitability
While revenue is a key variable for analyzing business
performance, your company has to generate profits.
Based on your revenue analysis and the costs you
incurred to produce that revenue, you can decide
whether to expand product lines or abandon them,
depending on their profitability.
Determining your profit from revenue and costs lets
you find your break-even point by calculating how
much profit you need to cover your overhead and how
much you have to sell to generate that amount of
profit.

Projections
In addition to providing data on actual
performance, revenue analysis lets you project
present trends into the future.
If revenue has increased steadily by about 4
percent per year for the last five years, for
example, it is likely to rise by 4 percent again next
year.
For trends that have variations, you can either
smooth out the changes or find reasons for them
and remove the effects from the numbers.

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If you know about a change in your market
situation that will impact future numbers, you
may have to adjust your calculations for this
effect.
Revenue projections let you develop
corresponding strategies and plan future
levels of staffing and investment.

What Is Sales Analysis?


Sales Analysis a detailed examination of a
company's sales data, involving assimilating,
classifying comparing, and drawing
conclusions.
Accumulation of sales analysis information.

Uses of sales analysis


Several major broad applications of sales analysis
follow:
1. Establishment of the sales forecasting system.
2. Development of sales performance measures.
3. Evaluation of market position.
4. Production planning and inventory control.
5. Maintaining appropriate product mixes.
6. Modifying the sales territory structures.
7. Planning sales force activities.
8. Evaluation of salespeople's performance

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9. Measuring the effect of advertising and other
sales promotional activities.
10. Modifying channels of distribution.
11. Evaluating channels of distribution.

Analyzing Sales Volume


1. Total Sales Volume the starting point for a
sales volume analysis; the total sales for a
specific period for a company, region, product,
or customer.
2. Sales by region: district a) Retail Sales Index
Relative measure of the dollar volume of retail
sales that normally occur.
3. Sales by salesperson.
4. Sales by customer classifications
5. Sales by product

Revenue analysis by product


1.
2.
3.
4.
5.
6.

Product Usage data


Product pricing
Brand of the product
Margin on items purchased
Size or value of their purchases
Balance volume and margin to drive net
income.
7. warehousing cost incurred by each product.

Revenue analysis by territories


By the selling expenses incurred by each
territory
By the promotion expenses incurred by each
territory
By the cost of credit incurred by each territory
By the rate of turn round of stocks in each
territory

Revenue analysis by chennal


Revenue enhancing opportunities in the distribution
channels
Maximizes revenues through all distribution channels
By the method of sale; direct to customer, or through
wholesaler or retailer, or commission agent.
By order size and order handling cost to the firm.
By salesman; cost of sales calls, cost of orders booked,
order to call ratio etc.
By price category and discount classification; cost
incurred at each price category.

Revenue analysis by customer orders


1. Types of customers and proper approval of
customer orders
2. Selection of active customers
3. Order size
4. Proportion of cash and credit sales in each
customer type.
5. Mode of delivery taken by customer

TOP
1% of customers 50% of revenues
49% of profits

LARGE
4% of customers23% of
revenues25% of profits
Medium-Sized
15% of customers20% of
revenues21% of profits

Small80% of customers7% of revenues5% of


profits

MARKETING COST

Marketing cost
The total delivering cost associated
with goods or services to customers.
The marketing cost may include expenses associated
with transferring title of goods to a customer, storing
goods in warehouses pending delivery, promoting the
goods or services being sold, or the distribution of
the product to points of sale.
Examining the cost associated with each individual
marketing activity to assess the profitability of each.

Marketing cost analysis


Marketing cost analysis is a strategy applied in
marketing where the costs connected with
selling, storing, advertising and distributing of
products to particular buyers, are analysed in
order to determine their profitability.
Business firms use several tools and
techniques for marketing control.

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The important ones among them are listed here:
1. Marketing audit
2. Market share analysis
3. Marketing cost analysis
4. Credit control
5. Budgetary control
6. Ratio analysis
7. Contribution margin analysis
8. Marketing Information inputs and warning signals
9. MBO management by objectives

Engineered Costs
Engineered costs result from activities with reasonably
well defined cause and effect relationships between
inputs and outputs and costs and benefits.
Direct material costs provide a good example.
Engineers can specify precisely how many parts (inputs)
are required to generate a specific output such as a
microcomputer, a coffee maker, an automobile, or a
television set.
Direct labor also falls into the engineered cost category
as well as indirect resources that vary with product
specifications and production volume.
Engineered costs are variable in terms of cost behavior.

Discretionary Costs/ managed cost


Many activities are viewed as beneficial to an
organization, even thought the benefits obtained, or
value added by performing the activities cannot be
defined precisely, either before or after the activity is
completed.
The costs of the inputs, or resources required to
perform such activities are referred to as discretionary
costs.
Discretionary costs are usually generated by service or
support activities. Examples include employee training,
advertising, sales promotion, legal advice, preventive
maintenance, and research and development.

Committed Costs/capacity(fixed)cost
Committed costs refers to the costs associated with
establishing and maintaining the readiness to conduct
business.
The benefits obtained from these expenditures are
represented by the company's infrastructure.
For example, the costs associated with the purchase of
a franchise, a patent, drilling rights and plant and
equipment create long term obligations that fall into
the committed cost category. These costs are mainly
fixed in terms of cost behavior and expire to become
expenses in the form of amortization and depreciation.

Cost Defined in Terms of Cause and Effect


Type of Cost

Cause & Effect or Cost


Benefit Relationship

Cost Behavior

Examples

Discretionary

Relationships are
Fixed, variable and
difficult or impossible mixed in the short run.
to
define.

Cost of administrative and


support services such as
employee training, advertising,
sales promotion, legal advice,
preventive maintenance, and
research and development.

Variable in the short


run.

Engineered

Relationships are
relatively easy to
define.

Direct resources used in


production activities such as
direct materials and direct labor
and many indirect resources
such as electric power.

Relationships can be
estimated, but not
defined precisely.

Fixed in the short run. Cost of establishing and


maintaining the readiness to
conduct business, such as the
cost associated with plant and
equipment.

Committed

CLASSIFICATION OF MARKETING COST


By function

Marketing costs
1.
2.
a)
b)
3.
4.
4.
a)
b)
c)
5.
6.
7.

Variable
fixed costs
Programmed cost (advertisment, sales promotion, sales salary)
Committed cost (Rent, administrative and clerical salries)
Relevant (promotion of new product)
sunk costs (test marketing, last yr advertising exp.)
Margins
Gross margin (total sales-cogs)
Trade margin(unit sale price-unit cost price)
Net profit margin
Selling cost
Distribution cost (warehouse,
Research and distribution cost

Cost allocation
Cost allocation is the assigning of a common cost
to several cost objects.
Cost allocation (also called cost assignment) is the
process of finding cost of different cost objects
such as a project, a department, a branch, a
customer, etc.
It involves identifying the cost object, identifying
and accumulating the costs that are incurred and
assigning them to the cost object on some
reasonable basis.

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Cost allocation is important because it the
process through which costs incurred in
producing a certain product or rendering a
certain service is calculated.
If costs are not accurately calculated, a business
might never know which products are making
money and which ones are losing money.
If cost are misallocated, a business may be
charging wrong price to its customers and/or it
might be wasting resources on products that are
wrongly categorized as profitable.

Typical cost allocation mechanism


involves:
Identifying the object to which the costs have
to be assigned,
Accumulating the costs in different pools,
Identifying the most appropriate
basis/method for allocating the cost

Cost object
Cost object is an item for which a business
need to separately estimate cost.
Examples of cost object include a branch, a
product line, a service line, a customer, a
department, a brand, a project, etc.

Cost pool
Cost pool is the account head in which costs are
accumulated for further assignment to cost objects.
Examples of cost pools include factory rent, insurance,
machine maintenance cost, factory fuel, etc. Selection
of cost pool depends on the cost allocation base used.
For example if a company uses just one allocation base
say direct labor hours, it might use a broad cost pool
such as fixed manufacturing overheads. However, if it
uses more specific cost allocation bases, for example
labor hours, machine hours, etc. it might define
narrower cost pools.

Cost driver
Cost driver is any variable that drives some cost. If increase
or decrease in a variable causes an increase or decrease is a
cost that variable is a cost driver for that cost.
Examples of cost driver include:
Number of payments processed can be a good cost driver for
salaries of Accounts Payable section of accounting
department,
Number of purchase orders can be a good cost driver for cost
of purchasing department,
Number of invoices sent can be a good cost driver for cost of
billing department,
Number of units shipped can be a good cost driver for cost of
distribution department, etc.
While direct costs are easily traced to cost objects, indirect
costs are allocated using some systematic approach.

Cost allocation base


Cost allocation base is the variable that is used
for allocating/assigning costs in different cost
pools to different cost objects.
A good cost allocation base is something
which is an appropriate cost driver for a
particular cost pool.

Example
T2F is a university caf owned an operated by a student. While it has
plans for expansion it currently offers two products: (a) tea & coffee
and (b) shakes. It employs 2 people: Mr. A, who looks after tea &
coffee and Mr. B who prepares and serves shakes & desserts.
Its costs for the first quarter are as follows:
Mr. A salary
16,000
Mr. B salary
12,000
Rent
10,000
Electricity
8,000
Direct materials consumed in making tea & coffee
7,000
Direct raw materials for shakes
6,000
Music rentals paid
800
Internet & wi-fi subscription
500
Magazines
400

Continue..
Total tea and coffee sales and shakes sales
were 50,000 & 60,000 respectively. Number of
customers who ordered tea or coffee were
10,000 while those ordering shakes were
8,000.
The owner is interested in finding out which
product performed better.

CLASSIFICATION OF MARKETING COST


By function

Marketing costs
1.
2.
a)
b)
3.
4.
4.
a)
b)
c)
5.
6.
7.

Variable
fixed costs
Programmed cost (advertisment, sales promotion, sales salary)
Committed cost (Rent, administrative and clerical salries)
Relevant (promotion of new product)
sunk costs (test marketing, last yr advertising exp.)
Margins
Gross margin (total sales-cogs)
Trade margin(unit sale price-unit cost price)
Net profit margin
Selling cost
Distribution cost (warehouse,
Research and distribution cost

Cost allocation
Cost allocation is the assigning of a common cost
to several cost objects.
Cost allocation (also called cost assignment) is the
process of finding cost of different cost objects
such as a project, a department, a branch, a
customer, etc.
It involves identifying the cost object, identifying
and accumulating the costs that are incurred and
assigning them to the cost object on some
reasonable basis.

Continue
Cost allocation is important because it the
process through which costs incurred in
producing a certain product or rendering a
certain service is calculated.
If costs are not accurately calculated, a business
might never know which products are making
money and which ones are losing money.
If cost are misallocated, a business may be
charging wrong price to its customers and/or it
might be wasting resources on products that are
wrongly categorized as profitable.

Typical cost allocation mechanism


involves:
Identifying the object to which the costs have
to be assigned,
Accumulating the costs in different pools,
Identifying the most appropriate
basis/method for allocating the cost

CASE STUDY

Indian Refrigerator Market


India's Refrigerator market estimated at Rs. 2750 Cr. is catered mainly by 10 brands. The annual
capacity is estimated at around 4.15 million units is running head of demand of 1.5 millions. As there
is a demand and a surplus supply, all the manufacturers are trying out for new strategies in the market.
Times have changed and also the buying behaviour of the customer. Earlier it was cash and carry
system. Now dealers play an important role in selling; now the systems is exchange for old bring your
old refrigerator and take a new one with many gifts. A new company by name Electrolux has entered
the market which has acquired Allwyn, Kelvinator and Voltas brand. Researchers have revealed that
urban and city sales are declining and hence all manufacturers are trying to concentrate on rural
markets.
Electrolux strategy is customization of market, with special attention to the Northern and Southern
India markets, while Godrej the main player thinks that dealer network in rural market for sales and
service will be beneficial and is trying to give more emphasis on dealer network, whereas Whirlpool
has adopted the strategy of increasing the dealer network by 30%.
The market shares of the major players are as follows:

Godrej
Videocon
Kelvinator
Allwyn
Voltas
Questions

30%
13%
12%
10%
5%

Whirlpool
Daewoo
L.G
Others

27%
1%
1%
1%

1. Could the refrigerator market be segmented on geographical base planned by


Electrolux?
2. What would be the marketing mix for rural market?
3.Would 125 L and 150 L models be an ideal choice to launch in rural market?

MANAGEMENT OF ACCOUNTS
RECIEVABLE

Introduction
When goods and services are sold under an agreement
permitting the customer to pay for them at a later date,
the amount due from the customer is recorded as
accounts receivables; So, receivables are assets accounts
representing amounts owed to the firm as a result of
the credit sale of goods and services in the ordinary
course of business.
According to Robert N. Anthony, "Accounts receivables
are amounts owed to the business enterprise, usually by
its customers. Sometimes it is broken down into trade
accounts receivables; the former refers to amounts
owed by customers, and the latter refers to amounts
owed by employees and others".

Cost of Maintaining Receivables


Receivables are a type of investment made by a
firm. Like other investments, receivables too
feature a drawback, which are required to be
maintained for long that it known as credit
sanction.
Such costs associated with maintaining receivables
are detailed below: 1. Administrative Cost
2. Capital Cost
3. Production and Selling Cost
4. Delinquency Cost
5. Default Cost

Administrative Cost
If a firm liberalizes its credit policy for the good
reasons of either maximizing sales or
minimizing erosion of sales, it incurs two types
of costs:
1. Credit Investigation and Supervision Cost
2. Collection Cost

Capital Cost
There is no denying that maintenance of receivables by
a firm leads to blockage of its financial resources due to
the tie log that exists between the date of sale of goods
to the customer and the date of payment made by the
customer.
But the bitter fact remains that the firm has to make
several payments to the employees, suppliers of raw
materials and the like even during the period of time
lag. As a consequence, a firm is liable to make
arrangements for meeting such additional obligations
from sources other than sales.
Thus, a firm in the course of expanding sales through
receivables makes way for additional capital costs.

Production and Selling Cost


These costs are directly proportionate to the
increase in sales volume.
In other words, production and selling cost
increase with the very expansion in the
quantum of sales.

Delinquency Cost
This type of cost arises on account of delay in payment
on customer's part or the failure of the customers to
make payments of the receivables as and when they
fall due after the expiry of the credit period. Such debts
are treated as doubtful debts.
They involve: 1. Blocking of firm's funds for an extended period of
time,
2. Costs associated with the collection of overheads,
remainders legal expenses and on initiating other
collection efforts.

Default Cost
Similar to delinquency cost is default cost. Delinquency
cost arises as a result of customers delay in payments of
cash or his inability to make the full payment from the
firm of the receivables due to him.
Default cost emerges a result of complete failure of a
defaulter (customer) to pay anything to the firm in
return of the goods purchased by him on credit.
When despite of all the efforts, the firm fails to realize
the amount due to its debtors because of him complete
inability to pay for the same.
The firm treats such debts as bad debts, which are to be
written off, as cannot be recovers in any case.

Factors Affecting The Size Of


Receivables
The size of receivables is determined by a
number of factors for receivables being a
major component of current assets.
As most of them varies from business the
business in accordance with the nature and
type of business.

Consequence of excessive receivable

High opportunity cost


High risk of bad debts
High credit administration cost
High risk of liquidity

Consequence of inadequate receivable


Decrease in sales.
Risk of loosing market share.

Principles Of Credit Management


1.
2.
3.
4.

Allocation
Selection of Proper Credit Terms
Credit Investigation
Sound Collection Policies and Procedures

What Makes up the Credit Policy for a


Company?
If a company does a cost/benefit analysis and
makes the very important decision to extend
credit to its customers, then it has to establish
procedures for credit and collecting accounts.
There are usually three parts of a good credit
policy:
1. Terms of sale
2. Credit analysis
3. Collection policy

TERMS OF SALE

Introduction
The terms of sale for a credit customer state how the
firm will sale its products or services.
Will the firm require a cash sale or will it extend credit?
That decision is made through the process of credit
analysis and determining who should be granted credit.
If the small business decides to grant credit to a
customer, then it has to establish terms.
These terms will include the :
1. Credit Period And
2. Any Discount

Credit Period
When considering accounts receivables credit
policy, the credit period is the time period in
which a credit customer has to pay their bill.
If a company offers credit terms of 2/10, net
30, for example, the "net 30" portion of the
equation means that if the credit customer
does not take the 2% discount offered, then
the bill must be paid in 30 days.

Discount Period
The discount period is the time period during
which a company offers its customers a discount
on the purchases that company makes. The term
is associated with the accounts receivable credit
policy of the business firm.
The discount period is an issue for merchants
who offer credit to their customers.
For example; XYZ Corporation offers a 2%
discount if credit customers pay their bills within
10 days.

The credit term may be soft or tight :


Types of terms

Effect on sales

Effect on
investment in
account
receivable

Effect on bad
debts

Effect on credit
administration
cost

Soft term

Increase in
sales

Increase in
investment in
AR

Increase in bad
debts

Increase in
credit
administration
cost

Tight terms

Decrease in
sales

Decrease in
investment in
AR

Decrease in bad Decrease in


debts
credit
administration
cost

CREDIT ANALYSIS

Introduction
When determining credit policy, a company determines
how they will grant credit to consumers and
businesses.
They use a number of methods to do this including
pulling credit reports, evaluation of the 5C's of credit,
and credit scoring. These are:
1. Capacity
2. Collateral
3. Capital
4. Condition
5. Character

After credit analysis , the customers may be classified in


various categories such as follows:
Category of customers

Average college period

Default risk

Good

Within credit period

Marginal

Moderate collection
period

Moderate

Bad

Very large collection


period

High

COLLECTION POLICY

Introduction
If a company makes the decision to offer
credit to its customers, it needs to develop a
collections policy that it will use to monitor its
credit accounts.
Most companies use two approaches:
1. Average collection period
2. Accounts receivable aging schedule.

Average collection period


The approximate amount of time that it takes for a business
to receive payments owed, in terms of receivables, from its
customers and clients.
Calculated as:
ACP = (Days *AR)/Credit sales

Where:
Days = Total amount of days in period
AR = Average amount of accounts receivables
Credit Sales = Total amount of net credit sales during period

Accounts receivable aging schedule


An accounting table that shows the relationship
between a companys bills and invoices and its due
dates.
An aging schedule often categorizes accounts as
current (under 30 days), 1-30 days past due, 30-60 days
past due, 60-90 days past due, and more than 90 days
past due. Companies can use aging schedules to see
which bills it is overdue on paying and which customers
it needs to send payment reminders to or, if they are
too far behind, send to collections.

5 Strategies For Effective Accounts


Receivable Management
1.
2.
3.
4.
5.

Sign a Contract and Check Credit


Track Accounts Receivable
Make Payment Easy
Do Your Part
Re-Think Your Billing Approach

Sign a Contract and Check Credit


Managing accounts receivable begins before
the first invoice goes out the door.
With the guidance of legal counsel, develop a
binding contract or engagement letter that
sets forth your payment terms.
Run a credit check on prospective clients to
see if they have a history of late payments or
bankruptcies and other financial troubles.

Track Accounts Receivable


A key part of this process is to effectively track
accounts receivable.
You should always know which accounts are
outstanding and for how long. Run reports to
highlight payment trends and which customers
are frequently behind.
You can also set up alerts that will tell you when a
customer is overdue or soon to be overdue in
their payments to allow for more effective followup.

Make Payment Easy


Give your customers the options they need to pay
you quickly. Look into accepting credit cards or
allow direct transfers of payments.
Depending on your business, Paypal or another
mobile payment solution could also be a good fit.
Yes, many of these methods require a cut of the
transaction total, but if overdue payments are
haunting your business, it is likely worth the cost.

Do Your Part
A delayed invoice will obviously lead to
delayed payment.
Make sure you tie up loose ends on your side
of the equation and ensure that invoices are
sent out in a timely fashion.

Re-Think Your Billing Approach


If billing after you finish the work is causing
some problems, reassess your payment terms.
Ask clients to pay you in installments
throughout the engagement, and/or require a
deposit before work begins.
If youre not ready for a step this big, start
with simply shortening your payment terms.

INVENTORY MANAGEMENT

Introduction
Inventory is tangible property. Inventory
would include items which are held for sale in
the ordinary course of business (Finished
goods) or which are in the process of
production for the purpose of sale (Work-inProcess), or which are to be used in the
production of goods or services, which will be
for sale (Raw Materials).

Classification of inventory
(A) Raw materials: Raw materials are, directly, used in
manufacturing a product.
(B) Work-in-process: Work-in-process is partly finished
goods. They are in the process of conversion from the
stage of raw materials to finished goods.
(C) Finished goods: Finished goods are those goods, which
are completely ready for sale. Finished goods of one firm
can become the raw materials to another firm.
(D) Stores and Supplies: Stores and Supplies do not enter
into production, directly. However, in their absence, entire
production would be affected and at times, even, come to
a halt. Normally, their value is very small in the total
inventory. Examples are grease, oil, bulbs, brooms etc.

OBJECTIVES OF INVENTORY
Inventory is held for
Smooth production process for making
finished goods, meant for sale.
Sale of finished goods for sale in the ordinary
course of business.
Facilitating production process.

INVENTORY CONTROL
Inventory control involves physical control of materials,
preservation of stores, minimization of obsolescence and
damages through timely disposal and efficient handling.
Effective stock control system should ensure the
minimization of inventory carrying cost and materials
holding cost.
Level of stock is the important aspect of inventory control.
Stock level may be overstocking or understocking.
Overstocking requires large capital with high cost of
holding.
In the case of understocking , production and overall
performance of the concern as a whole will affect.

Thus, fixation of stock level is essential to maintain


sufficient stock for the smooth flow of production and sales. The
following are the important techniques
usually adopted in different industries :

(a) Maximum Stock Level.


(b) Minimum Stock Level.
(c) Danger Level.
(d) Re-Order Level.
(e) Economic Ordering Quantity (EOQ).
(f) Average of Stock Level

Maximum Stock Level


The maximum stock level indicates the maximum
quantity of an item should not be allowed to increase.
The maximum quantity of an item can be held in stack
at any time.
The following factors can be considered while fixing the
maximum stock levels :
(1) Availability of capital.
(2) Availability of floor space.
(3) Cost of storage.
(4) Possibility of fluctuation of prices in raw materials.
(5) Cost of insurance.
(6) Economic order of quantity.

Continue..

(7) Average rate of consumption.


(8) Re-order level and lead time.
(9) Seasonal nature of supply.
(10) Risk of obsolescence, depletion, evaporation
etc.
The maximum stock level can be calculated by the
following formula :
Maximum Stock Level = Re-Order Level + ReOrdering Quantity (Minimum Consumption x
Minimum Re-Ordering Period)

Minimum Stock Level


Minimum stock level indicates the minimum
quantity of material to be maintained in stock.
Accordingly, the minimum quantity of an item
should not be allowed to fall.
The minimum stock is also known as Safety Stock
or Buffer Stock.
The following formula is adopted for calculation
of minimum stock level :
Minimum Stock Level = Re-Order Level - (Normal
Consumption x Normal Re-Order Period)

Danger Level
It is the stock level below the Minimum Level. This
level indicates the danger point to affect the normal
production.
When materials reach danger level, necessary steps
should be taken to restock the materials. If there is any
emergency, special arrangements should be made for
fresh issue.
Generally this level is fixed above the minimum level
but below the reording level. The formula for
determination of danger level is :
Danger Level = Average Rate of Consumption x
Emergency Supply Time

Re-order Level
Re-order level is also termed as ordering Level. It indicates
when to order, i.e., orders for its fresh supplies.
This is the stock level between maximum and the minimum
stock levels. The re-order stock level is fixed on the basis of
economic order quantity, lead time and average rate of
consumption.
Calculation of re-order level is adopted by the following
formula :
Re-order Level = Minimum Level + Consumption during the
time to get fresh delivery
(or)
Re-order Level = Maximum Consumption x Maximum Reording Period

Economic Order Quantity (EOQ)


Economic Order Quantity is one of the important techniques
used to determine the optimum quantity or number of
orders to be placed from the suppliers.
The main objectives of economic order quantity is to
minimize the cost of ordering, cost of carrying materials and
total cost of production.
Ordering costs include cost of stationery, salaries of those
engaged in receiving and inspecting, general office and
administrative expenses of purchase departments.
Carrying costs are incurred on stationery, salaries, rent,
materials handling cost, interest on capital, insurance cost,
risk of obsolescence, deterioration and wastage of materials
and evaporation.

Economic Order Quantity can be calculated by the following


formula :

Average Stock Level


Average stock level is determined on the basis
of minimum stock level and re-order quantity.
This is calculated with the help of the
following formula:
Average Stock Level = Minimum Stock Level +
1/2 of
Re-order Quantity
(or)
=(Minimum Level + Maximum Level)/
2

The ABC Analysis


ABC Analysis is one of the important techniques
which is based on grading the items according to
the importance of materials.
This method is popularly known as Always Better
Control.
This is also termed as Proportional Value Analysis
- In inventory control, this technique helps to
analyze the distribution of any characteristic by
money value of importance in order to determine
its importance.

Accordingly, materials are grouped into three categories on the


basis of the money value of importance of materials.

(1) High Value Materials - A


(2) Medium Value Materials - B
(3) Low Value Materials - C

The following table shows more explanation about ABC Analysis :


Category

Percentage to total inventory

Percentage to total inventory cost

Less than 10

70 to 80

10 to 20

15 to 25

70 to 80

Less than 10

Advantages of ABC Analysis


(1) Exercise selective control is possible.
(2) Focus high attention on high value items is
possible.
(3) It helps to reduce the clerical efforts and
costs.
(4) It facilitates better planning and improved
inventory turnover.
(5) It facilitates goods storekeeping and effective
materials handling.

CREDIT POLICY

Clear, written guidelines that set


(1) the terms and conditions for
supplying goods on credit,
(2) customer qualification criteria,
(3) procedure for making collections, and
(4) steps to be taken in case of customer delinquency.
Also called collection policy.
consider the link between credit and sales. Easy credit
terms can be an excellent way to boost sales, but they
can also increase losses if customers default.

A typical credit policy will address the following points:

1.
2.
3.
4.
5.
6.

Credit limits
Credit terms
Deposits
Credit cards and personal checks
Customer information
Documentation

SALES PROMOTION

Sales Promotion
Sales promotions are the set of marketing
activities undertaken to boost sales of the
product or service.
There are two basic types of sales promotions:
1. Trade promotion and
2. Consumer sales promotions.

Trade promotion
The schemes, discounts, freebies, commissions and
incentives given to the trade (retailers, wholesalers,
distributors, C&Fs) to stock more, push more and
hence sell more of a product come under trade
promotion.
These are aimed at enticing the trade to stock up more
and hence reduce stock-outs, increase share of shelf
space and drive sales through the channels.
A typical trade scheme on soaps would be buy a case
of 12 soaps, get 1 or 2 free - or a 8% discount scheme
(1/12=8%). Such schemes are common in FMCG and
pharma industries.

Consumer sales promotions


Sales promotion activity aimed at the final consumer
are called consumer schemes.
These are used to create a pull for the product and are
advertised in public media to attract attention.
Maximum schemes are floated in festival times, like
Diwali or Christmas.
Examples are buy soap, get diamond free; buy biscuits,
collect runs; buy TV and get some discount or a free
item with it and so on. Consumer schemes become
very prominent in the 'maturity or decline' stages of a
product life cycle, where companies vie to sell their
own wares against severe competition.

Sales Promotion
Sales promotion is any initiative undertaken by an
organization to promote an increase in sales, usage
or trial of a product or service (i.e. initiatives that
are not covered by the other elements of the
marketing communications or promotions mix).
Sales promotions are varied. These are:
1. Free gifts
2. Discounted price
3. Joint promotion
4. Free sample
5. Voucher and coupons

Free gifts
Subway gave away a card with six spaces for
stickers with each sandwich purchase.
Once the card was full the consumer was
given a free sandwich.

Discounted prices
Budget airline, e-mail their customers with the
latest low-price deals once new flights are
released, or additional destinations are
announced.

Joint promotions
Joint promotions between brands owned by a
company, or with another companys brands.
For example fast food restaurants often run
sales promotions where toys, relating to a
specific movie release, are given away with
promoted meals.

Free samples
Free samples (aka. sampling) e.g. tasting of
food and drink at sampling points in
supermarkets. For example Red Bull (a
caffeinated fizzy drink) was given away to
potential consumers at supermarkets, in high
streets and at petrol stations (by a promotions
team).

Vouchers and coupons


Vouchers and coupons, often seen in
newspapers and magazines, on packs.

Competitions and prize draws


Competitions and prize draws, in newspapers,
magazines, on the TV and radio, on The
Internet, and on packs.

Cause-related and fair-trade


Cause-related and fair-trade products that
raise money for charities, and the less well off
farmers and producers, are becoming more
popular.

Finance deals
for example, 0% finance over 3 years on
selected vehicles.

PROMOTION

Promotion expenses:
A cost that a business incurs to make its
products or services better known to
consumers, usually in the form of giveaways.
Differences Between Advertising &
Promotional Expenses:
Advertising is often considered paying to
deliver and control a marketing message,
while promotion is paying to support your
marketing efforts more generically.

Advertising: Delivery Expenses


Delivering your marketing message may require
newspaper, magazine, TV or radio advertising.
Other means include direct mail, website banners
and links and billboards.
When you buy advertising, you control your
message by creating the copy used in the ad. Part
of the advertising expense is the media purchase,
such as a 30-second radio commercial or a halfpage magazine ad.
The price often does not cover creation of the ad.

Advertising: Creation Expenses


Media costs represent only part of the
advertising expense.
Someone must create the ads.
Advertising creation costs include agency fees,
in-house designers, copywriting and overhead
related to the development of the ad.

Continue
For example, if you have an advertising
department, you must include the costs of
your staff, office space, computers and
software in your advertising budget. If you
spend money on focus groups to test different
versions of advertising copy, slogans, jingles,
models or graphics, that expense is a part of
ad creation.

Promotion: Delivery Expenses


Examples of promotions include event
sponsorships, giveaways, on-site sampling,
contests and discounts.
Promotions often include items such as Tshirts, stickers, coupons and prizes.
If you sponsor an event and require staff to
work at the event, include your staff time as
part of the promotion expense.

Continue..
If you sign a one-year contract with a celebrity to
endorse your product, you would record the
celebrity's fee as an annual promotional expense
for accounting purposes.
If you require the celebrity to make six
appearances each year, you can assign one-sixth
of the celebrity's fee to each of the six
appearances he makes for an internal analysis of
the true cost of each of those six promotions.

Promotion: Creation Expenses


Calculate the cost of pre-promotion expenses
directly related to planning and creating a
promotion.
Site visits, consulting fees, travel, lodging and other
pre-event planning expenses are examples of
promotion creation expenses.
Giving your retailers, the media or event organizers
gifts or entertaining them would be expenses
indirectly associated with a promotion and
considered part of creating, rather than executing
the promotion.

SPECIAL PROMOTIONS

Introduction
Today, more and more small businesses are
interested in running offers, as a way to get
new customers.
The key to the success of this type of
campaign is finding a way to get your offer in
front of the right peoplethat is the people
who will likely to act on it, and ultimately help
you grow your business by becoming a new
loyal customer.

Example
Its our 15-15-15 Promotion!
Save 15% on ANY ABC Title or ABC Online Library for
the next 15 Days! From now until December 24, 2015,
save 15% on any ABC Title or ABC Online Library! Just
reference promotion code 151515 when you contact
your sales representative, marketing@abc.com or
1800-828-7571!
Please note: This promotion cannot be combined with
other ABC or ABC Online promotions. This promotion is
only valid on the first year of new subscriptions to ABC
Online collections, and cannot be used towards existing
subscriptions. Bookmark on Delicious

MARKETING RESEARCH
EXPENDITURE

Market Research
For example, a company that was considering going into
business might conduct market research first to test the
viability of its product or service idea. If the market
research confirms that company's predictions, they can
proceed confidently with their business plan. If not, they
can use the results of the market research to make
adjustments and do additional testing. Though market
research can be expensive and time consuming, it should
be less expensive and time consuming than fully developing
and bringing to market a new product or service that will
generate little or no interest from potential customers.

Market Research Expenditure


A marketing expenditure is simply a payment
made for a marketing-related investment or
expense.
Market research, product development,
promotions, sales and service are all areas in
which companies make marketing
investments. Companies often allocate certain
amounts toward marketing expenditures
through a set budget amount.

MARKETING INVESTMENTS

ROMI
Return on marketing investment (ROMI) is the
contribution to profit attributable
to marketing (net of marketing spending),
divided by the marketing 'invested' or risked.
ROMI is not like the other 'return-oninvestment' (ROI) metrics
because marketing is not the same kind of
investment.

Continue..
Return on marketing investment (ROMI) is a
metric used to measure the overall effectiveness
of a marketing campaign to help marketers make
better decisions about allocating future
investments.
ROMI is usually used in online marketing, though
integrated campaigns that span print, broadcast
and social media may also rely on it for
determining overall success. ROMI is a subset
of ROI (return on investment).

PROBABLITY THEORY

Introduction
Uncertainty is all around us and we often come
across real-life situations when we have to decide
on making a choice from the available options.
From weather forecasts, opinion polls to making
business decisions, the concepts of probability
come in handy at various aspects of our daily lives.
What are the chances?
Whether you are an economist, a businessman or
a manager, you will come across instances when
you have to face uncertainty with respect to the
outcomes of your business decisions.

Continue..
For example, when you have to launch a new
product into the market, you will need to
weigh in factors like market demand,
customer perception and usefulness of the
product in the targeted area. Probability
theory helps managers and businessmen to
select the right markets and the best time to
launch the product based on prior surveys and
customer information etc.

PROBABILITY
Probability theory is an important part of statistical
theory.
It is the science of uncertainty or chance, or
likelihood.
A probability value ranges between 0 and 1. A
probability value of 0 means there is no chance
that an will happen and a value of 1 means there is
100 percent chance that the event will happen.
Understanding probability is helpful for decisionmaking.

Continue..
Conducting an experiment or sample test
provides an outcome that can be used to
compute the chance of events occurring in the
future.
An experiment is the observation of some activity
or the act of taking some measurement.
Whereas, an outcome is a particular result of an
experiment.
The collection of one or more outcomes of an
experiment is known as an event.

Example..
For example, a market testing of a sample of
new breakfast cereal, new drink, new shoes,
new magazine, etc. gives the Director of
Production or Director of Marketing a
company a preliminary idea (outcome)
whether consumers would like the product if
it is produced and distributed in bulk.

Classification of Probability
1) Classical Probability
2) Empirical Probability
3) Subjective Probability

CLASSICAL PROBABILITY
When there are n equally likely outcomes to an
experiment.
The probability of certain events is already known
or the resulting probabilities are definitive.
For example:
(1)The chance that a woman gives birth to a male
or female baby (p = 0.50 or ),
(2)The chance that tail or head appears in a toss of
coin (p = 0.50 or ),

EMPIRICAL PROBABILITY
Empirical probability is based on past
experience.
The empirical probability, also known as
relative frequency, or experimental probability.
For example:
(1)300 of 700 business graduates were employed
in the past. The probability that a particular
graduate will be employed in his or her major
area is 300/700 = 0.43 or 43%.

Continue
(2) The probability that your income tax return
will be audited if there are 20 lakh mailed to
your district office and 2,000 are to be audited is
2,000/20,00,000 = 0.001 or 0.10%.

SUBJECTIVE PROBABILITY
Subjective probability is a probability assigned
to an event based on whatever evidence is
available.
It is an educated guess. Unlike empirical
probability, it is not based on past experience.
Subjective probability is obtained by
evaluating the available options and by
assigning the probability.

Example
Examples of events that require computing
subjective probability:
(1)Estimating the probability that a person wins
a lottery.
(2)Estimating the probability that the GM will
lose its first ranking in the car sales.

APPLICATION IN BUSINESS
I. In business: probability theory is used in the
calculation of long-term gains and losses. This is
how a company whose business is based on risk
calculates "probability of profitability" within
acceptable margins.
Every decision made in the business world has risk
to it. So, in business, you would use probability to
take a close look at the company`s financial risks.
Even the decisions that come down from
management all have a probability of success and a
probability to fail.

Continue..
II. Probability in Manufacturing businesses can use
probability to determine the cost-benefit ratio or
the transfer of a new manufacturing technology
process by addressing the likelihood of improved
profits.
In other instances, manufacturing firms use
probability to determine the possibility of financial
success of a new product when considering
competition from other manufacturers, market
demand, market value and manufacturing costs..

Continue..
Other instances of probability in
manufacturing include determining the
likelihood of producing defective products,
and regional need and capacity for certain
fields of manufacturing.

Continue..
III. Scenario Analysis: Probability distributions can
be used to create scenario analyses.
For example, a business might create three
scenarios: worst-case, likely and best-case. The
worst-case scenario would contain some value
from the lower end of the probability
distribution; the likely scenario would contain a
value towards the middle of the distribution; and
the best-case scenario would contain a value in
the upper end of the scenario.

Continue..
IV. Risk Evaluation: In addition to predicting future
sales levels, probability distribution can be a
useful tool for evaluating risk.
For example, a company considering entering a
new business line. If the company needs to
generate 50,00,000 in revenue in order to break
even and their probability distribution tells them
that there is a 10 percent chance that revenues will
be less than 5,00,000, the company knows roughly
what level of risk it is facing if it decides to pursue
that new business line.

Continue..
V. Sales Forecasting: One practical use for probability
distributions and scenario analysis in business is to
predict future levels of sales. It is essentially
impossible to predict the precise value of a future
sales level; however, businesses still need to be
able to plan for future events.
Using a scenario analysis based on a probability
distribution can help a company frame its possible
future values in terms of a likely sales level and a
worst-case and best-case scenario. By doing so, the
company can base its business plans on the likely
scenario but still be aware of the alternative
possibilities.

Importance of Statistics
While theoretical probability is based on the prior
knowledge on the possible outcomes, in some cases its
difficult to compute the theoretical probability of an
event.
For example, how do we know that baseball team A will
win this season? The probability depends on their past
record, player performance and other factors. We need to
look into the historical data to arrive at a probability; the
more the teams success rate, the better its chances of
winning the title. For this reason, statistics and statistical
analysis is very important in deducing the probability of
complex events.

DECISION TREE

Introduction
Decision Trees are excellent tools for helping you to
choose between several courses of action.
They provide a highly effective structure within which
you can lay out options and investigate the possible
outcomes of choosing those options.
They also help you to form a balanced picture of the
risks and rewards associated with each possible course
of action.
Decision trees are graphical representations of
alternative choices that can be made by a business,
which enable the decision maker to identify the most
suitable option in a particular circumstance.

Continue..
For example, they will be used when oil and gas
exploration companies have to decide whether to
invest in a particular gas field, or in choosing to
allocate resources to exploiting one gas field
rather than another. Decision trees are a helpful
visual tool when it is possible to measure the
probability of an event occurring and the likely
financial outcomes of making a particular
decision.

Decision trees provide an effective method of Decision


Making because they:

1. Clearly lay out the problem so that all options


can be challenged.
2. Allow us to analyze fully the possible
consequences of a decision.
3. Provide a framework to quantify the values of
outcomes and the probabilities of achieving
them.
4. Help us to make the best decisions on the basis
of existing information and best guesses.

Drawing a Decision Tree


A decision tree is a diagram consisting of
1. decision nodes (squares)
2. chance nodes (circles)
3. decision branches (alternatives)
4. chance branches (state of natures)
5. terminal nodes (payoffs or utilities)

Representing decision table as decision tree


ALTERNATIVES
a1
a2
.
am

STATES OF NATURE
...
q1
q2
qn
...
x11
x12
x1n
...
x21
x22
x2n
.
.
...
.
...
xm1
xm2
xmn
q1
a1
a2

x11

qn

x1n

am

q1

xm1

qn

Decision Tree Method


1.
2.
3.
4.

Define the problem


Structure / draw the decision tree
Assign probabilities to the states of nature
Calculate expected payoff (or utility) for the
corresponding chance node backward,
computation
5. Assign expected payoff (or utility) for the
corresponding decision node backward,
comparison
6. Represent the recommendation

Lets start with a story


Two business projects:
1. A Ice-cream shop
2. Drink stand

50% success

50% fail

Can earn upto 1 lakh

50% success

50% fail

Can earn upto 90k

1 lakh

30k

90k

10k

Which one
you should
do???

Expected value
Expected value of ice-cream shop;
= 50%(1 lakh)+50%(-30k)
= 35k
Expected value of drink stand;
= 50%(90k)+50%(-10k)
=40k

Problem
Suppose you have a restaurant doing well and is earning a gross
profit (cost-cost of sales) of Rs. 110 lakh per year and you have
some earning saved up for the expansion. Current overhead is 50
lakh per year. You have the choice b/w either putting up a new shop
of your restaurant in a city further away or simply setting up a small
shop in nearby town.
If you set up a new shop, there is a 37% chance that the economy in
the neighboring city does well, a 29% of the economy remain the
same. And a 34% chance that city`s economy does bad.
If the neighboring city economy does well, there is a 71% chance
your new shop will earn a huge gross profit of Rs. 400 lakh and 29%
chance it will earn a gross profit of 207lakh. If that city`s economy
stay the same , you will probably earn a gross profit of 85 lakh. If
that city`s economy goes bad , you will probably earn a gross profit
of 25 lakh.

Continue..
Or you may choose just expand you current restaurant with a new
small shop in a nearer city. There are equal probabilities that the
economy will either do well, stay the same or be bad. If the
economy does well , your new shop`s gross profit will be 70%
higher than the current shop. If economy stays the same, there is a
62% chances that gross profit will increase to 166lakhs and 38%
chance it will increase to 156 lakh. If economy does bad , your new
small shop gross profit will only be 50%of your current branch.
The cost of running the new shop in the far city is 30 lakh per year,
and the overhead a small new shop in the nearer city is 40% of your
current shop.
Using decision tree analysis which one is better far shop or nearer
small shop?

MARKETING RESEARCH
EXPENDITURE

Market Research
For example, a company that was considering going into
business might conduct market research first to test the
viability of its product or service idea. If the market
research confirms that company's predictions, they can
proceed confidently with their business plan. If not, they
can use the results of the market research to make
adjustments and do additional testing. Though market
research can be expensive and time consuming, it should
be less expensive and time consuming than fully developing
and bringing to market a new product or service that will
generate little or no interest from potential customers.

Market Research Expenditure


A marketing expenditure is simply a payment
made for a marketing-related investment or
expense.
Market research, product development,
promotions, sales and service are all areas in
which companies make marketing
investments. Companies often allocate certain
amounts toward marketing expenditures
through a set budget amount.

ROMI(RETURN ON MARKETING
INVESTMENTS)

Return on marketing investment


Marketing can be made accountable by
relating its expenditure to a firm`s financial
return through generating marketing assets.
Financial return :
1. profit,
2. market share, and
3. shareholder`s value.

Marketing assets

Customer equity
Brand equity
Customer satisfaction
CSR

Calculation of ROMI
Lenskold (2003) proposes formula for the
calculation of ROMI.
ROMI = (Gross margin-marketing investment)/
marketing investment
(Gross margin = Revenue cost of goods
incremental expenses)

Evaluation of ROMI
1. Return on quality
2. Return on advertising
3. Return on loyalty program

NEW-PRODUCT DEVELOPMENT

New Product Development


1.
2.
3.
4.

Development of original products,


Product improvements,
Product modifications, and
New brands through the firms own R & D
efforts.

New Product Development Strategy


New products can be obtained via acquisition
or development.
New products suffer from high failure rates.
Several reasons account for failure.

Major Stages in New-Product


Development

New Product Development Process


Stage 1: Idea Generation
Internal idea sources:
R&D

External idea sources:


Customers, competitors, distributors, suppliers

Stage 2: Idea Screening


Product development costs increase dramatically in
later stages.
Ideas are evaluated against criteria;
most are eliminated.

Stage 3: Concept Development and Testing


Product concepts provide detailed versions of new
product ideas.
Consumers evaluate ideas in concept tests.

Stage 4: Marketing Strategy Development


Strategy statements describe:
The target market, product positioning, and sales,
share, and profit goals for the first few years.
Product price, distribution, and marketing budget for
the first year.
Long-run sales and profit goals and the marketing mix
strategy.

Stage 5: Business Analysis


Sales, cost, and profit projections

Stage 6: Product Development


Prototype development and testing

Stage 7: Test Marketing


Stage 8: Commercialization

LAUNCHING NEW PRODUCT

Introduction
Launching a new product attracts consumers
as well as corporate buyers, and informs the
public about your product and business.
Your product launch needs to be exciting and
informative.

Few suggestions on how to launch a


new product
1. Market research
2. Design attractive packaging
3. Determine your target audience
4. Implement a unique slogan
5. Know your competition
6. Consult a public relations firm
7. Write a product sheet
8. Launch a website
9. Purchase advertising
10. Hold a press conference

Market research
Conduct market research.
Learn who is using the product, who will buy it
and to whom is it beneficial?

Design attractive packaging


Create packaging that is colorful and pleasing
to the consumer's eye. Smart packaging is the
first step to getting your new product noticed.
Include your company name, product name
and any main selling points you want to
convey on the outside of the packaging.

Determine your target audience


Decide what demographic will benefit most
from your product.
This is the target audience that should receive
the most attention when you market a new
product. Consumers of this age, gender and
social and economic background will be most
receptive to the new idea and will, most likely,
buy your product.

Implement a unique slogan


Prepare for your product launch by creating a
catchy and unique slogan that will be used to
identify it.
The slogan should consist of simple language
and could rhyme or contain words beginning
with the same letter to make it more
memorable.

Know your competition


Research products similar to the one you're planning to
launch that are already well-known by consumers.
Use this information to direct the attention of your
launch at ways that your product is different and better
than the competition.
Evaluate how your product differs or compares to
current product offerings and determine the ways in
which your product/company excels.
Identify the reasons customers purchase elsewhere
and the ways that you can entice them to purchase
your new product instead.

Consult a public relations firm


Work with a public relations agent with experience
in your industry or in marketing new products.
An expert can help you solidify your target
audience, determine the best forms of media
advertising and plan promotions.
Ideas include allowing the press to review your
product, writing articles to send to public media,
giving interviews, and holding a launch event.
The more opportunities you have to present your
product to the target market, the more people will
know the product and become interested in
purchasing it.

Write a product sheet


Create a list of product features and details.
This should explain the product to consumers
while still making it attractive.
Include general usage, product components or
ingredients and any relevant safety warnings
or liability information.

Launch a website
Design a website advertising your new
product and offering more information for
consumers.
Include user testimonials, product
comparisons and ordering information or
promotional offers to entice buyers.

Purchase advertising
Place ads in several media outlets to reach the
maximum number of consumers.
Websites work well for posting ads and linking
to the product's website.
Buy ad space in local newspapers or trade
publications to increase the awareness of your
new product.

Hold a press conference


Schedule a press conference with consumers
and members of industries related to your
product or service.
This will allow you explain the product, offer
samples, answer questions and create a buzz
in the industry.

PRODUCT LIFE CYCLE

Product life cycle


Product life cycle is a business analysis that
attempts to identify a set of common stages in
the life of commercial products,in other words
the 'Product Life cycle' PLC is used to map the
lifespan of the product,i.e. the stages through
which a product goes during its lifespan.

Stages
INTRODUCTION
Low and slow stage: The product sales are the
lowest and move up very slowly at snail's pace
Highest promotional Stage: During this period of
introduction or the development ,promotional
expenses bear the highest proportion of sales
Highest Product prices: Lower input and sales
absorbing fixed costs.

GROWTH : Once the market has accepted the


product, sales begin to rise. This is most crucial
stage and help the brand to establish in the
market.
MATURITY: Market becomes saturated because
,the house hold demand is satisfied and
distribution channels are full.
DECLINE : Sooner or later actual sales begin to
fall under the impact of new product
competition and changing consumer tastes and
preferences.

Goals
The goals of PLC management are to reduce
time to market, improve product quality,
reduce prototyping costs, identify potential
sales opportunities and revenue
contributions, and reduce environmental
impacts at end-of-life.
To create successful new products the
company must understand its customers,
markets and competitors.

Stages of PLC

Product Life Cycle Examples


Its possible to provide examples of various
products to illustrate the different stages of
the product life cycle more clearly. Here is the
example of watching recorded television and
the various stages of each method:
1. Introduction 3D TVs
2. Growth Blue ray discs/DVR
3. Maturity DVD
4. Decline Video cassette

MARKETING & FINANCE

Introduction
In business, revenue or turnover is income that a
company receives from its normal business activities,
usually from the sale of goods and services to
customers.
Sales revenue or revenues is income received from
selling goods or services over a period of time.
Income from sales of goods and services, minus the
cost associated with things like returned or
undeliverable merchandise. Also called "Sales", "Net
Sales", "Net Revenue", and just plain "Revenue".

Introduction
Financial aspects of marketing earlier named
as Marketing Finance.
It is refer to any effort to quantify the
contribution of marketing to increased
business value.
Quantitative measurement of any action
designed to increase customer value.

Marketing

1. Customer
value creation
2. Brand equity
3. Innovation
4. Customer
satisfaction
5. CSR

Finance

Impact of
Marketing

1. Business value
creation
2. Financial
performance
3. Firms value
4. Stock return
5. Cost of debt

Financial aspects of Marketing fall into different


broad categories:

1. Different Financial measure for marketing like


ROI.
2. Different marketing investment to get
maximum ROMI.
3. Measuring the impact of marketing.
4. Customer value creation.
5. Marketing role in business strategy like
pricing etc.

Links between marketing and


financial performance
Marketing is seen as an expense not an
investment.
Marketing activities often reduce short-term
profitability.
Marketing focus on customer relationship or
client base.
Marketing try to establish brand equity in the
market for the long run.
Successful marketing activities (increased sales)
can have a negative impact on working capital
cash is king!

Financial and Economic performance


1.
2.
3.
4.

Sales
Profit
Costs
Cash flow

Marketing assets

Customer equity
Brand equity
Customer satisfaction
Market share
CSR

Financial Metrics
1.
2.
3.
4.
5.
6.
7.
8.

Margin
Growth
Marketing ROI
Customer lifetime value
Revenues
Acquisition costs
Retention costs
Operational costs

Marketing Scorecard
1. Market position share, penetration
2. Marketing assets brand, knowledge,
relationships
3. Customers awareness, attitudes, satisfaction,
sales funnel
4. Marketing processes research, segmentation,
service, management
5. Activities campaigns (reach, response, share of
voice)
6. Marketing Channel

Elements of Cost
There are broadly three elements of cost
1. Material,
2. Labor and
3. Expenses

Sales
A sale is the exchange of a commodity for
money or service in return for money or the
action of selling something.

Revenue
Revenue is the amount of money that is brought
into a company by its business activities, usually
from the sale of goods and services to customers.
In general usage, revenue is income received by
an organization in the form of cash or cash
equivalents.
Sales revenue or revenues is income received
from selling goods or services over a period of
time.

ROI( Return on investment)


Return on investment ROI is a popular financial
metric for evaluating the financial consequences
of individual investments and actions.
ROI has become popular in the last few decades
as a general purpose metric for evaluating capital
acquisitions, projects, programs, initiatives, as
well as traditional financial investments in stock
shares or the use of venture capital.
ROI is sometimes said to measure profitability.
That description is accurate and useful.

Investment Framework by ROI


The ROI is used to compare the profitability of
the business/project.
ROI= NIBT/Total Assets

Example
Suppose a Division with assets of Rs. 90,000 and
net income before tax of Rs. 20,000. What will be
its ROI?

Solution:
ROI= NIBT/Total Assets
= 20,000/90,000
=.22
=22%

Numerical
Suppose a cost of capital for the division is
15% and a new opportunity appears that
require an investment of Rs. 15,000, yielding
an annual profit improvement of Rs. 3,000/yr.
the rate from this new investment opportunity
is 20%, which is well above the division`s cost
of capital. What will be the new ROI ?

Solution
ROI= (20,000+3,000)/(90,000+15,000)
=23,000/1,05,000
=.219
=21.9%

Numerical
If the division has an asset carried at a Rs.
20,000, cost that earns Rs. 3600/yr (18%
return) the division can increase its ROI by
disposing of the asset.

Solution
ROI= (20,000-3600)/(90,000-20,000)
= 16,400/70,000
= 0.234
= 23.4%

Advantages of ROI
1. Provide optimum utilization of assets.
2. Helps in dispose of assets.
3. Serve as a yardstick in measuring managements
efficiency and effectiveness.
4. Provides strong decision making on profitability.
5. Provide alternative long-term investment proposals.
6. Provide a base for comparison.
7. Tie together the many phases of financial planning,
sales objectives, cost control, and the profit goal.
8. Aid in detecting weaknesses with respect to utilization
of resources.

Disadvantages of ROI
1. Lack of agreement on the right or optimum rate
of return might discourage managers whose
opinion is that the rate is set at an unfair level.
2. Proper allocation requires certain data regarding
sales, costs, and assets. The accounting and cost
system might not give such needed details.
3. Values and valuations of assets, particularly with
regard to jointly used assets, might give rise to
difficulties and misunderstandings.

Continue
4. Excessive preoccupation with financial factors due to
constant attention to ratios and trends might distract
managements interest from technical and other
responsibilities.
5. Managers may be influenced to make decisions that
are not the best for the long-run interests of the firm.
6. A single measure of performance (e.g., return on
capital employed) may result in a fixation on improving
the components of the one measure to the neglect of
needed attention to other desirable activities both
short- and long-run.

MANAGEMENT
OF
SALES REVENUE ANALYSIS

Sales Revenue Analysis


Calculating profitability is a key part of revenue
analysis.
An analysis of your revenue from sales make
informed decisions regarding business strategy.
You can determine key variables and calculate
business ratios that tell you how your business is
performing.
From a revenue analysis, you can tell where it
makes sense to invest and what activities you
may want to discontinue.

continue

Revenue variation gives you quick guidance on


future trends.
It gives the idea about:
1. Comparison
2. Allocation
3. Profitability
4. Projections

Comparison
Analyzing your revenue from sales , compare the
amounts from the most recent period to the revenue
from previous years.
Such a comparison gives you an indication of how well
your business is performing.
A steady increase from year to year is a positive trend
and lets you plan future strategies with confidence.
A decreasing trend means you have to make major
changes.
Uneven increases and decreases mean your company is
responding to market influences, and you have to work
on making your strategies more effective to keep your
company on track.

Allocation
A key part of revenue analysis is allocating parts of
overall revenue to the items that generated the
underlying sales.
This allocation influences your future marketing
strategies, because it is direct feedback on what the
customers of your target market valued.
If a product with certain features generated a lot of
revenue and the revenue increased substantially from
the previous year, you have to promote products with
those features more heavily.
At the same time, you can reduce emphasis on products
that didn't generate much revenue or whose revenue is
declining.

Profitability
While revenue is a key variable for analyzing business
performance, your company has to generate profits.
Based on your revenue analysis and the costs you
incurred to produce that revenue, you can decide
whether to expand product lines or abandon them,
depending on their profitability.
Determining your profit from revenue and costs lets
you find your break-even point by calculating how
much profit you need to cover your overhead and how
much you have to sell to generate that amount of
profit.

Projections
In addition to providing data on actual
performance, revenue analysis lets you project
present trends into the future.
If revenue has increased steadily by about 4
percent per year for the last five years, for
example, it is likely to rise by 4 percent again next
year.
For trends that have variations, you can either
smooth out the changes or find reasons for them
and remove the effects from the numbers.

Continue..
If you know about a change in your market
situation that will impact future numbers, you
may have to adjust your calculations for this
effect.
Revenue projections let you develop
corresponding strategies and plan future
levels of staffing and investment.

What Is Sales Analysis?


Sales Analysis a detailed examination of a
company's sales data, involving assimilating,
classifying comparing, and drawing
conclusions.
Accumulation of sales analysis information.

Uses of sales analysis


Several major broad applications of sales analysis
follow:
1. Establishment of the sales forecasting system.
2. Development of sales performance measures.
3. Evaluation of market position.
4. Production planning and inventory control.
5. Maintaining appropriate product mixes.
6. Modifying the sales territory structures.
7. Planning sales force activities.
8. Evaluation of salespeople's performance

Continue
9. Measuring the effect of advertising and other
sales promotional activities.
10. Modifying channels of distribution.
11. Evaluating channels of distribution.

Analyzing Sales Volume


1. Total Sales Volume the starting point for a
sales volume analysis; the total sales for a
specific period for a company, region, product,
or customer.
2. Sales by region: district a) Retail Sales Index
Relative measure of the dollar volume of retail
sales that normally occur.
3. Sales by salesperson.
4. Sales by customer classifications
5. Sales by product

Revenue analysis by product


1.
2.
3.
4.
5.
6.

Product Usage data


Product pricing
Brand of the product
Margin on items purchased
Size or value of their purchases
Balance volume and margin to drive net
income.
7. warehousing cost incurred by each product.

Revenue analysis by territories


By the selling expenses incurred by each
territory
By the promotion expenses incurred by each
territory
By the cost of credit incurred by each territory
By the rate of turn round of stocks in each
territory

Revenue analysis by chennal


Revenue enhancing opportunities in the distribution
channels
Maximizes revenues through all distribution channels
By the method of sale; direct to customer, or through
wholesaler or retailer, or commission agent.
By order size and order handling cost to the firm.
By salesman; cost of sales calls, cost of orders booked,
order to call ratio etc.
By price category and discount classification; cost
incurred at each price category.

Revenue analysis by customer orders


1. Types of customers and proper approval of
customer orders
2. Selection of active customers
3. Order size
4. Proportion of cash and credit sales in each
customer type.
5. Mode of delivery taken by customer

TOP
1% of customers 50% of revenues
49% of profits

LARGE
4% of customers23% of
revenues25% of profits
Medium-Sized
15% of customers20% of
revenues21% of profits

Small80% of customers7% of revenues5% of


profits

MARKETING COST

Marketing cost
The total delivering cost associated
with goods or services to customers.
The marketing cost may include expenses associated
with transferring title of goods to a customer, storing
goods in warehouses pending delivery, promoting the
goods or services being sold, or the distribution of
the product to points of sale.
Examining the cost associated with each individual
marketing activity to assess the profitability of each.

Marketing cost analysis


Marketing cost analysis is a strategy applied in
marketing where the costs connected with
selling, storing, advertising and distributing of
products to particular buyers, are analysed in
order to determine their profitability.
Business firms use several tools and
techniques for marketing control.

Continue..
The important ones among them are listed here:
1. Marketing audit
2. Market share analysis
3. Marketing cost analysis
4. Credit control
5. Budgetary control
6. Ratio analysis
7. Contribution margin analysis
8. Marketing Information inputs and warning signals
9. MBO management by objectives

Engineered Costs
Engineered costs result from activities with reasonably
well defined cause and effect relationships between
inputs and outputs and costs and benefits.
Direct material costs provide a good example.
Engineers can specify precisely how many parts (inputs)
are required to generate a specific output such as a
microcomputer, a coffee maker, an automobile, or a
television set.
Direct labor also falls into the engineered cost category
as well as indirect resources that vary with product
specifications and production volume.
Engineered costs are variable in terms of cost behavior.

Discretionary Costs/ managed cost


Many activities are viewed as beneficial to an
organization, even thought the benefits obtained, or
value added by performing the activities cannot be
defined precisely, either before or after the activity is
completed.
The costs of the inputs, or resources required to
perform such activities are referred to as discretionary
costs.
Discretionary costs are usually generated by service or
support activities. Examples include employee training,
advertising, sales promotion, legal advice, preventive
maintenance, and research and development.

Committed Costs/capacity(fixed)cost
Committed costs refers to the costs associated with
establishing and maintaining the readiness to conduct
business.
The benefits obtained from these expenditures are
represented by the company's infrastructure.
For example, the costs associated with the purchase of
a franchise, a patent, drilling rights and plant and
equipment create long term obligations that fall into
the committed cost category. These costs are mainly
fixed in terms of cost behavior and expire to become
expenses in the form of amortization and depreciation.

Cost Defined in Terms of Cause and Effect


Type of Cost

Cause & Effect or Cost


Benefit Relationship

Cost Behavior

Examples

Discretionary

Relationships are
Fixed, variable and
difficult or impossible mixed in the short run.
to
define.

Cost of administrative and


support services such as
employee training, advertising,
sales promotion, legal advice,
preventive maintenance, and
research and development.

Variable in the short


run.

Engineered

Relationships are
relatively easy to
define.

Direct resources used in


production activities such as
direct materials and direct labor
and many indirect resources
such as electric power.

Relationships can be
estimated, but not
defined precisely.

Fixed in the short run. Cost of establishing and


maintaining the readiness to
conduct business, such as the
cost associated with plant and
equipment.

Committed

CLASSIFICATION OF MARKETING COST


By function

Marketing costs
1.
2.
a)
b)
3.
4.
4.
a)
b)
c)
5.
6.
7.

Variable
fixed costs
Programmed cost (advertisment, sales promotion, sales salary)
Committed cost (Rent, administrative and clerical salries)
Relevant (promotion of new product)
sunk costs (test marketing, last yr advertising exp.)
Margins
Gross margin (total sales-cogs)
Trade margin(unit sale price-unit cost price)
Net profit margin
Selling cost
Distribution cost (warehouse,
Research and distribution cost

Cost allocation
Cost allocation is the assigning of a common cost
to several cost objects.
Cost allocation (also called cost assignment) is the
process of finding cost of different cost objects
such as a project, a department, a branch, a
customer, etc.
It involves identifying the cost object, identifying
and accumulating the costs that are incurred and
assigning them to the cost object on some
reasonable basis.

Continue
Cost allocation is important because it the
process through which costs incurred in
producing a certain product or rendering a
certain service is calculated.
If costs are not accurately calculated, a business
might never know which products are making
money and which ones are losing money.
If cost are misallocated, a business may be
charging wrong price to its customers and/or it
might be wasting resources on products that are
wrongly categorized as profitable.

Typical cost allocation mechanism


involves:
Identifying the object to which the costs have
to be assigned,
Accumulating the costs in different pools,
Identifying the most appropriate
basis/method for allocating the cost

Cost object
Cost object is an item for which a business
need to separately estimate cost.
Examples of cost object include a branch, a
product line, a service line, a customer, a
department, a brand, a project, etc.

Cost pool
Cost pool is the account head in which costs are
accumulated for further assignment to cost objects.
Examples of cost pools include factory rent, insurance,
machine maintenance cost, factory fuel, etc. Selection
of cost pool depends on the cost allocation base used.
For example if a company uses just one allocation base
say direct labor hours, it might use a broad cost pool
such as fixed manufacturing overheads. However, if it
uses more specific cost allocation bases, for example
labor hours, machine hours, etc. it might define
narrower cost pools.

Cost driver
Cost driver is any variable that drives some cost. If increase
or decrease in a variable causes an increase or decrease is a
cost that variable is a cost driver for that cost.
Examples of cost driver include:
Number of payments processed can be a good cost driver for
salaries of Accounts Payable section of accounting
department,
Number of purchase orders can be a good cost driver for cost
of purchasing department,
Number of invoices sent can be a good cost driver for cost of
billing department,
Number of units shipped can be a good cost driver for cost of
distribution department, etc.
While direct costs are easily traced to cost objects, indirect
costs are allocated using some systematic approach.

Cost allocation base


Cost allocation base is the variable that is used
for allocating/assigning costs in different cost
pools to different cost objects.
A good cost allocation base is something
which is an appropriate cost driver for a
particular cost pool.

Example
T2F is a university caf owned an operated by a student. While it has
plans for expansion it currently offers two products: (a) tea & coffee
and (b) shakes. It employs 2 people: Mr. A, who looks after tea &
coffee and Mr. B who prepares and serves shakes & desserts.
Its costs for the first quarter are as follows:
Mr. A salary
16,000
Mr. B salary
12,000
Rent
10,000
Electricity
8,000
Direct materials consumed in making tea & coffee
7,000
Direct raw materials for shakes
6,000
Music rentals paid
800
Internet & wi-fi subscription
500
Magazines
400

Continue..
Total tea and coffee sales and shakes sales
were 50,000 & 60,000 respectively. Number of
customers who ordered tea or coffee were
10,000 while those ordering shakes were
8,000.
The owner is interested in finding out which
product performed better.

CLASSIFICATION OF MARKETING COST


By function

Marketing costs
1.
2.
a)
b)
3.
4.
4.
a)
b)
c)
5.
6.
7.

Variable
fixed costs
Programmed cost (advertisment, sales promotion, sales salary)
Committed cost (Rent, administrative and clerical salries)
Relevant (promotion of new product)
sunk costs (test marketing, last yr advertising exp.)
Margins
Gross margin (total sales-cogs)
Trade margin(unit sale price-unit cost price)
Net profit margin
Selling cost
Distribution cost (warehouse,
Research and distribution cost

Cost allocation
Cost allocation is the assigning of a common cost
to several cost objects.
Cost allocation (also called cost assignment) is the
process of finding cost of different cost objects
such as a project, a department, a branch, a
customer, etc.
It involves identifying the cost object, identifying
and accumulating the costs that are incurred and
assigning them to the cost object on some
reasonable basis.

Continue
Cost allocation is important because it the
process through which costs incurred in
producing a certain product or rendering a
certain service is calculated.
If costs are not accurately calculated, a business
might never know which products are making
money and which ones are losing money.
If cost are misallocated, a business may be
charging wrong price to its customers and/or it
might be wasting resources on products that are
wrongly categorized as profitable.

Typical cost allocation mechanism


involves:
Identifying the object to which the costs have
to be assigned,
Accumulating the costs in different pools,
Identifying the most appropriate
basis/method for allocating the cost

CASE STUDY

Indian Refrigerator Market


India's Refrigerator market estimated at Rs. 2750 Cr. is catered mainly by 10 brands. The annual
capacity is estimated at around 4.15 million units is running head of demand of 1.5 millions. As there
is a demand and a surplus supply, all the manufacturers are trying out for new strategies in the market.
Times have changed and also the buying behaviour of the customer. Earlier it was cash and carry
system. Now dealers play an important role in selling; now the systems is exchange for old bring your
old refrigerator and take a new one with many gifts. A new company by name Electrolux has entered
the market which has acquired Allwyn, Kelvinator and Voltas brand. Researchers have revealed that
urban and city sales are declining and hence all manufacturers are trying to concentrate on rural
markets.
Electrolux strategy is customization of market, with special attention to the Northern and Southern
India markets, while Godrej the main player thinks that dealer network in rural market for sales and
service will be beneficial and is trying to give more emphasis on dealer network, whereas Whirlpool
has adopted the strategy of increasing the dealer network by 30%.
The market shares of the major players are as follows:

Godrej
Videocon
Kelvinator
Allwyn
Voltas
Questions

30%
13%
12%
10%
5%

Whirlpool
Daewoo
L.G
Others

27%
1%
1%
1%

1. Could the refrigerator market be segmented on geographical base planned by


Electrolux?
2. What would be the marketing mix for rural market?
3.Would 125 L and 150 L models be an ideal choice to launch in rural market?

MANAGEMENT OF ACCOUNTS
RECIEVABLE

Introduction
When goods and services are sold under an agreement
permitting the customer to pay for them at a later date,
the amount due from the customer is recorded as
accounts receivables; So, receivables are assets accounts
representing amounts owed to the firm as a result of
the credit sale of goods and services in the ordinary
course of business.
According to Robert N. Anthony, "Accounts receivables
are amounts owed to the business enterprise, usually by
its customers. Sometimes it is broken down into trade
accounts receivables; the former refers to amounts
owed by customers, and the latter refers to amounts
owed by employees and others".

Cost of Maintaining Receivables


Receivables are a type of investment made by a
firm. Like other investments, receivables too
feature a drawback, which are required to be
maintained for long that it known as credit
sanction.
Such costs associated with maintaining receivables
are detailed below: 1. Administrative Cost
2. Capital Cost
3. Production and Selling Cost
4. Delinquency Cost
5. Default Cost

Administrative Cost
If a firm liberalizes its credit policy for the good
reasons of either maximizing sales or
minimizing erosion of sales, it incurs two types
of costs:
1. Credit Investigation and Supervision Cost
2. Collection Cost

Capital Cost
There is no denying that maintenance of receivables by
a firm leads to blockage of its financial resources due to
the tie log that exists between the date of sale of goods
to the customer and the date of payment made by the
customer.
But the bitter fact remains that the firm has to make
several payments to the employees, suppliers of raw
materials and the like even during the period of time
lag. As a consequence, a firm is liable to make
arrangements for meeting such additional obligations
from sources other than sales.
Thus, a firm in the course of expanding sales through
receivables makes way for additional capital costs.

Production and Selling Cost


These costs are directly proportionate to the
increase in sales volume.
In other words, production and selling cost
increase with the very expansion in the
quantum of sales.

Delinquency Cost
This type of cost arises on account of delay in payment
on customer's part or the failure of the customers to
make payments of the receivables as and when they
fall due after the expiry of the credit period. Such debts
are treated as doubtful debts.
They involve: 1. Blocking of firm's funds for an extended period of
time,
2. Costs associated with the collection of overheads,
remainders legal expenses and on initiating other
collection efforts.

Default Cost
Similar to delinquency cost is default cost. Delinquency
cost arises as a result of customers delay in payments of
cash or his inability to make the full payment from the
firm of the receivables due to him.
Default cost emerges a result of complete failure of a
defaulter (customer) to pay anything to the firm in
return of the goods purchased by him on credit.
When despite of all the efforts, the firm fails to realize
the amount due to its debtors because of him complete
inability to pay for the same.
The firm treats such debts as bad debts, which are to be
written off, as cannot be recovers in any case.

Factors Affecting The Size Of


Receivables
The size of receivables is determined by a
number of factors for receivables being a
major component of current assets.
As most of them varies from business the
business in accordance with the nature and
type of business.

Consequence of excessive receivable

High opportunity cost


High risk of bad debts
High credit administration cost
High risk of liquidity

Consequence of inadequate receivable


Decrease in sales.
Risk of loosing market share.

Principles Of Credit Management


1.
2.
3.
4.

Allocation
Selection of Proper Credit Terms
Credit Investigation
Sound Collection Policies and Procedures

What Makes up the Credit Policy for a


Company?
If a company does a cost/benefit analysis and
makes the very important decision to extend
credit to its customers, then it has to establish
procedures for credit and collecting accounts.
There are usually three parts of a good credit
policy:
1. Terms of sale
2. Credit analysis
3. Collection policy

TERMS OF SALE

Introduction
The terms of sale for a credit customer state how the
firm will sale its products or services.
Will the firm require a cash sale or will it extend credit?
That decision is made through the process of credit
analysis and determining who should be granted credit.
If the small business decides to grant credit to a
customer, then it has to establish terms.
These terms will include the :
1. Credit Period And
2. Any Discount

Credit Period
When considering accounts receivables credit
policy, the credit period is the time period in
which a credit customer has to pay their bill.
If a company offers credit terms of 2/10, net
30, for example, the "net 30" portion of the
equation means that if the credit customer
does not take the 2% discount offered, then
the bill must be paid in 30 days.

Discount Period
The discount period is the time period during
which a company offers its customers a discount
on the purchases that company makes. The term
is associated with the accounts receivable credit
policy of the business firm.
The discount period is an issue for merchants
who offer credit to their customers.
For example; XYZ Corporation offers a 2%
discount if credit customers pay their bills within
10 days.

The credit term may be soft or tight :


Types of terms

Effect on sales

Effect on
investment in
account
receivable

Effect on bad
debts

Effect on credit
administration
cost

Soft term

Increase in
sales

Increase in
investment in
AR

Increase in bad
debts

Increase in
credit
administration
cost

Tight terms

Decrease in
sales

Decrease in
investment in
AR

Decrease in bad Decrease in


debts
credit
administration
cost

CREDIT ANALYSIS

Introduction
When determining credit policy, a company determines
how they will grant credit to consumers and
businesses.
They use a number of methods to do this including
pulling credit reports, evaluation of the 5C's of credit,
and credit scoring. These are:
1. Capacity
2. Collateral
3. Capital
4. Condition
5. Character

After credit analysis , the customers may be classified in


various categories such as follows:
Category of customers

Average college period

Default risk

Good

Within credit period

Marginal

Moderate collection
period

Moderate

Bad

Very large collection


period

High

COLLECTION POLICY

Introduction
If a company makes the decision to offer
credit to its customers, it needs to develop a
collections policy that it will use to monitor its
credit accounts.
Most companies use two approaches:
1. Average collection period
2. Accounts receivable aging schedule.

Average collection period


The approximate amount of time that it takes for a business
to receive payments owed, in terms of receivables, from its
customers and clients.
Calculated as:
ACP = (Days *AR)/Credit sales

Where:
Days = Total amount of days in period
AR = Average amount of accounts receivables
Credit Sales = Total amount of net credit sales during period

Accounts receivable aging schedule


An accounting table that shows the relationship
between a companys bills and invoices and its due
dates.
An aging schedule often categorizes accounts as
current (under 30 days), 1-30 days past due, 30-60 days
past due, 60-90 days past due, and more than 90 days
past due. Companies can use aging schedules to see
which bills it is overdue on paying and which customers
it needs to send payment reminders to or, if they are
too far behind, send to collections.

5 Strategies For Effective Accounts


Receivable Management
1.
2.
3.
4.
5.

Sign a Contract and Check Credit


Track Accounts Receivable
Make Payment Easy
Do Your Part
Re-Think Your Billing Approach

Sign a Contract and Check Credit


Managing accounts receivable begins before
the first invoice goes out the door.
With the guidance of legal counsel, develop a
binding contract or engagement letter that
sets forth your payment terms.
Run a credit check on prospective clients to
see if they have a history of late payments or
bankruptcies and other financial troubles.

Track Accounts Receivable


A key part of this process is to effectively track
accounts receivable.
You should always know which accounts are
outstanding and for how long. Run reports to
highlight payment trends and which customers
are frequently behind.
You can also set up alerts that will tell you when a
customer is overdue or soon to be overdue in
their payments to allow for more effective followup.

Make Payment Easy


Give your customers the options they need to pay
you quickly. Look into accepting credit cards or
allow direct transfers of payments.
Depending on your business, Paypal or another
mobile payment solution could also be a good fit.
Yes, many of these methods require a cut of the
transaction total, but if overdue payments are
haunting your business, it is likely worth the cost.

Do Your Part
A delayed invoice will obviously lead to
delayed payment.
Make sure you tie up loose ends on your side
of the equation and ensure that invoices are
sent out in a timely fashion.

Re-Think Your Billing Approach


If billing after you finish the work is causing
some problems, reassess your payment terms.
Ask clients to pay you in installments
throughout the engagement, and/or require a
deposit before work begins.
If youre not ready for a step this big, start
with simply shortening your payment terms.

INVENTORY MANAGEMENT

Introduction
Inventory is tangible property. Inventory
would include items which are held for sale in
the ordinary course of business (Finished
goods) or which are in the process of
production for the purpose of sale (Work-inProcess), or which are to be used in the
production of goods or services, which will be
for sale (Raw Materials).

Classification of inventory
(A) Raw materials: Raw materials are, directly, used in
manufacturing a product.
(B) Work-in-process: Work-in-process is partly finished
goods. They are in the process of conversion from the
stage of raw materials to finished goods.
(C) Finished goods: Finished goods are those goods, which
are completely ready for sale. Finished goods of one firm
can become the raw materials to another firm.
(D) Stores and Supplies: Stores and Supplies do not enter
into production, directly. However, in their absence, entire
production would be affected and at times, even, come to
a halt. Normally, their value is very small in the total
inventory. Examples are grease, oil, bulbs, brooms etc.

OBJECTIVES OF INVENTORY
Inventory is held for
Smooth production process for making
finished goods, meant for sale.
Sale of finished goods for sale in the ordinary
course of business.
Facilitating production process.

INVENTORY CONTROL
Inventory control involves physical control of materials,
preservation of stores, minimization of obsolescence and
damages through timely disposal and efficient handling.
Effective stock control system should ensure the
minimization of inventory carrying cost and materials
holding cost.
Level of stock is the important aspect of inventory control.
Stock level may be overstocking or understocking.
Overstocking requires large capital with high cost of
holding.
In the case of understocking , production and overall
performance of the concern as a whole will affect.

Thus, fixation of stock level is essential to maintain


sufficient stock for the smooth flow of production and sales. The
following are the important techniques
usually adopted in different industries :

(a) Maximum Stock Level.


(b) Minimum Stock Level.
(c) Danger Level.
(d) Re-Order Level.
(e) Economic Ordering Quantity (EOQ).
(f) Average of Stock Level

Maximum Stock Level


The maximum stock level indicates the maximum
quantity of an item should not be allowed to increase.
The maximum quantity of an item can be held in stack
at any time.
The following factors can be considered while fixing the
maximum stock levels :
(1) Availability of capital.
(2) Availability of floor space.
(3) Cost of storage.
(4) Possibility of fluctuation of prices in raw materials.
(5) Cost of insurance.
(6) Economic order of quantity.

Continue..

(7) Average rate of consumption.


(8) Re-order level and lead time.
(9) Seasonal nature of supply.
(10) Risk of obsolescence, depletion, evaporation
etc.
The maximum stock level can be calculated by the
following formula :
Maximum Stock Level = Re-Order Level + ReOrdering Quantity (Minimum Consumption x
Minimum Re-Ordering Period)

Minimum Stock Level


Minimum stock level indicates the minimum
quantity of material to be maintained in stock.
Accordingly, the minimum quantity of an item
should not be allowed to fall.
The minimum stock is also known as Safety Stock
or Buffer Stock.
The following formula is adopted for calculation
of minimum stock level :
Minimum Stock Level = Re-Order Level - (Normal
Consumption x Normal Re-Order Period)

Danger Level
It is the stock level below the Minimum Level. This
level indicates the danger point to affect the normal
production.
When materials reach danger level, necessary steps
should be taken to restock the materials. If there is any
emergency, special arrangements should be made for
fresh issue.
Generally this level is fixed above the minimum level
but below the reording level. The formula for
determination of danger level is :
Danger Level = Average Rate of Consumption x
Emergency Supply Time

Re-order Level
Re-order level is also termed as ordering Level. It indicates
when to order, i.e., orders for its fresh supplies.
This is the stock level between maximum and the minimum
stock levels. The re-order stock level is fixed on the basis of
economic order quantity, lead time and average rate of
consumption.
Calculation of re-order level is adopted by the following
formula :
Re-order Level = Minimum Level + Consumption during the
time to get fresh delivery
(or)
Re-order Level = Maximum Consumption x Maximum Reording Period

Economic Order Quantity (EOQ)


Economic Order Quantity is one of the important techniques
used to determine the optimum quantity or number of
orders to be placed from the suppliers.
The main objectives of economic order quantity is to
minimize the cost of ordering, cost of carrying materials and
total cost of production.
Ordering costs include cost of stationery, salaries of those
engaged in receiving and inspecting, general office and
administrative expenses of purchase departments.
Carrying costs are incurred on stationery, salaries, rent,
materials handling cost, interest on capital, insurance cost,
risk of obsolescence, deterioration and wastage of materials
and evaporation.

Economic Order Quantity can be calculated by the following


formula :

Average Stock Level


Average stock level is determined on the basis
of minimum stock level and re-order quantity.
This is calculated with the help of the
following formula:
Average Stock Level = Minimum Stock Level +
1/2 of
Re-order Quantity
(or)
=(Minimum Level + Maximum Level)/
2

The ABC Analysis


ABC Analysis is one of the important techniques
which is based on grading the items according to
the importance of materials.
This method is popularly known as Always Better
Control.
This is also termed as Proportional Value Analysis
- In inventory control, this technique helps to
analyze the distribution of any characteristic by
money value of importance in order to determine
its importance.

Accordingly, materials are grouped into three categories on the


basis of the money value of importance of materials.

(1) High Value Materials - A


(2) Medium Value Materials - B
(3) Low Value Materials - C

The following table shows more explanation about ABC Analysis :


Category

Percentage to total inventory

Percentage to total inventory cost

Less than 10

70 to 80

10 to 20

15 to 25

70 to 80

Less than 10

Advantages of ABC Analysis


(1) Exercise selective control is possible.
(2) Focus high attention on high value items is
possible.
(3) It helps to reduce the clerical efforts and
costs.
(4) It facilitates better planning and improved
inventory turnover.
(5) It facilitates goods storekeeping and effective
materials handling.

CREDIT POLICY

Clear, written guidelines that set


(1) the terms and conditions for
supplying goods on credit,
(2) customer qualification criteria,
(3) procedure for making collections, and
(4) steps to be taken in case of customer delinquency.
Also called collection policy.
consider the link between credit and sales. Easy credit
terms can be an excellent way to boost sales, but they
can also increase losses if customers default.

A typical credit policy will address the following points:

1.
2.
3.
4.
5.
6.

Credit limits
Credit terms
Deposits
Credit cards and personal checks
Customer information
Documentation

SALES PROMOTION

Sales Promotion
Sales promotions are the set of marketing
activities undertaken to boost sales of the
product or service.
There are two basic types of sales promotions:
1. Trade promotion and
2. Consumer sales promotions.

Trade promotion
The schemes, discounts, freebies, commissions and
incentives given to the trade (retailers, wholesalers,
distributors, C&Fs) to stock more, push more and
hence sell more of a product come under trade
promotion.
These are aimed at enticing the trade to stock up more
and hence reduce stock-outs, increase share of shelf
space and drive sales through the channels.
A typical trade scheme on soaps would be buy a case
of 12 soaps, get 1 or 2 free - or a 8% discount scheme
(1/12=8%). Such schemes are common in FMCG and
pharma industries.

Consumer sales promotions


Sales promotion activity aimed at the final consumer
are called consumer schemes.
These are used to create a pull for the product and are
advertised in public media to attract attention.
Maximum schemes are floated in festival times, like
Diwali or Christmas.
Examples are buy soap, get diamond free; buy biscuits,
collect runs; buy TV and get some discount or a free
item with it and so on. Consumer schemes become
very prominent in the 'maturity or decline' stages of a
product life cycle, where companies vie to sell their
own wares against severe competition.

Sales Promotion
Sales promotion is any initiative undertaken by an
organization to promote an increase in sales, usage
or trial of a product or service (i.e. initiatives that
are not covered by the other elements of the
marketing communications or promotions mix).
Sales promotions are varied. These are:
1. Free gifts
2. Discounted price
3. Joint promotion
4. Free sample
5. Voucher and coupons

Free gifts
Subway gave away a card with six spaces for
stickers with each sandwich purchase.
Once the card was full the consumer was
given a free sandwich.

Discounted prices
Budget airline, e-mail their customers with the
latest low-price deals once new flights are
released, or additional destinations are
announced.

Joint promotions
Joint promotions between brands owned by a
company, or with another companys brands.
For example fast food restaurants often run
sales promotions where toys, relating to a
specific movie release, are given away with
promoted meals.

Free samples
Free samples (aka. sampling) e.g. tasting of
food and drink at sampling points in
supermarkets. For example Red Bull (a
caffeinated fizzy drink) was given away to
potential consumers at supermarkets, in high
streets and at petrol stations (by a promotions
team).

Vouchers and coupons


Vouchers and coupons, often seen in
newspapers and magazines, on packs.

Competitions and prize draws


Competitions and prize draws, in newspapers,
magazines, on the TV and radio, on The
Internet, and on packs.

Cause-related and fair-trade


Cause-related and fair-trade products that
raise money for charities, and the less well off
farmers and producers, are becoming more
popular.

Finance deals
for example, 0% finance over 3 years on
selected vehicles.

PROMOTION

Promotion expenses:
A cost that a business incurs to make its
products or services better known to
consumers, usually in the form of giveaways.
Differences Between Advertising &
Promotional Expenses:
Advertising is often considered paying to
deliver and control a marketing message,
while promotion is paying to support your
marketing efforts more generically.

Advertising: Delivery Expenses


Delivering your marketing message may require
newspaper, magazine, TV or radio advertising.
Other means include direct mail, website banners
and links and billboards.
When you buy advertising, you control your
message by creating the copy used in the ad. Part
of the advertising expense is the media purchase,
such as a 30-second radio commercial or a halfpage magazine ad.
The price often does not cover creation of the ad.

Advertising: Creation Expenses


Media costs represent only part of the
advertising expense.
Someone must create the ads.
Advertising creation costs include agency fees,
in-house designers, copywriting and overhead
related to the development of the ad.

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For example, if you have an advertising
department, you must include the costs of
your staff, office space, computers and
software in your advertising budget. If you
spend money on focus groups to test different
versions of advertising copy, slogans, jingles,
models or graphics, that expense is a part of
ad creation.

Promotion: Delivery Expenses


Examples of promotions include event
sponsorships, giveaways, on-site sampling,
contests and discounts.
Promotions often include items such as Tshirts, stickers, coupons and prizes.
If you sponsor an event and require staff to
work at the event, include your staff time as
part of the promotion expense.

Continue..
If you sign a one-year contract with a celebrity to
endorse your product, you would record the
celebrity's fee as an annual promotional expense
for accounting purposes.
If you require the celebrity to make six
appearances each year, you can assign one-sixth
of the celebrity's fee to each of the six
appearances he makes for an internal analysis of
the true cost of each of those six promotions.

Promotion: Creation Expenses


Calculate the cost of pre-promotion expenses
directly related to planning and creating a
promotion.
Site visits, consulting fees, travel, lodging and other
pre-event planning expenses are examples of
promotion creation expenses.
Giving your retailers, the media or event organizers
gifts or entertaining them would be expenses
indirectly associated with a promotion and
considered part of creating, rather than executing
the promotion.

SPECIAL PROMOTIONS

Introduction
Today, more and more small businesses are
interested in running offers, as a way to get
new customers.
The key to the success of this type of
campaign is finding a way to get your offer in
front of the right peoplethat is the people
who will likely to act on it, and ultimately help
you grow your business by becoming a new
loyal customer.

Example
Its our 15-15-15 Promotion!
Save 15% on ANY ABC Title or ABC Online Library for
the next 15 Days! From now until December 24, 2015,
save 15% on any ABC Title or ABC Online Library! Just
reference promotion code 151515 when you contact
your sales representative, marketing@abc.com or
1800-828-7571!
Please note: This promotion cannot be combined with
other ABC or ABC Online promotions. This promotion is
only valid on the first year of new subscriptions to ABC
Online collections, and cannot be used towards existing
subscriptions. Bookmark on Delicious

MARKETING RESEARCH
EXPENDITURE

Market Research
For example, a company that was considering going into
business might conduct market research first to test the
viability of its product or service idea. If the market
research confirms that company's predictions, they can
proceed confidently with their business plan. If not, they
can use the results of the market research to make
adjustments and do additional testing. Though market
research can be expensive and time consuming, it should
be less expensive and time consuming than fully developing
and bringing to market a new product or service that will
generate little or no interest from potential customers.

Market Research Expenditure


A marketing expenditure is simply a payment
made for a marketing-related investment or
expense.
Market research, product development,
promotions, sales and service are all areas in
which companies make marketing
investments. Companies often allocate certain
amounts toward marketing expenditures
through a set budget amount.

MARKETING INVESTMENTS

ROMI
Return on marketing investment (ROMI) is the
contribution to profit attributable
to marketing (net of marketing spending),
divided by the marketing 'invested' or risked.
ROMI is not like the other 'return-oninvestment' (ROI) metrics
because marketing is not the same kind of
investment.

Continue..
Return on marketing investment (ROMI) is a
metric used to measure the overall effectiveness
of a marketing campaign to help marketers make
better decisions about allocating future
investments.
ROMI is usually used in online marketing, though
integrated campaigns that span print, broadcast
and social media may also rely on it for
determining overall success. ROMI is a subset
of ROI (return on investment).

PROBABLITY THEORY

Introduction
Uncertainty is all around us and we often come
across real-life situations when we have to decide
on making a choice from the available options.
From weather forecasts, opinion polls to making
business decisions, the concepts of probability
come in handy at various aspects of our daily lives.
What are the chances?
Whether you are an economist, a businessman or
a manager, you will come across instances when
you have to face uncertainty with respect to the
outcomes of your business decisions.

Continue..
For example, when you have to launch a new
product into the market, you will need to
weigh in factors like market demand,
customer perception and usefulness of the
product in the targeted area. Probability
theory helps managers and businessmen to
select the right markets and the best time to
launch the product based on prior surveys and
customer information etc.

PROBABILITY
Probability theory is an important part of statistical
theory.
It is the science of uncertainty or chance, or
likelihood.
A probability value ranges between 0 and 1. A
probability value of 0 means there is no chance
that an will happen and a value of 1 means there is
100 percent chance that the event will happen.
Understanding probability is helpful for decisionmaking.

Continue..
Conducting an experiment or sample test
provides an outcome that can be used to
compute the chance of events occurring in the
future.
An experiment is the observation of some activity
or the act of taking some measurement.
Whereas, an outcome is a particular result of an
experiment.
The collection of one or more outcomes of an
experiment is known as an event.

Example..
For example, a market testing of a sample of
new breakfast cereal, new drink, new shoes,
new magazine, etc. gives the Director of
Production or Director of Marketing a
company a preliminary idea (outcome)
whether consumers would like the product if
it is produced and distributed in bulk.

Classification of Probability
1) Classical Probability
2) Empirical Probability
3) Subjective Probability

CLASSICAL PROBABILITY
When there are n equally likely outcomes to an
experiment.
The probability of certain events is already known
or the resulting probabilities are definitive.
For example:
(1)The chance that a woman gives birth to a male
or female baby (p = 0.50 or ),
(2)The chance that tail or head appears in a toss of
coin (p = 0.50 or ),

EMPIRICAL PROBABILITY
Empirical probability is based on past
experience.
The empirical probability, also known as
relative frequency, or experimental probability.
For example:
(1)300 of 700 business graduates were employed
in the past. The probability that a particular
graduate will be employed in his or her major
area is 300/700 = 0.43 or 43%.

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(2) The probability that your income tax return
will be audited if there are 20 lakh mailed to
your district office and 2,000 are to be audited is
2,000/20,00,000 = 0.001 or 0.10%.

SUBJECTIVE PROBABILITY
Subjective probability is a probability assigned
to an event based on whatever evidence is
available.
It is an educated guess. Unlike empirical
probability, it is not based on past experience.
Subjective probability is obtained by
evaluating the available options and by
assigning the probability.

Example
Examples of events that require computing
subjective probability:
(1)Estimating the probability that a person wins
a lottery.
(2)Estimating the probability that the GM will
lose its first ranking in the car sales.

APPLICATION IN BUSINESS
I. In business: probability theory is used in the
calculation of long-term gains and losses. This is
how a company whose business is based on risk
calculates "probability of profitability" within
acceptable margins.
Every decision made in the business world has risk
to it. So, in business, you would use probability to
take a close look at the company`s financial risks.
Even the decisions that come down from
management all have a probability of success and a
probability to fail.

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II. Probability in Manufacturing businesses can use
probability to determine the cost-benefit ratio or
the transfer of a new manufacturing technology
process by addressing the likelihood of improved
profits.
In other instances, manufacturing firms use
probability to determine the possibility of financial
success of a new product when considering
competition from other manufacturers, market
demand, market value and manufacturing costs..

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Other instances of probability in
manufacturing include determining the
likelihood of producing defective products,
and regional need and capacity for certain
fields of manufacturing.

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III. Scenario Analysis: Probability distributions can
be used to create scenario analyses.
For example, a business might create three
scenarios: worst-case, likely and best-case. The
worst-case scenario would contain some value
from the lower end of the probability
distribution; the likely scenario would contain a
value towards the middle of the distribution; and
the best-case scenario would contain a value in
the upper end of the scenario.

Continue..
IV. Risk Evaluation: In addition to predicting future
sales levels, probability distribution can be a
useful tool for evaluating risk.
For example, a company considering entering a
new business line. If the company needs to
generate 50,00,000 in revenue in order to break
even and their probability distribution tells them
that there is a 10 percent chance that revenues will
be less than 5,00,000, the company knows roughly
what level of risk it is facing if it decides to pursue
that new business line.

Continue..
V. Sales Forecasting: One practical use for probability
distributions and scenario analysis in business is to
predict future levels of sales. It is essentially
impossible to predict the precise value of a future
sales level; however, businesses still need to be
able to plan for future events.
Using a scenario analysis based on a probability
distribution can help a company frame its possible
future values in terms of a likely sales level and a
worst-case and best-case scenario. By doing so, the
company can base its business plans on the likely
scenario but still be aware of the alternative
possibilities.

Importance of Statistics
While theoretical probability is based on the prior
knowledge on the possible outcomes, in some cases its
difficult to compute the theoretical probability of an
event.
For example, how do we know that baseball team A will
win this season? The probability depends on their past
record, player performance and other factors. We need to
look into the historical data to arrive at a probability; the
more the teams success rate, the better its chances of
winning the title. For this reason, statistics and statistical
analysis is very important in deducing the probability of
complex events.

DECISION TREE

Introduction
Decision Trees are excellent tools for helping you to
choose between several courses of action.
They provide a highly effective structure within which
you can lay out options and investigate the possible
outcomes of choosing those options.
They also help you to form a balanced picture of the
risks and rewards associated with each possible course
of action.
Decision trees are graphical representations of
alternative choices that can be made by a business,
which enable the decision maker to identify the most
suitable option in a particular circumstance.

Continue..
For example, they will be used when oil and gas
exploration companies have to decide whether to
invest in a particular gas field, or in choosing to
allocate resources to exploiting one gas field
rather than another. Decision trees are a helpful
visual tool when it is possible to measure the
probability of an event occurring and the likely
financial outcomes of making a particular
decision.

Decision trees provide an effective method of Decision


Making because they:

1. Clearly lay out the problem so that all options


can be challenged.
2. Allow us to analyze fully the possible
consequences of a decision.
3. Provide a framework to quantify the values of
outcomes and the probabilities of achieving
them.
4. Help us to make the best decisions on the basis
of existing information and best guesses.

Drawing a Decision Tree


A decision tree is a diagram consisting of
1. decision nodes (squares)
2. chance nodes (circles)
3. decision branches (alternatives)
4. chance branches (state of natures)
5. terminal nodes (payoffs or utilities)

Representing decision table as decision tree


ALTERNATIVES
a1
a2
.
am

STATES OF NATURE
...
q1
q2
qn
...
x11
x12
x1n
...
x21
x22
x2n
.
.
...
.
...
xm1
xm2
xmn
q1
a1
a2

x11

qn

x1n

am

q1

xm1

qn

Decision Tree Method


1.
2.
3.
4.

Define the problem


Structure / draw the decision tree
Assign probabilities to the states of nature
Calculate expected payoff (or utility) for the
corresponding chance node backward,
computation
5. Assign expected payoff (or utility) for the
corresponding decision node backward,
comparison
6. Represent the recommendation

Lets start with a story


Two business projects:
1. A Ice-cream shop
2. Drink stand

50% success

50% fail

Can earn upto 1 lakh

50% success

50% fail

Can earn upto 90k

1 lakh

30k

90k

10k

Which one
you should
do???

Expected value
Expected value of ice-cream shop;
= 50%(1 lakh)+50%(-30k)
= 35k
Expected value of drink stand;
= 50%(90k)+50%(-10k)
=40k

Problem
Suppose you have a restaurant doing well and is earning a gross
profit (cost-cost of sales) of Rs. 110 lakh per year and you have
some earning saved up for the expansion. Current overhead is 50
lakh per year. You have the choice b/w either putting up a new shop
of your restaurant in a city further away or simply setting up a small
shop in nearby town.
If you set up a new shop, there is a 37% chance that the economy in
the neighboring city does well, a 29% of the economy remain the
same. And a 34% chance that city`s economy does bad.
If the neighboring city economy does well, there is a 71% chance
your new shop will earn a huge gross profit of Rs. 400 lakh and 29%
chance it will earn a gross profit of 207lakh. If that city`s economy
stay the same , you will probably earn a gross profit of 85 lakh. If
that city`s economy goes bad , you will probably earn a gross profit
of 25 lakh.

Continue..
Or you may choose just expand you current restaurant with a new
small shop in a nearer city. There are equal probabilities that the
economy will either do well, stay the same or be bad. If the
economy does well , your new shop`s gross profit will be 70%
higher than the current shop. If economy stays the same, there is a
62% chances that gross profit will increase to 166lakhs and 38%
chance it will increase to 156 lakh. If economy does bad , your new
small shop gross profit will only be 50%of your current branch.
The cost of running the new shop in the far city is 30 lakh per year,
and the overhead a small new shop in the nearer city is 40% of your
current shop.
Using decision tree analysis which one is better far shop or nearer
small shop?

MARKETING RESEARCH
EXPENDITURE

Market Research
For example, a company that was considering going into
business might conduct market research first to test the
viability of its product or service idea. If the market
research confirms that company's predictions, they can
proceed confidently with their business plan. If not, they
can use the results of the market research to make
adjustments and do additional testing. Though market
research can be expensive and time consuming, it should
be less expensive and time consuming than fully developing
and bringing to market a new product or service that will
generate little or no interest from potential customers.

Market Research Expenditure


A marketing expenditure is simply a payment
made for a marketing-related investment or
expense.
Market research, product development,
promotions, sales and service are all areas in
which companies make marketing
investments. Companies often allocate certain
amounts toward marketing expenditures
through a set budget amount.

ROMI(RETURN ON MARKETING
INVESTMENTS)

Return on marketing investment


Marketing can be made accountable by
relating its expenditure to a firm`s financial
return through generating marketing assets.
Financial return :
1. profit,
2. market share, and
3. shareholder`s value.

Marketing assets

Customer equity
Brand equity
Customer satisfaction
CSR

Calculation of ROMI
Lenskold (2003) proposes formula for the
calculation of ROMI.
ROMI = (Gross margin-marketing investment)/
marketing investment
(Gross margin = Revenue cost of goods
incremental expenses)

Evaluation of ROMI
1. Return on quality
2. Return on advertising
3. Return on loyalty program

NEW-PRODUCT DEVELOPMENT

New Product Development


1.
2.
3.
4.

Development of original products,


Product improvements,
Product modifications, and
New brands through the firms own R & D
efforts.

New Product Development Strategy


New products can be obtained via acquisition
or development.
New products suffer from high failure rates.
Several reasons account for failure.

Major Stages in New-Product


Development

New Product Development Process


Stage 1: Idea Generation
Internal idea sources:
R&D

External idea sources:


Customers, competitors, distributors, suppliers

Stage 2: Idea Screening


Product development costs increase dramatically in
later stages.
Ideas are evaluated against criteria;
most are eliminated.

Stage 3: Concept Development and Testing


Product concepts provide detailed versions of new
product ideas.
Consumers evaluate ideas in concept tests.

Stage 4: Marketing Strategy Development


Strategy statements describe:
The target market, product positioning, and sales,
share, and profit goals for the first few years.
Product price, distribution, and marketing budget for
the first year.
Long-run sales and profit goals and the marketing mix
strategy.

Stage 5: Business Analysis


Sales, cost, and profit projections

Stage 6: Product Development


Prototype development and testing

Stage 7: Test Marketing


Stage 8: Commercialization

LAUNCHING NEW PRODUCT

Introduction
Launching a new product attracts consumers
as well as corporate buyers, and informs the
public about your product and business.
Your product launch needs to be exciting and
informative.

Few suggestions on how to launch a


new product
1. Market research
2. Design attractive packaging
3. Determine your target audience
4. Implement a unique slogan
5. Know your competition
6. Consult a public relations firm
7. Write a product sheet
8. Launch a website
9. Purchase advertising
10. Hold a press conference

Market research
Conduct market research.
Learn who is using the product, who will buy it
and to whom is it beneficial?

Design attractive packaging


Create packaging that is colorful and pleasing
to the consumer's eye. Smart packaging is the
first step to getting your new product noticed.
Include your company name, product name
and any main selling points you want to
convey on the outside of the packaging.

Determine your target audience


Decide what demographic will benefit most
from your product.
This is the target audience that should receive
the most attention when you market a new
product. Consumers of this age, gender and
social and economic background will be most
receptive to the new idea and will, most likely,
buy your product.

Implement a unique slogan


Prepare for your product launch by creating a
catchy and unique slogan that will be used to
identify it.
The slogan should consist of simple language
and could rhyme or contain words beginning
with the same letter to make it more
memorable.

Know your competition


Research products similar to the one you're planning to
launch that are already well-known by consumers.
Use this information to direct the attention of your
launch at ways that your product is different and better
than the competition.
Evaluate how your product differs or compares to
current product offerings and determine the ways in
which your product/company excels.
Identify the reasons customers purchase elsewhere
and the ways that you can entice them to purchase
your new product instead.

Consult a public relations firm


Work with a public relations agent with experience
in your industry or in marketing new products.
An expert can help you solidify your target
audience, determine the best forms of media
advertising and plan promotions.
Ideas include allowing the press to review your
product, writing articles to send to public media,
giving interviews, and holding a launch event.
The more opportunities you have to present your
product to the target market, the more people will
know the product and become interested in
purchasing it.

Write a product sheet


Create a list of product features and details.
This should explain the product to consumers
while still making it attractive.
Include general usage, product components or
ingredients and any relevant safety warnings
or liability information.

Launch a website
Design a website advertising your new
product and offering more information for
consumers.
Include user testimonials, product
comparisons and ordering information or
promotional offers to entice buyers.

Purchase advertising
Place ads in several media outlets to reach the
maximum number of consumers.
Websites work well for posting ads and linking
to the product's website.
Buy ad space in local newspapers or trade
publications to increase the awareness of your
new product.

Hold a press conference


Schedule a press conference with consumers
and members of industries related to your
product or service.
This will allow you explain the product, offer
samples, answer questions and create a buzz
in the industry.

PRODUCT LIFE CYCLE

Product life cycle


Product life cycle is a business analysis that
attempts to identify a set of common stages in
the life of commercial products,in other words
the 'Product Life cycle' PLC is used to map the
lifespan of the product,i.e. the stages through
which a product goes during its lifespan.

Stages
INTRODUCTION
Low and slow stage: The product sales are the
lowest and move up very slowly at snail's pace
Highest promotional Stage: During this period of
introduction or the development ,promotional
expenses bear the highest proportion of sales
Highest Product prices: Lower input and sales
absorbing fixed costs.

GROWTH : Once the market has accepted the


product, sales begin to rise. This is most crucial
stage and help the brand to establish in the
market.
MATURITY: Market becomes saturated because
,the house hold demand is satisfied and
distribution channels are full.
DECLINE : Sooner or later actual sales begin to
fall under the impact of new product
competition and changing consumer tastes and
preferences.

Goals
The goals of PLC management are to reduce
time to market, improve product quality,
reduce prototyping costs, identify potential
sales opportunities and revenue
contributions, and reduce environmental
impacts at end-of-life.
To create successful new products the
company must understand its customers,
markets and competitors.

Stages of PLC

Product Life Cycle Examples


Its possible to provide examples of various
products to illustrate the different stages of
the product life cycle more clearly. Here is the
example of watching recorded television and
the various stages of each method:
1. Introduction 3D TVs
2. Growth Blue ray discs/DVR
3. Maturity DVD
4. Decline Video cassette