Finance for Marketing Decisions

Prof GB

Why, Where and How to Get Financial Information

• Using financial data enhances credibility

• We can get financial data easily and for free

• There are 5 main ways to get financial data:

  • Company’s Website

  • Edgar

  • Wall Street Journal

  • Brokers

  • Become a shareholder

Getting Financial Information from Company’s Website

1. Go to the company’s site

2. Scroll down to Investor Relations

Why do Firms Hire Contractors?

1. No headcount impact

2. No corporate approval required

3. Item is “hidden” on expenses

4. Much faster

5. Need to spend the budget before December 31st. It’s been a good year

Productivity

Productivity increases: producing more units, or selling more dollars, with the same or lower headcount

This increases productivity:

• Training

• Engagement

• Automation, clear processes

This decreases productivity:

• High rotation

• Low Morale

• Unclear, badly managed processes

Outsourcing & Offshoring

Outsourcing:

• Who does the work - an external person or company, not an employee

Offshoring:

• Where the work is done - in another country, by either a company’s own foreign staff or a third-party provider

Outsourcing & Offshoring (Chart)

Outsourcing:

• Where: local or global (anywhere)

• Who: an outside person (contractor/freelancer) or external company, not your employee. Contractors are hired for specific tasks and do not receive employee benefits

• Example: Google employs over 130,000 contractors compared to 123,000 direct employees. They work in IT support, software testing, food service

Offshoring:

• Where: another country

• Who: own employees/outside company abroad

• Example: Google laid off hundreds of US employees and moved engineering and IT positions to offices in India and Mexico

Severance

Severance: compensation and/or benefits employers pay to employees who are laid off, whose jobs are eliminated because of downsizing, or who are fired

• In mny countries, it is mandatory and regulated by law

• In the US, there is no requirement in the Fair Labor Standards Act (FLSA) for severance pay

What are 3 Main Sections of a P&L?

1. Sales

2. Cost of sales

3. Expenses

Sales - Cost - Expenses = Net Income

Using % of Sales as the Benchmark Ratio

• Sales and Revenue are the same thing

• Use “Net” Sales or Revenue if available

To calculate ratios, divide each line item by Net Sales or Net Revenue. This makes it easier to compare across competitors and make sense of numbers

• For example, to calculate Cost of Sales as a percentage of Net Sales: Divide Cost of Sales by Net Sales

Net Sales or Net Revenue

• Sales or Revenue: It’s the same

• “Net” is important. It means after discounts and returns

  • It’s also referred as the “Top Line.” You will find it near the top on a P&L

Net Income, Net Proft

• Net Income, Net Profit: It’s the same

• Net Income is the profitability, the amount of money we made after paying all expenses, taxes

  • It’s also referred as the Bottom Line, you will find it at the Bottom a P&L

Gross Profit & Gross Margin

Gross Profit: Net Sales minus Cost of Sales

• Jenny = $1,000 - $300 = $700

Gross Margin: Gross profit as a %

• Jenny = $700 / 1,000 = 70%

Jose’s Gross Profit

• Airport Transfer: $100

• Total Cost: $40

• Gross Profit: $60

***Total Cost includes Mercedes-Benz lease, gasoline, insurance, maintenance, parking and airport fees

Jose’s Marginal Cost

• Airport Transfer Price: $100

• Maria’s Offer: $40

• Jose’s Marginal Cost: $?

***Jose sells transfers to the airport for $100. His total cost (see previous slide is $40). Maria offers him $40 for the ride. What is the marginal cost of adding Maria to an empty seat?

How Would You Build a P&L?

1. Sales

2. Cost of Sales

3. Expenses

Sales - Cost - Expenses = Net Income

EBITDA

EBITDA or Earnings Before Interest, Tax, Depreciation, & Amortization

Example:

• Jenny made $2,700. If she was to pay income taxes, that would be reduced by 20% and her Net Income would be $2,160

• Her earnings before tax, however, would still be $2,700. She doesn’t pay interest, depreciation or amortization

What is a Balance Sheet?

A balance sheet is a statement summarizing what we own (assets), what we owe (liabilities), and what we invested (our capital or equity)

Assets = Liabilities + Equity

How to Read Any BS. The Main 5 Business Drivers

1. Receivables

2. Inventory

3. Property, Plant & Equipment

4. Payables

5. Debt

Jenny’s BS. Monday. Payables (A Liability)

Once per month, after taking the Finance for Marketing decisions class, Jenny goes to Newark Airport and gets on an Emirates flight to China

***Selling, General & Administrative (S&GA expenses). Travel is included there for expenses not related to manufacturing

Impact on Cash

Reduces Cash:

1. Receivables

2. Inventory

3. Property, Plant & Equipment

Maintains/Increases Cash:

4. Payables

5. Debt

Scenarios 1 & 2. Business is Successful (Borrow $15K from Bank, Sell All 50 Pairs - Equity Investor $15K, Sells All 50 Pairs)

In a good situation, go with the bank not the equity investor

Scenarios 3 & 4. Business Fails (Borrows $15K from Bank, Sells 10 Pairs - $15K from Investor, Sells 10 Pairs)

In a bad situation, it is better to go with equity not a bank

Inflation & Salary Increases

The global inflation rate in 2021 was 3.5%. A company instructed its companies to increase salaries for up to 3.5%

Pricing questions needed information:

1. What

2. How much

3. When

Most financial transactions have more than one consequence. The best way to tackle these problems is:

• Separate the problem into the different parts, showing the “as is” or “do nothing scenario”

• Quantify the changes or delta for each part of the problem

• Add up the difference

Do not accept a raise if it is not higher than the inflation rate

Pricing Impact

The Washington Square company has sales of $400. Total payroll expenses are $40, or 10% of sales.

The company implements a 10% price increase to all products and customers, effective immediately. All customers accept the price increase and continue buying the same quantities (the head of marketing, who led the communication process, graduated from NYU’ SPS).

The company then doubles the compensation for all its employees. What is the impact on profitability?

Timing Price Increases

• July is ½ the year

Delaying a price increase reduces the total revenue gained. If prices rise in January, a price increase then benefits the full 12 months (100%). Starting the increase July 1st captures only half the year (50%). Starting October 1st captures just the last 3 months (25%)

Tips on How to Increase Prices

What I’ve learned increasing prices globally:

• Explain price increases well. Your client will understand when there is inflation and an increase in costs

• Go prepared to know how to respond when challenged

• Mention price decreases first. List price increases from lowest to highest

• If you get a price increase, push back. otherwise, look for costs cuts from other suppliers or raise prices to clients

Which Currency is Stronger? - Cost per Response

I only need 0.50 British pounds to buy a dollar. For each British pound, I get 2 dollars. Therefore, nothing.

How many units of a currency we get per dollar is not an indication of the strength of a currency or why prices are lower or more expensive in one country

Cost per Response (CPR) measures the cost to get any reaction, such as clicks or survey answers

Cost per Inquiry

Cost per Inquiry (CPI) is the average amount spent to get one potential customer to show interest, such as filling out a contact form, subscribing via email, making a phone call, chatting live, requesting a product demo, downloading contact, or registering for a webinar

Customer Acquisition Cost. Why do Banks Pay $2,000?

Discounts, Cost & Marketing Expense / Number of Customers Acquired = Customer Acquisition Cost

Customer Lifetime Value. How do Banks Make $3,000?

Cash we get per year or transaction X Years consumer is retained, or number of transactions = Customer lifetime value