Published on March 10, 2014
Margins & Profitability. Financial Return 23rd January
Chapter 3 Chapter 10
Lecture Objectives • To explain financial reporting principles • To explain “margins” • To define the main financial metrics important for marketing
• Managers are requesting more accountability from marketers • Accounting v. marketing – marketing has fewer standardised techniques for measuring performance Measuring Marketing Performance
Chapter 3 at a glance Margins and Profits • Margins • Average price per unit • Variable and Fixed Costs • Breakeven analysis and Contribution analysis
Chapter 10 at a glance Marketing and finance • Net profit and return on sales (ROS) • Return on investment (ROI) • Project metrics: Payback, Net Present Value(NPV). • Return on marketing investment (ROMI)
• Annual Plan control looks at the objectives of the annual marketing plan. Evaluates these against results achieved & takes action • Financial or Expense control considers the financial parameters and objectives in the annual marketing plan. • Strategic control ensures the organization maximises opportunities 3 types of control
Key Metrics (in red & bold) Margins and Profits • Margins : Unit Margin. Percentage (%) Margin • Average price per unit • Variable and Fixed Costs • Breakeven analysis and contribution analysis: Contribution per unit. Contribution Margin. Breakeven revenue. Breakeven quantity.
LW2MM01 UNIT MARGIN Definition “Unit Prices LESS Unit Cost” Construction UNIT MARGIN= SELLING PRICE PER UNIT - COST PER UNIT (in relevant currency) EXAMPLE 135 pence per litre (95 Octane petrol) - 130 pence per litre= 5 pence per litre
LW2MM02 % MARGIN Definition “Unit Margin as a % of Unit Price”
LW2MM02 % MARGIN Definition “Unit Margin as a % of Unit Price” Construction % MARGIN = UNIT MARGIN (currency) SELLING PRICE per UNIT EXAMPLE Unit Margin per litre £0.05 % Margin = 3.7% Selling Price per litre £1.35
LW2MM03 AVERAGE SELLING PRICE Definition “The average selling price of each unit sold in a period” Construction AVERAGE PRICE PER UNIT= TOTAL REVENUE/TOTAL UNIT SALES EXAMPLE SALES VALUE IN A PERIOD £156M AVERAGE PRICE £15,600 UNIT SALES IN SAME PERIOD 10,000
LW2MM04 FIXED AND VARIABLE COSTS Definition “Fixed costs are those which do not vary with volume (output)” “ Variable costs are those which (do) vary with volume (output) ”
LW2MM05 CONTRIBUTION PER UNIT Definition “Unit Price LESS unit Variable Cost Construction
LW2MM06 CONTRIBUTION MARGIN Definition “Contribution per unit divided by unit price” Construction Contribution Margin (%)= Contribution per unit (eg £) Selling Price per unit (eg £)
LW2MM07 BREAKEVEN SALES LEVEL Definitions “Breakeven is that level of sales where sales value equals total cost of sales” BREAKEVEN QUANTITY “ Breakeven (unit sales) equals Fixed Cost divided by Contribution per unit” BREAKEVEN REVENUE “Breakeven revenue is Fixed Cost divided by the percentage Contribution Margin ”
Fixed costs Units Sold Money(£) Determining the break even point Total variable costs
Fixed costs Total revenue Units Sold Money(£) Determining the break even point Total cost Total variable costs
Fixed costs Break even point Total revenue Units Sold Money(£) Determining the break even point Losses Total cost Total variable costs Profits
Chapter 10 Marketing and finance • Net profit and return on sales (ROS) • Return on investment (ROI) • Project metrics: Payback, Net Present Value(NPV). • Return on marketing investment (ROMI)
LW2MM07 NET PROFIT Definition “Sales Revenue Less Total Costs” Construction Net Profit = Sales Revenue less Total Costs (Total costs will include a share of Corporate Overheads)
LW2MM08 RETURN ON SALES (ROS) Definition “Net Profit as a % of sales revenue” Construction Net Profit = Sales Revenue – Total Cost Return on Sales (%) = Net Profit Sales Revenue
LW2MM09 RETURN ON INVESTMENT (ROI) Definition “The financial benefit accruing from prior financial investments, expressed as a percentage of the investment” Construction Net Profit = Sales Revenue – Total Cost Return on Investment (%) = Net Profit Investment
Return on Investment (ROI) • Also known as Accounting Rate of Return (ARR) • Average annual profit after depreciation but before interest to capital invested.
ROI example Initial outlay for a computing system is £110,000. Annual cash flows over five years will be £24,400 p.a. The scrap value estimated at end will be £10,000. Depreciation on straight line basis. What is the ARR? Investment £110,000 Scrap value £10,000 Life (years) 5 Annual cash flows £24,400 Annual Depreciation £20,000 Average Annual Profit £4,400 ARR is (£4400/£110000) 4.00% Average Investment (initial + scrap/2) £60,000 Or ARR using average investment is 7.33%
Payback Period Method • Estimates the time taken by a project’s net cash flow to recover the initial investment. • Favours projects which can recoup their cost quickly. Year Cash Flow Cum. Cash Flow Cash Flow Cum. Cash Flow Cash Flow Cum. Cash Flow £ £ £ £ £ £ 0 Initial investment -21000 -21000 -21000 1 Net cash inflow 3000 3000 5000 5000 8000 8000 2 Net cash inflow 14000 17000 15000 20000 6000 14000 3 Net cash inflow 4000 21000 1000 21000 7000 21000 4 Net cash inflow 500 6000 10000 Payback reached at end of year 3 3 3 Project J Project L Project R
Time Value of Money • To make sensible investment decisions appraisal method should also make a logical allowance for the projected timing of the costs and benefits. • Interest earned on interest already paid is called compounding. • Concept involves going from today’s value, or present value (PV) to future value (FV).
Net Present Value (NPV) • The value of a stream of future cash flows after accounting for the time value for money • Why? To summarise the value of cash flows over multiple periods
LW2MM10 RETURN ON MARKETING INVESTMENT (ROMI) Definition “The contribution attributable to marketing investments, expressed as a percentage of the marketing monies invested or put at risk” Construction ROMI (%) = Incremental Revenue*Contribution Margin (%) LESS Marketing Exp. Marketing Expenditure
Marketing Profitability Analysis • Step 1: Identify functional expenses • Step 2: Assign functional expenses to marketing entities • Step 3: Prepare a profit-and-loss statement for each marketing entity
Profit-and-Loss Statements for Channels
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