Whew, so we've covered marketing's impact on the income statement, revenue, profit, and cash flow. It should now be evident that marketing plays a tremendous role in the success of the business. The projection of money promised, services delivered, and the speed of cash through the door can all be positively affected by a strong marketing organization. By developing strong relationships with clients, establishing trust and credibility, and delivering the right resources at the right time, marketers can demonstrate their greater value across the entire organization.
Marketing is no longer just about demand generation, lead hand-off, and sales enablement. Marketers now influence both the short-term success and long-term potential of a company.
This influence extends beyond the money coming into the organization, as we've covered in the last 4 posts. Marketers can also impact and influence monetary investment. Let's take a look at inventory control and capital expenditures.
Last week we discussed the importance of cash flow. What's often troubling for organizations is when they evaluate their finances and discover that all of their cash is held up in inventory. This is not a good thing for the company because a company always wants to carry as little inventory as possible.
Most companies will evaluate inventory days and turnover. These ratios are based on the fact that inventory flows through a company and it can flow at a greater or lesser speed. Companies tend to look at inventory as frozen cash. You don't want an inventory deficit that?s so low you can?t meet customer demand. At the same time you don't want inventory sitting on the shelves because you're not generating cash through the door.
Demand Prediction Reporting is becoming a highly requested feature. Companies want to build out data models that track (or pull data over from an existing system) inventory, purchase history, frequency of purchase, quantities of assets, partner they buy from, average delivery time per partner and per asset. Based on the data model, they want to create dashboards that demonstrate trends in purchase (time of year, geography, etc), opportunities for up-sells and add-ons, and sales cycle duration. This information can be used to create automated trigger emails that send communications in the month or so leading up to when they typically order. But this is now more than a futuristic objective. Companies are now integrating systems and tying customer-facing channels into their sales, marketing, and production programs.
As I began digging into the lines on a balance sheet, one question I had was; is marketing a capital expenditure or an operating expense? An operating expense reduces the bottom line immediately, and a capital expenditure spreads the hit out over several accounting periods. Operating expenses are the costs required to keep the business going day to day, like marketing salaries. These are listed on the income statement and are subtracted from revenue to determine profit.
Capital expenditure is the purchase of an item that's considered a long term investment. The category is broad and includes equipment purchases and the development of new products. These appear on the balance sheet and the depreciation of capital expenditures appears on the income statement. They're treated different from ordinary expenses because they typically involve large amounts of cash, are expected to provide returns for several years, and they entail some degree of risk.
As greater IT purchasing has shifted to the marketing organization, the role of capital investments has also become a consideration. The basic principle of capital investments is tied to the time value of money. Money (or cash) you have now is more valuable than the money you hope to collect in the future.
Marketers that are looking to invest in marketing and sales technology must be able to demonstrate the future returns of cash invested today. Below are 3 steps to calculate capital expenditures.
Step 1: Determine the initial cash outlay. This is tricky because it requires some educated guessing. You must make judgment calls about what a machine or project is going to cost before it begins to generate revenue. These calculations should be factored as cash out the door, not decreased profits.
Step 2: Project future cash flows (not profit) from the investment.
Step 3: Evaluate future cash flows to figure the return on investment. Are they substantial enough so that the investment is worthwhile? On what basis can we make that determination? Consider the payback method, the net present value (NPV) method, and the internal rate of return (IRR) method.