Appendix B – Financial Analysis in Marketing 611
APPENDIX B
FINANCIAL ANALYSIS IN MARKETING
OVERVIEW
A number of basic concepts from accounting and finance offer invaluable tools to marketers.
Understanding the contributions made by these concepts can improve the quality of marketing decisions.
In addition, marketers often must be able to explain and defend their decisions in financial terms. These
accounting and financial tools can be used to supply quantitative data to justify decisions made by
marketing managers. In this appendix, we describe the major accounting and finance concepts that have
marketing implications and explain how they help managers make informed marketing decisions.
LECTURE OUTLINE
Appendix B: Financial Analysis in Marketing
Key Terms: income statement, balance sheet, assets, liabilities, owner’s equity, partners’ equity,
shareholders’ equity, cost of goods sold, operating expenses, Selling, Administrative, and General
Expenses, depreciation, net interest expense, net income, performance ratios, profitability measures, gross
profit margin, net profit margin, return on assets, asset turnover, net profit margin, inventory turnover,
accounts receivable turnover, markup, markdown
PowerPoint Basic: 2-8
PowerPoint Expanded: 2-16
1. Financial statements
a. All companies prepare a set of financial statements regularly
b. Two of the most important financial statements are the income
statement and balance sheet
i. An income statement is a financial record of a firm’s
2016 Income
Statement
c. Example of an income statement
i. In Figure B.1, the firm designs and manufactures a variety of
composite components for manufacturers of consumer,
industrial, and government products
ii. Based on these numbers, it was a very profitable year for
d. Explanation of terms and expenses on income statement
i. For any firm making products (a manufacturer) or marketing
one or more products (an importer, retailer, or wholesaler),
the largest single expense is usually cost of goods sold
ii. Cost of goods sold reflects the cost, to the firm, of the goods
it markets—the income statement shows how cost of goods
step), the cost of goods sold is calculated
vi. By subtracting cost of goods sold from total sales revenues
generated during the year, the gross profits are calculated
vii. Operating expenses make up a broad category including
sales compensation and expenses, advertising and
of certain company assets (machinery, office furniture, or
computer equipment)
xii. Net interest expense is the difference between what a firm
paid in interest on various loans and what it collected in
interest on investments it might have made during the time
2. Performance ratios
a. Performance ratios are used to assess the activity of a firm, using
data from income statements and balance sheets, then comparing
Appendix B – Financial Analysis in Marketing 613
with industry standards and with data from previous years
iii. Ideally, firms want gross profit margins that are equal to or
higher than those of other firms in their industry
e. Net profit margin
i. Net profit margin equals net income divided by sales
ii. It is the percentage of each sales dollar that the firm earns in
profit, or keeps, after all expenses have been paid
iii. Firms want to see rising, or at least stable, net profit margins
f. Return on assets (ROA)
i. Return on investment or sales, also called return on assets
g. Inventory turnover
i. Inventory turnover measures the number of times a firm
“turns” its inventory each year
ii. It is typically categorized as an activity ratio because it
evaluates the effectiveness of the firm’s resource use
iii. Inventory turnover equals sales divided by average
inventory
iv. Different organizations can have very different inventory
turnover ratios, depending on the types of products they sell
h. Accounts receivable turnover
i. Accounts receivable turnover measures the number of times
per year a company “turns” its receivables
3. Markups and markdowns
a. Markups and markdowns help to establish selling prices and
evaluate various pricing strategies
b. Both concepts are closely tied to a firm’s income statement
c. Markups
consumers and its ability to attract new shoppers
vi. Excessive markups can drive away customers; inadequate
markups may fail to cover costs or make a profit
vii. They are usually stated as a percentage of either the selling
price or cost of the product