Basics of Accounting for Marketing Activities

Marketing Activities

Accounting will always be a part of every marketing activities or campaigns. With proper accounting, the movement of sales will be tracked, marketing activities will be financed prudently, and the funds will be allocated accordingly. These measures will ensure that the company’s marketing campaigns or activities will not have any adverse effects on its finances and overall operations. There exists a link between accounting and marketing. While the former evaluates the financial status of the enterprise, the latter uses the generated data in appropriating the finances that marketing managers will have to work on.

While businesses employ various accounting systems in monitoring their financial status, marketing managers utilize accounting metrics in making sure that the finances are properly allocated and are spent effectively and efficiently.

Marketing Cycle

Before a marketing campaign starts, the marketing manager has to secure first the budget. He/She should be able to specify the gross revenue goals, breakeven goals, and market share goals first in order to determine the amount of money needed for the individual marketing activity.

Sales come after marketing. Its cycle starts with the marketing budget, which will determine the sales. The sales will determine the financing strategy, which will determine the marketing budget. From there on, the business cycle continues.

Key Metrics

Nowadays, companies use metrics, indicators, or measurements in assessing or evaluating almost everything — from the company’s financial status to the marketability of their products or services. However, there is no definite accounting metric that will provide the data that marketing managers need to know regarding the appropriation of finances for a certain marketing campaign or activity. With that, a group of metrics is necessary in order to complete the whole picture while aiding the management in making critical decisions for the company.

  • Customer Satisfaction

The customer satisfaction metric is probably one of the most important parameters used by marketing managers. Generally, this metric is derived from researches carried out with a sample of customers. These people will be asked to give a quantitative feedback regarding their contentment and/or satisfaction on an array of elements related to their experience with the company.

The significance of this metric is that it will measure the efficacy of the marketing strategy of the company, as well as the quality of its product or service. With the customer satisfaction metric, marketing managers will know if the resources they allocated for a particular marketing campaign are worth spending for, or if they should allocate more funds for the marketing activity in order for it to be much more efficient.

  • Return on Marketing Investment

The Return on Marketing Investment or ROMI is the metric used in quantifying the return on the company’s expenses on its marketing activities. ROMI will illustrate the earnings and expenditures incurred during the progression of the marketing activity.

According to the Canadian Marketing Association, ROMI is calculated through this formula:

ROMI = [(Incremental Revenue due to Marketing Activities * Gross Margin on those Revenues) — Costs of Marketing Activities] / Costs of Marketing Activities

  • Cost of Acquisition

The Cost of Acquisition metric encompasses all marketing activities-related expenses. This may include incentives, agency fees, and media costs.

To compute for the Cost of Acquisition,

Cost required in Acquiring a new Client or Sale / Quantity of Sales ascribed from the Marketing Activity

  • Customer Lifetime Value

The constant and costly spending through marketing activities aims to retain the customers of an enterprise, increase its sales, and build a relationship with the customers. In doing so, businesses measure their customers’ economic worth by using the Customer Lifetime Value (CLTV) metric. Also known as Customer Equity, CLTV can be calculated using the formula:

CLTV = Present Value of (Average Profit generated per annum * Number of Years) — Acquisition Cost

  • Disclosures in Financial Statements

According to Columbia Business School, the existing Generally Accepted Accounting Principles (GAAP) in the country, as described in Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, identifies the “costs of internally developing, maintaining, or resolving intangible assets, including goodwill, that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole” as incurred expenses. Therefore, marketing expenses can be tracked and are stated on the income statement under Selling, General, and Administrative Expenses. With regards to the cash flow statement, the marketing outlays are declared as operating cash outflows.

For marketing-related intangibles like brand names, trademarks, and advertising jingles, their fair values are estimated directly and are accounted based on supposed useful lives.