Cash flow is king

When considering any business, the two principle documents which are consulted are the Balance Sheet and the Profit and Loss account. These two documents give a thumbnail sketch of the business operations, in terms of its trading results and its general solvency. However, neither of these documents tells the reader how good the organization is at getting and maintaining its profitable income.

If “marketing” is defined as “The management process responsible for identifying, anticipating and satisfying customer requirements profitably”, then “marketing “ is the management process responsible for producing sustainable profitable income for the long term future of the business. The efficiency and effectiveness of marketing management is therefore of crucial importance so that measurements of marketing performance ought to be seen in the Profit and Loss account, balance sheet or somewhere else, but they aren’t…

Marketing practitioners frequently talk about “adding value” to the business, without defining what that “value” is. Is “brand value” any more relevant than “goodwill” in a balance sheet as neither are tangible assets? Strong brand names do not guarantee the survival of a business. In the airline industry, TWA and PanAM, were not only considered world famous companies but as “brands” in themselves. But however valuable the names may have seemed, it did not stop either of them being liquidated and the names going to oblivion.

While “brand image” may help to condition the prospective customer, it does not make money or produce cash flow. Logos may visually help to identify a brand, and provide recognition for the customer but they are costly to change, and do not add to business income. While logos may have some importance in the world of fast moving consumer good, as product identifier, they have little relevance in the business to business sector.

Whether a business is large or small, its long term future will depend on the amount of income it makes and the amount of profit it retains. Brand names and logos may help to produce the image of a product or service, but it is the managers of “marketing” who have the responsibility for producing profitable income. As managers, their performance should be measured on the amount of profitable income they produce, not on the questionable value of an intangible asset such as a brand name.

For large companies the balance sheet is of major significance in that it shows its solvency in its ability to pay creditors from its assets if the need should arise. For smaller companies, especially those started within the last twenty years or so, the balance sheet has less importance, because many will have minimal assets. The nature of the modern office and IT equipment means that it is often more economically attractive to lease offices and equipment rather than buy them which reduces the asset value on the balance sheet. In addition, leasing contracts often have the attraction of providing for regular updating of equipment, thus avoiding problems of equipment obsolescence and disposal. For most small and medium sized businesses, the profit and loss account with its ability to monitor the cash flow for the business, has greater importance than the balance sheet. Maintenance of cash flow is therefore one of the primary responsibilities of the marketer, who will need to manage a number of factors that affect it, including:

1. Number of enquires
2. Conversion rate of enquires to order
3. Total Value of orders
4. Cost of processing orders through to delivery
5. Credit days allowed before payment
6. Amount of credit days from suppliers
7. Volume and value of bad debts.

In order to improve cash flow marketers need to seek ways to:
1. Increase suitably qualified enquires
2. Improve conversion rates
3. Increase order size in order to increase income value and reduce processing costs.
4. Reduce credit days by early settlement discounts or other incentives.
5. Maximize credit with suppliers.
6. Minimize the cost of sales calls and customer contact without damaging the customer relationship.

Managers of “marketing” will have specific interest in both the “Balance Sheet” and the “Profit and Loss account”. While in some large businesses, managers of “marketing” may be involved in building the “value” of their Brands as intangible assets, the main responsibility for all such managers in both large and small businesses remains the maximizing profitable income for their long term future, with the minimum use of assets and investment. In reality the performance of managers of marketing will be measured on to their contribution to the Profit and Loss account of their respective businesses, in terms of the amount of profitable income produce they produce and the efficiency with which they produce it, rather than on a “brand valuation” on the Balance Sheet.

© N.C.Watkis, Contract Marketing Service 04 Feb 11

February 17, 2011   Posted in: marketing management

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