One of the biggest challenges facing marketing today is the failure of financial executives to fully understand the true value of marketing.  A few months ago I came across a KPMG survey where financial executives ranked marketing at the bottom of investments necessary to generate long-term growth.  Training, information technology, human resources and R&D were all ranked higher.

Financial managers, especially CFOs, must understand that a company’s brands are an asset—an intangible asset but an asset nonetheless.  However, brand investments are expensed and not capitalized.  For example, it makes no sense to capitalize a machine that costs $100,000 over ten years but capitalize a marketing branding program that costs the same over one year.  Under scenario 1, as shown in the accompanying table, the effect of the machine’s acquisition on the profit and loss statement for one year is only $10,000.  Under scenario 2, revenue has decreased by $50,000 and as a result marketing is cut by $40,000, while the machinery investment is left alone.  However, as outlined in scenario 3, we can see the true implications of our investments only if we look at them from a cash basis perspective. When both machinery and marketing are capitalized over only one year, the effect of both investments on cash is the same. But in reality, the useful life of the brand is likely to outlive that of the machine.  Capitalization accounting principles are the main reason why marketing budgets are the first to be slashed when corporations are looking to trim costs.  Accrued earnings do not deliver shareholder value; cash does.  It is myopic to make investment decisions based solely on short-term accrual accounting implications.

Scenario 1

Scenario 2

Scenario 3

Revenue

250,000

200,000

200,000

Machinery

10,000

10,000

100,000

Branding

100,000

60,000

100,000

Other Cost

90,000

90,000

90,000

Profit

50,000

40,000

(90,000)

Margin

20%

20%

(45%)