Upper lifiiil

Desired level

Lower lin-iir

1 Î 3 i 5 r, T S 9 1Ç 1 I 12 13 l-i 15 rime Pïiind explain i his occurrence: (I) The company Milt has good expense control, and this si l urn ion represents a rare chance event. (2) The company has lost control over This expense arid Should find the cause. If no investigation is made, the risk is tlint some real change might have occurred, and the Company will fail behind. It the environment is investigated, the risk is that the investigation wlU Uncover nothing and he a waste of time and effort.

'Hie behavior of successive observations even within tlie upper and lower control limits should be watched. Note in Figure 4.2 that the level of the expanse- to-sales ratio rose steadily from the ninth period onward. The probability oiencountering six successive increases in Yttrn should be independent events is only 1 lit EH.-13 This unusual pattern should have led to an investigation sometime before the fifteenth observation.

The expense- to -sales ratios should be analyzed in ¡in overall financial framework to determine liuvv and where the company is making its money. Marketers, arc Increasingly using financial analysis to find profitable strategies beyond sales building

Management uses financial analysis to identify the factors that a fleet tha company's rate Of return on net worth?* The main factors are shown in Figure 4-3, along with illustrative numbers for a targe chain-store retailer. The retailer fc earning a 12.5 percent renin i on net worth. The return Or nei worth is the product of two ratios, ihe company's return rm ussets anil its finUiuiat leverage. To improve its return on net worth, the company must increase its ratio of net profits to its assets or increase the ratio of its assets to its net worth. The company should Analyze the composition of its assets (i.e.. cash, accounts receivable, Inventory, and plant and equipment) and sec if it Can improve its asset management

FIG. 4,2 The Cofltnol-Chait Model

Prptit Margin

Prptit Margin

tie t sites

Return on Asset;

Net profits Tolal assets

FinflnCiil Leverage

Return on Asset;

FinflnCiil Leverage

Net profits Tolal assets

Total assets Net worth

Net oro'its Wet Vidrth

FIG. 4.3 Flnanc al MlkN ot Return on Met V/crt'

tie t sites

Total assets

The return on assets is tlte product oftwq ratios, [lieprofit Jpij-Jpjjj^iiitici Uic risier tunmvr. rhe prufit margin in figure 43 seems tow, whejieas the asset luinimi is mone normal Tor retailing. The m;iriceting executive can seek k> improve performance ii* two ways: (I) Increase ¡he profit margin by increasing sales or cutting costs; and (2) increase ihe asset turnover l>y Increasing sales or reducing assets (e.g., inventory, receivables) that are held against a given level of sales.

Profitability Analysts

Companies can benefit from deeper financial analysis, and Should measure the profitahility of (heir products, territories, customer groups, segments, trade channels, and order si^cs, This information can help management determine whether any products Or marketing act Miles should be expanded, reduced, or eliminated. The results can often be surprising t lore an1 some disconcerting findings from a bank profitability study:

We have found that anywhere from 20 to '10 percent of an individual institution^ products are unprovable, and tip to GQ percent of their accounts generate tosses. Qui research haE shown thai. In most firms, more than half of all customer relationships are not profitable. attd 'So to "in percent arc-only marginally so. ii is freqttijttly a mere 10 to percent of a firm's relalionships that generate the bulk of ils profits. Our profitability research Into the branch system of a regional bank produced some surprising results... 30 percent of the bank's branches were unprofitable.-*"

MARKETING-PROFITABILITY ANALYSIS We will illustrate the steps in marketingpro filability analysis with the following example;

The marketing vice president of a lawnmower company wants tn determine the profitability of selling its lawn-mower through Ibree types ol retail channels: hardware stores, garden supply shops, and department stores. The company's proliband-ioss statement is shown in Table +,6.

Step 1: Identifying Functional Expenses Assume that the eotpenses listed fn Table 4.6 are incurred to sell the product advertise it, pack and deliver it. and hill and collect for i t/IT ie first I ask is to measure how much of each expense was incurred ill etich activity.

Suppose ihat most of die salary expense wenj to sales representatives and the rest went to an advertising ttjanager, packing and delivvrv help, a fid an office accountant. I,el the breakdown of the 58,300 he S5.I0Q, $1,200, *1,400, and $1,600, respectively, I able 4.7 shows the allocation of the salary expense io these four act!vitlos.

' t'ahle 4.7 also shows the rem account of S3,000 allocated to the four net ¡vines, liecausc the sales reps work away from tbe office, none of the building's rent expense is assigned to selling. Most of I he expenses for Hoot space mid rented equipment are for packing and delivery. fhe supplies account covers promotional materials, packing materials, fuel purchases for delivery, and home office stationery. I he &t.5t)() in ibis account is reassigned to the functional uses made of the supplies.


AEimp'i KlftBlit-anä-LüSsSrtlBnifinl Sales $60.000

Co$t gf goods sold aa.OQO

Gross margin ©1,000 Expenses

Salaries S9.300

Rent 3,000 Supplies

Met profll


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