Financial Analysis

The expense-to-sales ratios should be analyzed in an overall financial framework to determine how and where the company is making its money. Marketers are increasingly using financial analysis to find profitable strategies beyond sales building.

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FIGUR E 6-12 The Control-Chart Model chapter 22

Managing the Total Marketing Effort

Management uses financial analysis to identify the factors that affect the company's rate of return on net worth.25 The main factors are shown in Figure 6-9, along with illustrative numbers for a large chain-store retailer. The retailer is earning a 12.5 percent return on net worth. The return on net worth is the product of two ratios, the company's return on assets and its financial leverage. To improve its return on net worth, the company must increase the ratio of its 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 see if it can improve its asset management.

The return on assets is the product of two ratios, the profit margin and the asset turnover. The profit margin in Figure 6-13 seems low, whereas the asset turnover is more normal for retailing. The marketing executive can seek to improve performance in two ways: (1) Increase the profit margin by increasing sales or cutting costs; and (2) increase the asset turnover by increasing sales or reducing the assets (e.g., inventory, receivables) that are held against a given level of sales.26

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