Monthly Archives: December 2016

A marketing plan is a core component of a business plan

The starting point for any marketing plan is an analysis of the strategic context, as a typical objective for most plans is promoting a good or service as effectively as possible. An assessment of the company, its environment and its customers helps to ensure that the author of the plan obtains a holistic view of the wider context. In turn this helps them to focus their energies and resources accordingly. This is particularly important given that most marketing managers will be subject to that all-too-familiar constraint—limited resources (invariably financial). In effect, a marketing plan is produced to ensure that limited resources are allocated to activities that are likely to bring the maximum return.

An assessment of the context will include analysis of both internal and external factors. There are a number of frameworks and tools designed to assist you with this:

  • A SWOT analysis forces you to consider internal Strengths and Weaknesses alongside external Opportunities and Threats.
  • Porter’s Five Forces is a framework designed to assist you in considering the broader competitive and environmental context.

It is also vital that you have a thorough understanding of your customers; look to whether segments exist within your broad customer group that can be profitably served utilizing specific and targeted marketing activities.

Following an analysis of broader conditions, a marketing strategy can then be put in place. This strategy needs to include financials so that all activities can be assessed in the context of their cost as a portion of the overall marketing budget. Regardless of the product or service, the objectives tend to be similar for most managers; create awareness, stimulate interest in the offering, and ultimately (profitably) convert this awareness into sales. All these factors are intertwined and, hence, the importance of effective market planning.

Using a local restaurant as an example, their marketing activities are going to be predominantly concentrated within a two to three mile radius of their restaurant, as this area is where the vast majority of their customers are likely to come from. Tactically, there is no point in such a restaurant advertising on TV (even locally) as the cost would be prohibitive in the context of their business model. They are limited in terms of capacity (number of seats) and their average cost per head so that, even if they created huge awareness and interest via TV advertising, the resultant revenues would still be unlikely to cover the cost of the specific marketing activity. On the other hand, stuffing leaflets through local letterboxes is extremely targeted and comes at low relative cost, which explains the sheer volume of fast-food flyers most of us get on a daily basis.

The reader of the plan should clearly be able to relate to the marketing initiatives in terms of the message, the target audience and the means to accessing this audience. A good marketing plan will detail specifics, i.e., a number of marketing activities, their respective costs, and the expected return on investment. Measuring return on marketing has historically been one of the greatest challenges the industry has faced. The advent of PPC (pay-per-click) advertising via the Internet has finally resulted in managers being able to track sales resulting from specific campaigns and adverts. However, this is just one means of advertising, and calculating effective ROI (return on investment) figures for other forms, such as billboards and TV, remains as elusive as ever.

In summary, a marketing plan should enable marketing managers to document their assessment of the opportunity in terms of effective allocation of limited resources. While most managers would love the luxury of a seven-figure marketing budget to spend on every conceivable advertising medium, the reality is that most need to market effectively on a pittance. A marketing plan assesses the most efficient means to attract potential customers and ultimately convert them to sales. Without a plan, a business is essentially rudderless and marketing activities are more likely to be reactive and, hence, considerably less effective.

The illustration below shows a Business Ratios table

It includes dozens of standard business ratios calculated from business plan financials, and used and expected by bankers, financial analyists, and investors. It also includes a column of statistical indicators for the specific type of business. This industry information is classified and categorised by Standard Industrial Classification (SIC) codes. The data involved comes from the database of Integra Information System, a leading provider of industry-specific economic information.

Main ratios

  • Current. Measures company’s ability to meet financial obligations. Expressed as the number of times current assets exceed current liabilities. A high ratio indicates that a company can pay its creditors as they fall due. A number less than one indicates potential cash flow problems.
  • Quick. This ratio is very similar to the Acid Test (see below), and measures a company’s ability to meet its current obligations using its most liquid assets i.e. cash or cash equivalents. It shows Total Current Assets excluding stock divided by Total Current Liabilities.
  • Total Debt to Total Assets. Percentage of Total Assets financed with debt.
  • Pre-Tax Return on Net Worth. Indicates shareholders’ earnings before taxes for each pound invested. This ratio is not applicable if the subject company’s net worth for the period being analysed has a negative value.
  • Pre-Tax Return on Assets. Indicates profit as a percentage of Total Assets before taxes. Measures a company’s ability to manage and allocate resources.

Additional ratios

  • Net Profit Margin. This ratio is calculated by dividing Sales into the Net Profit, expressed as a percentage.
  • Return on Equity. This ratio is calculated by dividing Net Profit by Net Worth, expressed as a percentage.

Activity ratios

  • Accounts Receivable Turnover. This ratio is calculated by dividing Sales on Credit by Accounts Receivable/ Debtors. This is a measure of how well your business collects its debts.
  • Collection Days. This ratio is calculated by multiplying Accounts Receivable by 360, which is then divided by annual Sales on Credit. Generally, 30 days is exceptionally good, 60 days is bothersome, and 90 days or more is a real problem.
  • Stock Turnover. This ratio is calculated by dividing the Cost of Sales by the average stock balance.
  • Accounts Payable/Creditors Turnover. This ratio is a measure of how quickly the business pays its bills. It divides the total new Accounts Payable/Creditors for the year by the average Accounts Payable balance.
  • Payment Days. This ratio is calculated by multiplying average Accounts Payable by 360, which is then divided by new Accounts Payable.
  • Total Asset Turnover. This ratio is calculated by dividing Sales by Total Assets.

Debt ratios

  • Debt to Net Worth. This ratio is calculated by dividing Total Liabilities by total Net Worth.
  • Current Liab. to Liab. This ratio is calculated by dividing Current Liabilities by Total Liabilities.

Liquidity ratios

  • Net Working Capital. This ratio is calculated by subtracting Current Liabilities from Current Assets. This is another measure of cash position.
  • Interest Coverage. This ratio is calculated by dividing Profits Before Interest and Taxes by total Interest Expense.

Additional ratios

  • Assets to Sales. This ratio is calculated by dividing Assets by Sales.
  • Current Debt/Total Assets. This ratio is calculated by dividing Current Liabilities by Total Assets.
  • Acid Test. This ratio is calculated by dividing Current Assets (excluding stock and debtors) by Current Liabilities.
  • Sales/Net Worth. This ratio is calculated by dividing Total Sales by Net Worth.
  • Dividend Payout. This ratio is calculated by dividing Dividends by Net Profit.

Budgeting Tips

  1. Understand that it’s about people: Successful budgeting depends on people management more than anything else. Every budgeted item must be “owned” by somebody, meaning that the owner has responsibility for spending, authority to spend, and the belief that the spending limit is realistic. People who don’t believe in a budget won’t try to implement it. People who don’t believe that it matters won’t worry about a budget either.
  2. Budget “ownership” is critical: To “own” a budget item is to have the authority to spend and responsibility for spending. Ideally a budget management system makes plan-vs.-actual results visible to a group of managers, so that there is peer pressure that rewards budgeting successes and penalizes budgeting failures.
  3. Budgets need to be realistic: Nobody really owns a budget item until they believe the budget amount is realistic. You can’t really commit to a budget you don’t believe in.
  4. It’s also about following up: Unless the people involved know that somebody will be tracking and following up, they won’t honor a budget. Publishing budget plan and actual results will make a world of difference. Rewards for budget success and penalties for budget failures can be as simple as peer group managers sharing results.

Your budget and milestones work together
As you develop your budget, keep in mind your business plan milestones. That’s where you set specific goals, dates, responsibilities, and budgets for your managers. It makes a plan concrete. Make sure your budget matches your milestones.

Ideally, every line in a budget is assigned to somebody who is responsible for managing that budget. In most cases you’ll have groups of budget areas assigned to specific people, and a budgeting process that emphasizes commitment and responsibility. You’ll also need to make sure that everybody involved knows that results will be followed up.

The ideal plan relates the budgets to the Milestones table. The Milestones table takes all the important activities included in a business plan and assigns them to specific managers, with specific dates and budgets. It also tracks completion of the milestones and actual results compared to planned results.