512 The Marketing Book
In very many businesses, these factors are
most obviously present in the key marketing
investments which are being made in develop-
ing brands, entering new markets, launching
new products and developing new potential
channels of distribution such as the Internet,
etc. Thus, it is vital that these high-risk, long-
term investments are financially evaluated
using the most sophisticated techniques avail-
able. Many companies would automatically
calculate a full discounted cash flow for even
the simplest, relatively small investment on
labour-saving machinery in their factory or
their operations areas. Yet these same com-
panies often do not carry out such a long-term
financial evaluation of much larger expendi-
tures in the marketing area. Indeed, it is still not
uncommon to find almost no financialjustifica-
tion supporting many significant marketing
initiatives; the rationale for the decision is
based on the fact that the initiative is ‘strategi-
cally important’ or that ‘it has to be done’.
There appear to be many reasons for the
lack of sound financial controls in this area.
Almost all marketing expenditure is charged
(i.e. written off) to the profit and loss account in
the year in which it is spent, irrespective of the
time-frame over which the returns may be
generated. This is in accordance with the
‘prudent’ view underlying financial account-
ing, because the returns from these marketing
expenditures cannot be guaranteed. However,
there is no way that any new brand launch,
new market entry or major new product devel-
opment is financially justifiable by considering
only the returns generated in the first year. All
investment decisions must be financially eval-
uated by comparing the expenditures needed
against the future expected returns. Where
these returns are only expected well in the
future, they should be included as their present
value equivalent so that the comparison is
validly based (the details of this technique,
which is the discounted cash flow referred to
above, are outside the scope of this chapter, but
are covered in any good finance text). The
actual accounting treatment is irrelevant to
this decision evaluation process, as economic
business decisions should be based on the
future differential cash flows arising from the
decision.
Another apparent justification for not
applying financial rigour to major marketing
investment decisions is that it is very difficult to
estimate accurately the future cash flows which
may arise quite some time into the future from
such expenditures. This is, of course, true but it
is also true of many major investments in more
tangible assets, where these same companies
still try to prepare full financial evaluations.
Indeed, most of these companies would find it
unacceptable to consider any major tangible
asset investment which was not supported by a
full cash flow projection into the future.
It can be, and it often is, argued that the
cash flows from many marketing investments
are even more difficult to project, as they can be
dramatically affected by competitor responses
or unexpected shifts in the market. This merely
indicates the high-risk nature of many market-
ing investments. A major focus of the financial
evaluation should therefore be on highlighting
the key risks, how they can be quantified and,
wherever possible, how they can be removed or
minimized. This is the very essence of good
financial control and may indicate a need for
extensive marketing research or more thorough
competitor analysis before committing the
majority of the expenditure.
Marketing investments cannot be left out
of the financial evaluation and control process
as they are, for most businesses, the major
source of long-term shareholder value. As
indicated in Figure 20.3, there are several
entry barriers that do not directly depend on
marketing, but most of these are normally
short-lived advantages due to competitor res-
ponses. Product innovations are a good exam-
ple of this unless they are protected by a
patent or other restriction on competitive
copying. Once the innovation is launched,
competitors will attempt to copy the new
product, or even improve on it. In many
industries the time lag before these competitors