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Week 9: Marketing and Finance - Coggle Diagram
Week 9: Marketing and Finance
Accounting
Return on Sales (%) (ROS)
= Net Profit/ Sales Revenue => measure of
profitability
and
efficiency
of a firm
For firm with multiple divisions,
division level profitability
might not give a clear picture of
overall firm profitability
ROS limitations
it doesn't account for
future performance
doesn't take
capital investment
into account
EBITDA
EBITDA
= Net Profit + Interest Payments + Taxes + Depreciation and Authorization charges
a rough measure of
operating cashflows
(
page 6
)
Return on Investment (ROI)
ROI = Net Profit/ Investment
measures the
profitability adjusted for investment
Multi- period investments
Payback (#)
: number of periods required to
payback the initial investment
(
undiscounted
) (example:
page 9
)
NPV (example: page 10)
Internal Rate of Return (IRR)
: discount rate that results in an
NPV of 0
. If
IRR > hurdle rate
=> go ahead with investment (example:
page 11
)
Return on Marketing Investment (ROMI)
ROMI (%)
= (Gross Margin - Marketing Investment)/ Marketing Investment
Gross Margin
= Revenue - Cost of goods sold (COGS)
Revenue
refers to
additional revenue generated
as a result of marketing investment
does
not
included
future impact
of marketing investment
example:
page 13
(take into account the
hurdle rate
)
ROMI
hurdle rate
Gross Margin
= Marketing Investment x (ROMI + 1)
example: page 14
Incremental ROI (page 16)
further example: page 17
- calculate each stage
independently
Scalability of Marketing Investment
(p.18 - 20): take into account the
incremental values
Optimal Investment Theory
with every $ invest, return on investment
increases at diminishing rate
additional ROMI
associated with each additional $ invested will
decrease
diagram: page 22
Incremental ROMI = H (hurdle rate)
(at optimal)
ROMI = a + bI
Optimal Investment:
I = (H-a)/ 2b
At optimal:
ROMI = (H + a)/ 2
Return at optimal:
R = (H^2 - a^2)/ 4b = ROMI x I
Rational behind (
page 24
) - consider the
return investment
graph
graph
: page 25
example:
page 26 - 29
Profitability comparison
(p.30)
Management implications (p.31)