Money Circulation: Advertising’s Prime Efficiency Measure
Research by many organizations has shown that intangible assets now represent more than 80% of the value of large companies. The largest and most important of these assets include brands. When Molson Coors completed the MillerCoors acquisition in late 2016, MillerCoors was valued at nearly $ 21 billion, of which nearly $ 13 billion was attributable to the MillerCoors brands. In 2015, the Kraft brand was worth over $ 41 billion when Kraft merged with Heinz. Oddly enough, given the value of such assets, they rarely appear on a company's balance sheet. The value of brands is only accounted for in the event of an acquisition or impairment, and once they are recognized, the value remains the same regardless of how well or badly the company manages the brand, unless there is another acquisition or another other impairment before impairment.
Given the size of the stakes in question, there is a serious gap in not reporting how the management of a company's brands affects their value. Of course, according to current US accounting practices, there is no need to report the value of a company's brands or changes in value over time. One might assume that in the absence of public reporting agents, at least the health and value of brands would be monitored through internal management and control. Surprisingly, this is not the case in most companies. A recent study by the Marketing Accountability Standards Board (MASB) found that few companies have systematic procedures for evaluating and evaluating their brands. Failure to monitor the health and value of a company's greatest assets is misconduct by management.
Apologies for asset management
The reasons for the lack of such a brand evaluation and evaluation process are numerous. It is difficult. The numbers are blurry. The Board of Directors and senior management consider brands to be operational issues and accounting standards do not require them to report on brands. Marketing, which is normally responsible for managing the brand, does not understand finance. Such excuses are bad reasons to ignore how well a company manages important assets.
It is not difficult. All values, including property, plant and equipment, are at best estimates. If assets make up a significant part of the company's value, they are strategic by definition. Marketing professionals should be expected to speak the language of the company and finance. Most of them are trainable.
ISO, the International Organization for Standardization, has recently set standards for both brand valuation and brand valuation. Ultimately, a brand's value is the sum of its discounted cash flows over a limited period of time (likely useful life). As cash flows increase over time, the value of the brand increases, other things are the same. Similarly, the value of the brand decreases as the cash flows decrease. other things are the same. Such an approach is simple, direct, and requires little data.
Some suggest a more complex approach, arguing that "brand" is only part of the overall product or service offering, which includes things like the functional product and the quality of that product. This is really a question of the added value of a brand compared to a generic. It is relatively easy to determine the incremental value of a brand based on the markup surcharge in relation to its generic product, e.g. B. a trademark or a product without a brand. However, a brand's incremental value is not the same as a brand's value. The brand and value of this brand are inextricably linked to the manner of delivery to the customer, including the characteristics of the product. So the value of the brand is still the sum of its discounted cash flows over time.
Marketing expenses are often defensive
A brand's incremental value can be useful to measure the value of investing in marketing and branding activities. The return on marketing investments should add value to the brand in relation to the value without the investment. However, this incremental value can also be estimated from changes in the discounted cash flow. It is important to remember that marketing actions and spending are often defensive, so some marketing spending can be based on maintaining cash flow rather than increasing cash flow.
There are certainly more nuanced approaches to assessing the profitability of marketing investments and brand value. However, to be credible and to link marketing with business development, cash flow is the ultimate measure. It is also relatively easy to calculate, is understood by financial managers, and is consistent with the way companies have to report on their performance.
ContriDavid Stewart, Professor of Marketing and Business Law at Loyola Marymount University, Author, Financial Aspects of Marketing Decisions.
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