WHAT A CPA KNOWS ABOUT MARKETING: MORE SALES AREN’T ALWAYS THE ANSWER

There is an old joke about a marketing executive who bought a truckload of melons from a farmer for $1 each. He advertised them for sale at $0.85. When his CFO asked how he planned make a profit, he proudly replied, “Volume!”

Does that sound absurd to you? Surely, the story must be a throwback to the days before we had MBAs and complex modeling systems to direct our every move.

May I be honest? I have a degree in accounting, and have done graduate work in finance, not marketing. I have never worked in a purely marketing or sales function. Any marketing professional worth his salt has probably forgotten more on the subject then I will ever know. That explains the often-asked question of why a CPA wrote a book called Highly Visible Marketing, and blogs about marketing related topics.

I do not see myself as writing about marketing; at least not as the average person understands the word. I write about a business approach that is foreign to many marketing professionals. It is largely unheard of among small businesses.

I call it marketing accountability.

I focus clients on improving cash flow by growing the bottom line, not the top line. It is that focus that adds value.

Too many business people think like our melon-selling friend. They assume they can make money on any product or service, if they can just sell enough.

As obvious as it may sound, there must be a reasonable and measurable relationship between marketing costs and the expected cash flow and other benefits.

Without that mindset, there is no perceived need to compare costs and benefits. Little or no effort is spent matching expenses and revenues until someone asks why the cash balance is circling the drain or vendors start calling asking where their payment is.

Do you think I might be exaggerating the importance of accountability?

A 2005 study titled Small Business: Causes of Bankruptcy by Don B. Bradley III and Chris Cowdery of the University of Central Arkansas reported that of businesses in their study that filed for bankruptcy, 58% admitted to doing “little to no record keeping.” I assume a business that keeps no records has no ability to compare costs and benefits, let alone manage them.

I encounter this “I’ll make up the difference on volume” mentality with alarming frequency. One of those encounters was the cathartic event that led me to develop my marketing accountability approach.

I had a growing client who had reached $5 million in sales. Unfortunately, losses were growing even faster. They were in desperate straits, virtually out of cash. They thought the answer was to slash expenses and eliminate staff, while continuing to grow sales. In other words, they followed conventional business thinking.

I discovered they were losing money on their largest customer class, where all marketing efforts were directed. Much to their surprise, I did not suggest eliminating a single position. On the contrary, I recommended hiring a marketing person for the profitable customer base. I then directed  procedural improvements to make it easier for those customers to do business with my client. Finally, I suggested an immediate reduction in unprofitable customers.

Even more alarming is how often clients I assume are financially astute fall into the same trap. I worked with a very large company that started a bonus program on their entire product line. The problem was they lost money on some products, primarily because they were underpriced. The bonus structure did not differentiate between products. When sales of already unprofitable products increased, the added cost of bonuses produced a “double whammy” on the bottom line.

An appropriate tactic would have been to reward the sales force for increasing total sales, while also decreasing sales of unprofitable products.

As both examples illustrate, growing sales and increasing profits are not always synonymous. Admittedly, decreasing sales to improve cash flow and profits sounds counter-intuitive to someone lacking a firm grasp of their cost structure.

That is no excuse.

Knowing how to sell something without understanding the economic impact of those sales is a recipe for disaster. Those responsible for a promotion should also be held accountable for its results, good or bad. The ultimate result companies must focus on is how much cash a promotion puts in the bank. It really is that simple!

Does my marketing accountability approach work?

Here is what the client in the first example said, “While many companies are looking to cut back on employees as their first resort to handle cash shortages, CFO America was quick to point out that the right mix of customers was the crucial area of concern. They also were quite helpful in directing us in some marketing improvements that we could make. We are now in the process of implementing changes that are destined to enhance our financial picture.”

I leave you with that quote.

© 2011 by Dale R. Schmeltzle

CFO America: Your Cash Flow Optimization experts

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