How foundries can develop better marketing budgets.

Foundry marketing budgets vary widely, depending on the degree that program elements are considered necessary and to the extent they are implemented.

Usually, guesswork and instinct are the determinant factors, rather than thoughtful analysis. However, few management decisions are more important or can more significantly affect the growth and profitability of the foundry then those involving the marketing program and its budget.

The key question facing top management is how much money is needed to achieve marketing plan objectives. And how much is affordable and consistent with attaining profit objectives. In the real world, we usually will have to compromise between need and affordability, trying not to jeopardize our marketing or profit objectives.

A magic formula for determining the marketing budget has yet to be devised. Nevertheless, we should strive for a more scientific determination of what is really necessary. In the foundry industry, two methods are in wide use.

The first approach--typically taken by financial people--is to project future sales on the basis of historical trends, largely ignoring the optimism that sometimes blindsides marketing people. Typically, the budget is prepared by first deciding what after-tax profit is necessary for the operation, starting with gross profit, less general and administrative expenses, capital improvements, interest and taxes. Whatever is left over goes to marketing.

The second approach, sometimes mistakenly assumed to be scientific, is largely intuitive. It begins with the relationship between current marketing expenditures and sales volume. If gross profit is X dollars, marketing expenses are Y dollars and sales volume is Z, then we are spending Y/Z% of net sales and Y/X% of gross profit on marketing.

In the forecast period, let's say we anticipate increasing both sales and gross profit by 10%. So, to maintain the same relationship, we should increase marketing expenditures by a like amount--10%.

Often, it is assumed that there is a direct correlation between marketing expenditures and sales volume. But, in the case of most foundries, this is not necessarily so.

Flawed Philosophies

As we look more closely at these two very different philosophies, we see that they are both flawed. One is based entirely on the need for producing a predetermined profit; the other on what is supposed to be necessary to accomplish stated marketing objectives.

The first is wrong because it fails to credit marketing with any productive role or recognize a direct relationship between marketing expenditures and sales results. The second is also wrong because it assumes there is indeed a predictable correlation between expenditures and sales results that can be determined with exactness.

Neither method should be used to the exclusion of the other. The secret to effectively determining the marketing budget is to balance the two. Protect profits, which are the overriding concern, and at the same time budget marketing expenses adequately to ensure the foundry will remain financially healthy, and can expand and produce long-term profits.

In other words, marketing needs must be balanced against affordability and the potential for increasing profitability. So, for a more realistic approach to developing your marketing budget, try to objectively answer these key questions:

* What are your marketing objectives and to what extent do you rely on direct marketing expenditures to realize them?

* How much marketing, direct sales and sales promotion are needed to achieve a particular volume, and what reason is there to assume that the marketing budget is what's needed?

* If more money were spent on marketing, how much could sales and profitability be increased? How much would they drop if less money were spent? Why?

* Is the sales coverage provided for in the marketing budget too much or too little? Would deeper sales penetration increase total profit by adding business that entails no additional fixed overhead?

* Is there any provable relationship between sales coverage and sales results?

* Is there a reasonably apparent relationship between your marketing budget and the expected gross profit? Will the budget permit achieving an operating profit consistent with the foundry's requirements? Is the budget compatible with the company's cash flow needs?

All these questions are relevant to more realistically determine the marketing budget. Most of them will be difficult to answer and some may not be susceptible to factual answers at all. But the mere fact that these questions are being posed and serious attempts made to find the answers will provide some reassurance that all facets of the marketing budgeting problem have been explored.

Some foundries do indeed make marketing investments for the long term. They argue that sales and marketing expenses really create value, which in turn creates assets--real cash generating assets to warm the heart of any cold, calculating number cruncher.