Accounting and Marketing: Step Sisters or Noisy Neighbours - Essay Example

?Accounting and Marketing: Step Sisters or Noisy Neighbours Table of Contents Introduction 3 Accounting and Marketing: Step Sisters or Noisy Neighbours 4 Situation Analysis 4 Evaluation & Alternatives 8 Planning 9 Control 10 Conclusion 11 Reference 13 Bibliography 15 Introduction A company is like an organism where different functional departments represent several essential organs which should function in accordance to keep the company in a healthy state. The main function of different depart is to make optimum utilisation of the available resources to maximise wealth of the investors. Among these resources, capital is one of the most essential one and is considered as a life blood (Collins, 2010, p.2). “The maxim ‘Cash is King’ is far more than just a cliche” (Asgill, 2010, p.1). Therefore, the management is more concern for effective flow of cash within different departments in a company. Generally, it is the responsibility of the finance department to take care that the company can match its current cash outflow with the adequate cash inflows. And thus a steady balance can be maintained. Another strategically vital department is the marketing department which is responsible for introducing the product or the service to the potential customers and developing a base of loyal customers. The marketing department takes the responsibility of developing a marketing plan for the targeted market (Hiebing, Hiebing & Cooper, 2004, p. 16). At first glance one may think that finance as well as marketing is two distinct functional areas for an organisation but in reality both these departments are inter-related. For example responsibility of the marketing department is to serve the company so that the financial performance can be improved (Kanagal, 2009, p.3). However, to execute the marketing plan one needs required flow of cash otherwise it will be difficult to execute the plan; hence both finance and marketing are inter-dependent. Apart from providing required capital, the account department also performs several other functions for smooth functioning of the marketing department but both of these departments do have some conflicting principles which results in constant bitter relation and contradictory views. Considering such conflicting view points of these functional departments, people call them as noisy neighbours. Again, it cannot be neglected that they both are essential for a company and should operate in harmony so that the company can attain its corporate goal. Before finalising whether these departments are mere noisy neighbour or they are like step sisters which need to corporate with each other to maintain a healthy internal environment, their function in an organisation should be discussed in more details. So that the final conclusion is free from any biasness. Accounting and Marketing: Step Sisters or Noisy Neighbours Situation Analysis Companies develop their business strategies for each of the SBU after considering the sales forecast provided by the marketing department (Small Business Development Center, n.d., p.8). The marketing department asks its workforce to inform what they predict about the demand for specific the product in their specific target market for the coming year. The information collected by them is then combined to find out the sales prediction for the year to come. This information is of great value because after undertaking the data the management provide instruction to the production department about the units of products to be developed for next 12 months. The production department provide information regarding the amount and the quality of the required material for producing the required number of units in form of production budget. When this information is passed to the purchase department they give specific requirement of cash required to arrange the required materials. Figure 1: Budget formation This purchase budget is finally submitted to the finance department for final approval. It is the responsibilities of the finance depart to verify whether it is feasible for them to arrange the required cash. If the finance department find that the amount forecasted in the purchase budget is quite high, they ask for ratification in the purchase, production and sales budget. Therefore, again the marketing department has to revive the whole sales budget to match with constrains offered by the finance department. Considering the revived sales budget, all other departments change their annual budgets. After getting the final approval, the master budget is developed that needs to be followed by the company. Considering this final annual budget, the management set the annual target for the company to be achieved for next 12 month. Therefore, such an annual budget is required for effective utilisation of the resources (Ventana Research, 2008, p.4). After considering the final annual budget to be followed for the years to come, the marketing department again sets the marketing plan to achieve the projected sales target. Figure 2: Framework for marketing strategy (Source: Kanagal, 2009, p.7) Once the marketing department develops its final marketing plan to sell the predetermined units in the target market, they submit this marketing budget to get required capital. There is a common possibility that the finance department may not agree to provide the budgeted cash because it feels that such high expenditure on the marketing may disturb the total cost of sales. Cost of sales refers to the total cost incurred in developing the product, including direct expenses, overheads, administrative expense and cost incurred in marketing activities (McKeever, 2008, 103). Therefore, when the cost of sales increased, the management has to increase the selling price for each unit sold so that the profit margin remain constant. However, this may adversely affect the competitive position of the firm in the industry as others companies will continue to sell the product at comparatively lower cost. Figure 3: Factors that affect both marketing & account departments (Source: Collins, 2010, p.5) On the other hand the company has to sell the products at the same selling price by compromising a reduction in the profit margin. Such a reduction in profit margin will reduce the profitability state of the company. In such situation the net profit margin will be low and thus there will be a gradual fall in returns generated for the investors. Poor profit will affect the market image of the company and acquiring fresh capital through debt or by equity may be a major concern. Therefore, it is quite essential for the finance department to maintain proper profit margin by minimising indirect cost as far as possible (Adams, 2002, p.1-2). In the above given section it has been clearly explained that both the departments try to achieve same corporate goal that is growth in shareholders fund, but the approach for each of the department is different. The marketing department try to increase the revenue through aggressive marketing in through free gift vouchers on purchase, distribution of free samples, giving discount or other non-monitory promotions like buy two get one free. No doubt these promotional activities will increase the total revenue for the company but the cost incurred for these marketing activities may increase the marketing budget (Mitchell & Olsen, 2010, p.387). On the other hand the finance department is concern to minimise the expenditure as far as possible. Therefore, it prefers to cut the budget of marketing department because this is an indirect expenditure and add no value to the product. Therefore, such contradictory views of these departments result in constant conflict which resembles a salutation of “noisy neighbour” who are always eager to fight without any major reason. Evaluation & Alternatives Both marketing department and the accounting department are key components of an organisation. The relation of marketing department and the account department is not restricted only to revenue and cost dilemma, but in fact has multiple layers of interaction between them. These two departments are important stakeholders in an organisation and act as internal clients to each other. On time to time basis the account department assists the marketing department in several important areas. While making the decisions regarding finalisation of product mix or developing a new product, both account and marketing department act hand in hand (Wind, 1981, p. 2). The account department use marginal accounting tools to determine whether making investment in any new product will be profitable or not. The role of the marketing department is to analyse requirement of the customers and developing an idea for an innovative product which can fulfil the requirement of the target customers in a better manner. However, the role of the account department is to use cost accounting tools to determine the total expense that will incur on producing a single unit at different levels of production. The account department also provide information about the breakeven sales in terms of total unit and amount. Planning The accounts department The account department compares the forecasted sales volume with the breakeven sales to determine the safety margin. The narrow is the safety margin the higher is the risk associated with the new project. A company will never make investment for producing a new product if it does not add profit; thus the account department use capital budgeting to find out whether investing in the new project will generate positive cash flow. Accounting tools such as ‘net present value’ or ‘internal rate of return’ are some of the commonly used reliable techniques. In the present market, the competition is too high; the rival firms often use new technology or add innovative features to attract customers. Therefore, the account department may use the ‘payback period’ analysis to find out within how many days the new project will be able to recover the capital invested for developing new product. It is not that the account department assists the marketing section only in evaluating proposal of new product development. Even in deciding the product mix, the marketing depart requires assistance of financial tools to understand which of the product will generate more profit for the company. Therefore, the account department use the ‘profit index’ to compare the profit generating power of each of the products to be offered in the product mix. No doubt, only profitability is not the sole factor which makes a product more suitable for the product mix. Therefore, the marketing department find out all other external factors which need to be taken into consideration while finalising the decision. Both these departments work together to develop an appropriate model that allocates specific weightage to each of the variable while making final decision. Therefore, the management accounting has a vital role to play in the decision taken by the marketing department (Gatti, 2008, p.5). Control Apart from the above mentioned special cases, the marketing department required assistance of account section even in its day to day activities. Just developing a marketing plan and implementing does not provide assurance that it will be successful. Many a time it has been found that the marketing department develops an effective plan with great care. Even they succeed in implementing it as per the plan but still the result is not what it was supposed to be. The time when the marketing department come to know about the mistake, it is already too late and thus almost all the effort employed in developing and executing the plan goes in vain. However, if there has been any control system which can provide information about the failure at an early stage, then some proactive measures could have been taken. To get such a close monitoring, both marketing department and the finance department have to take part in developing a control system which use the data generated by both the departments to analyse whether the marketing plan is performing as it has been designed. As for example the marketing plan was to sell 1000 units per month in a specific target market. According to the plan for selling one unit total expense should be approximately $1. After a month the marketing department found that it succeeded in selling 1000 units, so as per them the plan is successful. However, the account department realised that sales cost per unit has exceeded the predetermined standards and it is $1.25 per unit. So, the account department can point out that though the target has been achieved but yet the marketing plan is not successful. By providing in-depth information about the factors which resulted in higher cost of sales, the account department can help in finding the loopholes so that next time a better and foolproof marketing plan can be developed. Account department also plays a great role in determining the performance of the sales persons. The account department determines the performance after considering the number of orders taken by each sales person, the total turnover made by them, the timely payment of bills by the customers and so on. The sales department and the marketing persons act together to smoothen the flow of payment from the customers so the company can maintain adequate liquidity. Conclusion After considering all the arguments it is quite clear that both marketing as well as account are strategically important functional departments for an organisation and there are multi layered communication between these two departments. Given that the marketing department is more concerned with the topline, and the accounting department with bottomline, it seems to be a zero sum game between these two departments. However, on closer looks it is evident that both these two departments are stakeholders in the same organisation, and hence need to work in a synchronized fashion. Though both these departments have a common goal of maximising shareholders fund, yet the way of attaining the goal is contradictory to each other. The marketing department pays attention towards maximisation of revenue whereas the financial department is concerned about reducing cost associated with indirect expenditure. To increase the sales, the marketing department prefers to go for aggressive advertisement and extensive use of promotional tools. This requires high expenditure but the finance department reluctantly agrees for such heavy indirect expense as this negatively affects the profitability. Therefore, both these departments always have a never ending conflict like noisy neighbours. However, there are many such situations where both the department work hand in hand to assist each other. As discussed earlier, the account department help the marketing department to develop a new product. Before commercialising the new product, account department conducts analysis to find out whether the product will be able to generate required profit. Account department also assist in controlling the marketing activities. One cannot deny that both these departments are closely inter-related with each other and thus they should develop better relation so that the company can achieve its corporate goal. Therefore, these two departments are like step sisters who should learn to live in hormone. Reference Adams, D. 2002. Economies of scale. ARENA4FINANCE LTD. [Pdf]. Available at: http://www.download-it.org/free_files/filePages%20from%20E-F.pdf [Accessed on January 07, 2011]. Asgill. 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