Effective managers are sensitive to the differences between working capital and investment capital.
The former is the money it takes to keep the business running, to generate the transactions, fill the gap between the sales registered in the P&L, and the cash coming into the bank this month. The latter is the money that needs to be invested to keep the business competitive, renewed, and more likely to have a long and successful life delivering competitive returns to stakeholders.
Peter Drucker observed that: ‘The purpose of a business is to create and keep a customer’ which is often used as a quote.
The full quote was: “Because the purpose of business is to create a customer, the business enterprise has two, and only two basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”
He was right, as usual.
Without customers, you do not have a business.
Marketing activity of any sort is an investment in future sales.
The creation and long-term engagement with customers, is just as much an investment as one in a piece of capital equipment. Marketing consumes funds over time that are necessary to generate the cash coming into the bank consistently and predictably.
Marketing investments are in effect, the working capital of revenue generation. However, they are treated as expenses in the profit and Loss statement, which leads to them being regarded as a variable expense, rather than an investment.
You could mount an argument that a major proportion of the marketing budget should be capitalised, as an asset, not depreciated as you would with capital equipment, but offset by a deferred revenue liability.
In a past life, in charge of significant marketing budgets, I have been on the losing end of the argument that cutting marketing expenditure in tough times is absolutely the wrong thing to be doing. The net result has been to erode brand position, revenue, and margins over time, as well as not being able to take advantage of competitors similarly dumb decisions to reduce marketing investment.
The research evidence to avoid such cuts is overwhelming. However, while the marketing budget resides in the P&L, it will continue to be a balancing item for annual EBIT, rather than playing the long-term role of building commercial sustainability.
