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Marketing Basics - Kotler Philip

Calculation of analytical coefficients

The business performance report contains the data necessary to derive several key ratios. Usually these are the so-called operational coefficients , i.e. percentage ratios of individual indicators of the report to the amount of net sales, which give entrepreneurs the opportunity to compare the achievements of the current year with the results of the previous one (or competitors with industry indicators for the same year) to determine the degree of success of the company. Most often, such operating ratios as the share of gross profit, the share of net profit, the share of operating expenses, as well as the share of reimbursements and discounts are calculated.

Another useful factor from the point of view of analytical work is an indicator of the intensity of inventory turnover. The inventory turnover rate is the number of times a product has been fully renewed or sold completely during a certain period of time (usually during a year). This indicator can be calculated based on the amount of the cost of goods, the amount of the sale price of the goods or the number of units sold.

CALCULATION FORMULA COEFFICIENT

CALCULATION ON THE REPORT DATA

Share of gross profit

Share of net profit

Share of operating costs

Share of refunds and discounts

The calculation formula can be as follows:

Inventory turnover rate

We will calculate according to the first formula:

This means that inventory in the Parsons store is fully renewed 3.3 times during 1983. Usually, the higher the rate of intensity of inventory turnover, the higher the efficiency of managing the company and its profitability.

As a criterion for assessing the effectiveness of management often use the indicator of the rate of return on invested capital, which is calculated on the basis of the data contained in the report on the results of economic activity and the balance sheet of the company. Most often, the following formula is used to calculate this indicator:

Rate of return on invested capital

When considering this formula, two questions arise. First, why use the two-step procedure if the rate of return on invested capital can be derived as a simple ratio of net profit to invested capital? And secondly, what exactly do you mean by "invested capital"?

Justification for the answer to the first question can be obtained by finding out how each of the components of the formula affects the rate of return. Suppose Parsons calculated the rate of return on invested capital as follows:

Rate of return on invested capital

If Parsons believed that an increase in his share of the clothing market would give him certain marketing advantages, he would probably achieve the same rate of return on invested capital by doubling his sales volume at constant levels of profit and investment (by reducing the profit ratio while growth in turnover and market share):

Rate of return on invested capital

Parsons could achieve an increase in the rate of return on invested capital due to the growth of net profit, carrying out more advanced marketing planning, its implementation and more effective control:

Rate of return on invested capital

Another way to increase the rate of return on invested capital is to find a way to reduce investment (possibly by reducing the average volume of inventory by Parsons) while maintaining the same levels of sales and profit:

Rate of return on invested capital

But what do they mean by “invested capital” in the formula for calculating the rate of return on invested capital? Often they think that “invested capital” is the total amount of the firm’s assets. However, today, many researchers, when evaluating the effectiveness of the company management system, take other initial data to calculate the rate of profit. Some calculate the rate of return on invested capital in the form of net assets of the company, others in the form of equity, and others in the form of working capital. Since the volume of investment is measured at a certain point in time, the rate of return on invested capital is calculated based on the average amount of investment between two points in time (for example, between January 1 and December 31 of the same year). The rate of return on invested capital can also be calculated in the form of an “internal rate” based on an analysis of future cash receipts given in the current valuation (for details on this method, see any textbook on financing problems). The goal of all these measurements is to find out how efficiently the company uses its resources. As inflation, competitive pressure and the cost of capital increase, such measurements serve as an important barometer of marketing and the effectiveness of the firm’s management system.