Creative AND Cash-Savvy: Negotiate Higher Marketing Budgets through These Financial Ratios
Crunching proxies as a copywriter was once paradoxical to me. Despite my gravitation towards financial marketing, I dreaded the idea of ever opening a spreadsheet or generating a pie chart—until I was forced to take an accounting class in my graduate program.
The initial learning curve was equivalent to being a first-time skier forced down a Black Diamond—but every inch of progression drove me towards a creative breakthrough. By understanding balance sheets, inventory stats and turnover, you too can identify conducive metrics to rationalize healthier marketing budgets.
From calculations to Cannes Lions
Although you can determine a company’s entire financial health and performance from a pro forma, I’ll merely highlight the key ratios which fortify innovation and allow creatives to have greater input towards executive decisions. To illustrate my calculations, let’s first examine line items from Lululemon’s 2022 annual report.
Sourced from Lululemon’s 2022 annual report. Please note that I’ve consolidated line items. Depending on company materials, you may have to gather line items from both balance sheets and income statements.
Metric #1—Current Ratio: no financial analysis is complete without calculating the ever-important current ratio. In non-finance terms, it measures a company’s ability to cover immediate obligations such as staff pay, utilities, materials and inventory. You calculate the current ratio simply by dividing current assets / current liabilities. A ratio over one indicates a company has more current assets than liabilities, and are more likely to meet short-term obligations.
Lululemon has a stellar current ratio of 2. A high CR may indicate marketing efficiency and justify a higher ad spend to further grow revenue. Opposingly, a staggering current ratio means a marketing audit is required. Identify what isn’t working. As marketing is crucial for growing assets, eliminating your marketing spend is not feasible. Businesses with lower marketing spend should consider economical strategies such as:
- Search Engine Optimization (SEO)
- Content marketing—such as this article—to build authority and SEO visibility
- Social media
- In-house/freelance marketing over agencies when possible
- Community engagement such as contesting to encourage repostings and word-of-mouth
I would not recommend sales promotion or discounting in this instance as they further dilute struggling profits.
Metric #2—Inventory Turnover: in my eyes, the biggest driver of innovation and opportunity. This ratio measures the speed in which a company sells and replaces its entire inventory. You determine it by calculating the cost of goods sold (COGS) / average inventory. Lululemon has an excellent inventory turnover ratio of 2.5—meaning they clear and restock their global inventory 2.5 times annually.
High inventory turnover suggests effective marketing sales, and inventory management, whereas low turnover often indicates over stocking or slow sales.
For marketers, inventory turnover creates a crucial narrative by allowing you to discuss success between product offerings. Understanding sales gaps in existing inventory determines which products to further market and where creativity is best allocated.
Metric #3—Asset Turnover: Similar to inventory turnover, asset turnover measures the efficiency of all assets, beyond inventory, to drive revenue. You determine it by calculating net sales / average total assets. Lululemon’s asset turnover ratio is slightly below average at 0.8—as many of their assets include factories which don’t generate income.
However, this ratio is crucial in financial marketing where cash and intangibles comprise a greater portion of assets. For marketers, indicating how effectively assets are leveraged to drive sales identifies declining trends, whether through poor selling or under-utilized assets—and where to best deploy innovation.
Metric #4—Marketing/advertising as a % of sales: I saved the most obvious for last. Exactly as stated, this metric calculates the percentage of sales revenue a company dedicates to promoting goods and services. You determine this by calculating (marketing and advertising expenses / sales revenue) x 100. Despite spending over $3.28 BN in marketing, Lululemon only invests 4.1% of their total sales on promotion.
Aligning this ratio with existing business objectives is paramount when negotiating budgets. Lululemon states in their annual report they’re aiming to double both their male customer base AND revenue by 2026—these assertory goals will indefinitely fall short without adequate marketing expansion.
From theory to application
Without marketers, there’s no growth, awareness or distinguishment. The dire need of innovation puts our importance in equilibrium with finance and accounting. An informed creative is truly irreplaceable, and by leveraging the mentioned ratios, you will receive greater assurance from stakeholders. Measuring the income gaps and inventory lags in a company determines which mediums to harness, and which items to market in a timely manner.
As a financial marketer, I’m naturally more number-savvy than your average wordsmith. Need meticulously-crafted financial content that builds, instead of breaks your bank? Then contact me on LinkedIn for a free consultation.
