Cash Flow: Marketing’s Top Performance Measure

David StewartJanuary 13, 20204 min

Research by many organizations has established that intangible assets now account for more than 80% of the value of major corporations. Among the largest and most important of these assets are brands. When Molson Coors completed its acquisition of MillerCoors in late 2016, MillerCoors was valued at close to $ 21 billion, of which almost $ 13 billion was attributed to the value of the MillerCoors brands. In 2015, the Kraft brand was valued at over $ 41 billion when Kraft merged with Heinz. Curiously, given the value of such assets, they rarely appear on a firm’s balance sheet. Only in cases of an acquisition or impairment are the value of brands placed on the balance sheet and once they are on the balance sheet the value remains the same regardless of how well or how poorly the firm manages the brand, unless there is another acquisition or impairment.

Given the size of the stakes at issue, the failure to report on how a firm’s management of its brands is affecting their value is a serious omission. Of course current U.S. accounting practices do not require the reporting of the value of a firm’s brands or how the value has changed over time. One might assume that in the absence of public reporting firms would at least monitor the health and value of brands as a part of internal management and control. Surprisingly, this is not the case in most firms. A recent study by the Marketing Accountability Standards Board (MASB) found that few firms have any systematic process for the evaluation and valuation of their brands. Such failure to monitor the health and value of a firm’s largest assets is management malpractice.

Excuses Versus Asset Management

The reasons for the absence of such brand evaluation and valuation process are numerous. It’s hard. The numbers are fuzzy. The board and senior management view brands as operational issues and, accounting standards do not require that they report on brands. Marketing, which is usually tasked with managing the brand, does not understand finance. Such excuses are poor reasons for ignoring how well a firm is managing important assets.

It is not hard. All measures of value, even those for tangible assets, are, at best, estimates. When assets represent a significant portion of a firm’s value, they are by definition, strategic. Marketers should be expected to speak the language of the firm, finance and most are trainable.

ISO, the International Organization for Standardization, has recently established standards for both brand evaluation and brand valuation. Ultimately, the value of a brand is the sum of its discounted cash flows over some finite period of time (it’s likely useable life). If cash flows are increasing over time, the value of the brand is increasing, other things being equal. Similarly, if cash flows are declining the value of the brand is decreasing; again, other things being equal. Such an approach is simple, direct, and requires little data.

Some would suggest a more complex approach, arguing that “brand” is but one part of the total product or service offering that also includes such things as the functional product and the quality of that product. This is really a question of the incremental value of a brand relative to a generic product. It is relatively easy to determine the incremental value of a brand using the price premium of the brand relative to its generic product, such as a store brand or unbranded product. But, the incremental value of a brand is not the same as the value of a brand. The brand, and the value of that brand, is inseparable from the way it is delivered to the customer, which includes characteristics of the product. Thus, the value of the brand is still the sum of its discounted cash flows over time.

Marketing Expenditures Are Often Defensive

The incremental value of a brand can be useful for gauging the value of investments in marketing and brand building activities. The return on marketing investments should increase the incremental value of the brand relative to value without the investment. But, even this incremental value can be estimated using changes in discounted cash flow. It is important to remember that marketing actions and expenditures are often defensive, so some marketing expenditures can be justified in terms of maintaining cash flow rather than increasing cash flow.

There are certainly more sophisticated approaches for the evaluation of return on marketing investments and the value of brands. Nevertheless, to be credible and to link marketing to business performance, cash flow represents the ultimate metric. It is also relatively easy to compute, is understood by financial managers, and is consistent with the way firms are required to report on their performance.

Contributed to Branding Strategy Insider by: David Stewart, President’s Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.

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