Cash Flow is Profit

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My previous post on cash flow from marketing activities didn't explain which flows of cash it referred to.

Some people who talk about increasing marketing ROI are referring to increasing sales revenue. So, they're happy when they generate $2 in sales for every $1 in marketing expense. But is this a high marketing ROI when compared with a company's other investments, or is it low, or just average?

Marketing typically generates $1-$4 of sales revenue for every marketing dollar spent, so a $2 return is typical, but that still doesn't answer the question of how marketing compares with the rest of the company.

The cash flow I was referring to is the cash that's left over after paying all costs of making the product, serving the customer, and each customer's portion of the operating expenses.

In other words, an increase in net cash flow means an increase in profit - not sales revenue.

So, let's take a look at how that 2-to-1 return of sales revenue to marketing expense can compare with a company's other Investments

Here's how sales revenue is allocated at companies like IBM and P&G:

Revenue 100%
Cost of Goods Sold -55%
Gross Profit 45%
Expenses -35%
Profit 10%

Based on marketing generating $2 of revenue per marketing dollar spent, the company will receive $0.20 - which is a return of 20%.

So, the next time your CFO questions the return on marketing, have your marketing ROI ready. It's very likely that your ROI is higher than the investments in the rest of the company!

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