We are discussing here 2 approaches to budgeting. They have their advantage and disadvantage.
It is called top-down approach because the budgets are made by the top executed and then the money is passed down the line to various departments. This approach is applied in affordable method percentage of sales, competitive parity method and Return On Investments (ROI)method of budgeting.
In this method promotion adjectives are set for the tasks to be performed. All the necessary activities to achieve the objectives are planned. The cost of these activities are as certained and budgeted. The total promotion budget is then approved by top management. This is also knowas the build-up approach of budgeting.
“Money is the backbone of all organization. Your budget should be in accordance with your objectives and the chosen Media”
Competitive Parity Method
Many firms base their advertising expenditure to compete with their rivals or their competitors.The information regarding this is found in business magazines, journals and annual reports of the company. They not only try to have the same expenditure but also try to choose the media accordingly. They also choose the media vehicle and the frequency of advertisement to match with that of the competitor. Firms believe that by following this method they can make the optimal expenditure to lead to stability in market place etc.
This method may ignore the objectives of the company and concentrate only on competitive advertising. It may also ignore the other aspects like creativity and the role of media. The effect of expenditure is known after the advertisement has been released, and one does notknow the next move of the competitor for expenses on the advertisement and promotion. Some companies use the comparative method in conjunction with other methods as well. It would however be more appropriate to keep in mind the objective of the firm before going in for this method.
This simply means what the firm can afford after meeting all their expenses. The firm allocates the amounts to be spent on production and after that allocation is done for advertising and promotion. The tasks to be performed by advertising is not considered. In this method there can be chances of overspending or understanding. This approach is common in small firms and some big firms not having much knowledge of advertisement resort to this methodas well. In this method it is difficult to get into financial problem as we are spending only what we can afford. In this method it is difficult to assess whether the advertising expenditure madeis optimal and will give proper results. Advertising expenditure must lead to sales. In this connection we have to refer to the S-shaped response model, which is dealt earlier.
A Fixed Percentage of Turnover Method
This method is most common used in small and medium-sized companies. A percentage amount of the sales as decided is allocated for advertising expenditure. The percentage is based on lastyear’s sales. The sales can be projected for next year and percentage expenses incurred accordingly. The advertising expenses can be calculated on straight percentage sales or on the percentage of unit cost.
Method I—Percentage SalesThat sales in the year ending 2002-2003 is Rs. 80, 00, 000 if the % of sales is 10% 800, 000 Advertising Budget is 800, 000
Method Percentage of Unit CostIf the cost of a unit is Rs. 1000/- If 1, 000 unit are sold revenue generated is 10, 00, 000 if the % decided is 10% 1, 00, 000 Advertising Budget 1, 00, 000
The percentage of expenditure allocated differs from one company to another. Some companies go for a higher percentage and others for lower depending upon their needs and situations faced by them. This method is simple to calculate and is safe. In case of fluctuating sales one has to be careful both in increasing and decreasing of sales. It may lead to overspending when the potential is low and underspending when the potential is high. In case of a new product there is no previous record hence it is difficult to judge and maybe risky. In this method it is safer to see the past sales and make a forecast of the expectedsales as well.
Objective and Task Method
The expenditure allotted depends on the functions to be performed to achieve the objectives of the organisation.
Establishing of objective may be interpreted as achieving a percentage market share and bring awareness of the brand to the consumers and general public. The strategies may include advertising in various media, and other elements of promotion mix. Then the cost ofvarious media chosen is estimated. It is also necessary to monitor the expenses and evaluatethe results. It is difficult to correlate the expenses with the task performed for this experience is required. Other methods consist of regression analysis, adaptive control model and compromise method given earlier.
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