One critical component of effective marketing for your business is setting an advertising budget. Overspending can adversely impact profit. Under spending can make it difficult to achieve your marketing objectives. Understand the advertising budget process so that you can efficiently and effectively manage and control expenditures.
Marketing Plan Review
Your marketing plan is one key driver for determining your budget. For example, your company’s plans to penetrate a new market may require more advertising than required in markets where your company is already established. A market plan also determines how advertising dollars are allocated. For example, the plan includes a description of what media will be used to advertise to target markets. Media costs may influence how advertising dollars are allocated. In industries where cooperative advertising is offered, outside funding for some of a company’s advertising should be factored into the advertising budget. Cooperative advertising is an arrangement with a company, usually a manufacturer, and party, such as a wholesaler, distributor or retailer where one company offers to pay part of the advertising of another company. The dollars provided are dependent on a number of factors, such as company sales and the content of an advertising message.
Budget Calculation Methods
The method of calculating dollars allocated to advertising varies. One method involves examining the standard percent of sales allocated to advertising within a company’s industry. Another method is by determining dollars that should be allocated to specific marketing projects.
Preparation and Review
The advertising budget is usually prepared by a company’s marketing department. The budget is broken down into calendar segments, often quarterly, so that during the year, budget versus actual expenditures can be tracked. Budget dollars are supported by contracts signed with media outlets, such as magazines. After marketing prepares the ad budget, it is reviewed and approved by other departments in the company, such as sales and finance. If required, adjustments are made and a final budget is prepared. The advertising budget should be broken down into such levels as territory, region and product so that it is easier to track sales performance against advertising expenditures.
Understand that preparing an advertising budget is an estimation process and should be revised as market conditions and sales levels change. To allow flexibility in the advertising budget, a percent of the budget should be unallocated to make funds available if unforeseen circumstances occur.