Running a business means tracking and planning for expenses. With a good handle on costs, management can forecast future budgets. By adding sales forecasts it also can project revenues and net income. These costs, including advertising, fall into two general categories: fixed and variable
Promoting a Company
An advertising budget can include a wide range of expenses, such as print and broadcast ads, marketing campaigns, brochures, catalogues, and promotional efforts such as giveaways, contests, and focus groups and surveys. Every company sets an advertising budget. The dollar amount can vary from one quarter or year to the next, but it represents a fixed cost.
Fixed and Variable Expenses
Management budgets fixed costs, such as advertising, and keeps control over the expense. Companies know how much they're planning to spend on advertising over a particular period and can calculate the percentage of that expense as part of their unit costs. Variable costs, by contrast, can change for many reasons: supply and demand of the company's goods, the cost of raw materials, transportation costs, and commissions paid to salespeople and distributors. Generally, the higher sales volume the company experiences, the higher the variable expenses.
Advertising represents a discretionary fixed cost, meaning the level of spending is up to company management and the spending level can change from one budget period to the next. There's an ongoing process of evaluating how well advertising spending is working, and how advertising is affecting sales. Advertising can target customers with information about specific products, services and promotions, or it can simply give the company general exposure in the marketplace.
A fixed cost like advertising can still increase or decrease throughout the year, depending on the season, the weather, the market and demand, or other factors. Toy companies, for example, ramp up advertising in the fall, just before the holiday season, while warm-weather resorts will budget more for print ads and broadcast spots in the winter. A company that sees an ad campaign working well may deploy more funds to take advantage of a revenue surge, or pull back on advertising when a competitor enters the market and a change in marketing strategy is needed.