If you want a bigger marketing budget, focus on creating cash flows

In the finance world, creating value means generating cash flows that exceed the cost of capital, so this is how marketers need to frame their internal communications.

Looking back at my life with all the foolishly imagined wisdom of a soon-to-be 40-year-old, it is clear that I’ve never really been popular.

Although I was quite adept at sports and therefore generally selected early in whatever school activity needed someone who could run fast or shoot a ball hard, I seldom even made the list when parties were had. Not that I went all that often when I was invited, mind, instead preferring the company of my books. My superior stamina made no difference to the fact that I found, and still often find, intimate social settings strangely exhausting.

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Perhaps it is why I enjoy the part of my job that has me speaking in front of thousands of people so much – the inner child receiving at once all the attention in the room that through my youth was reserved for other, better looking and more socially apt classmates. Perhaps I can enjoy it because my adolescent days forced me to learn not to pay attention to others’ opinions of me, as I inevitably fulfilled the criteria most important to teenagers unfavorably, and therefore find no reason to get nervous about it.

Truth be told, I don’t really know. My wife believes I take pleasure in showing what I can do, as opposed to demonstrating what I can’t do, and she tends to be right about most things (particularly when I know she might be reading what I write). What I do know is that the net result is a reverse polarisation of what most people normally find; I am confident in front of large groups of strangers, but lack confidence in small groups of friends.

Marketing, it seems, has a similarly complicated relationship with confidence. On one hand, industry thought-leaders are quick to dramatically highlight the strategic risks involved in budget cuts and reduced ad spend. On the other, the same voices are heard meekly admitting that, in the grand scheme of things, advertising isn’t really that important.

Both statements can be argued to be correct. But that also means that both statements can be argued to be incorrect – if there are inherent risks in cutting ad spend, advertising cannot be unimportant.

Obviously, the answer is, as always, ‘it depends’. Budget cuts may carry a strategic risk, but risks are weighed against other risks and it may turn out to be a risk that needs taking. Similarly, advertising may be a weak force, but is nonetheless a force. Improving the odds of a purchase from 1 in 10,000 to 1 in 9,999 in a single individual makes little difference, but across a large audience it may be significant.

Budget-setting season

Context is king. To paraphrase what I wrote earlier this year, sometimes you need to pick the fruit, sometimes you need to water the tree. Sometimes you need to cut down the tree for firewood. And marketing is a lot more than just advertising anyway.

But we are now heading into budget-setting season. All over the globe, stern-looking women and men in suits, sharing at best a lack of understanding of what marketing does and at worst an intense disdain for it, are sitting in darkly wooden conference rooms, meticulously searching for any justification they can find for why marketing should get crumbles, not slices, of the corporate cake. Rest assured the aforementioned soundbites may be held against you in the court of ‘bah’.

The faster brands can grow and deploy more capital at attractive return rates, the more value they are deemed to create.

Marketing, in other words, needs to start thinking about what business value it can argue it delivers – and fast.

In the cold kingdom of finance, companies are considered to create value by investing capital to generate future cash flows at rates of return that exceed their cost of capital – the faster brands can grow and deploy more capital at attractive return rates, the more value they are deemed to create. A corollary of this principle is the conservation of value: any action that doesn’t increase cash flow doesn’t create value.

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Going into budget talks, it is therefore worth considering reframing what marketing is and does around cash flow, not merely to suit the linguistic milieu, but also to demonstrate the value of our oft-neglected profession to the rest of the organisation. The value of a brand is generally seen as increasing if cash flows are. Conversely, if cash flows decrease over time, so too does the value of the brand. The value of the brand itself can be summarised as the sum of its discounted cash flows over time.

Additionally, cash flow has the benefit of being objective fact – unlike, for example, profit, which can be argued to include subjective interpretation (different, equally acceptable, accounting methods can lead to different earnings figures). Put differently, by connecting what the marketing department does to cash flows, it is provided with an objective measure of its importance.

If cash flow provided the baseline of our utilised verbiage, acquisition would become “acceleration of short-term cash flow”. Brand-building would turn into “stabilisation of future cash flow”.

And, who knows, maybe marketers could emerge as confident providers of organisational value. Not only would it better our chances of obtaining budget space, hell, we might even get invited to the C-suite party.

JP Castlin is the chief executive at Rouser and a strategy keynote speaker