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Financial analysts say marketing is an investment, not a cost

90% of financial analysts surveyed think marketing spend should be CapEx rather than OpEx

Moving marketing off the income statement would instantly make businesses look more profitable – and then companies would think differently about marketing because it’s literally an “asset” on the balance sheet

A survey of financial analysts from the Institute of Practitioners in Advertising (IPA) really turned my head recently. The “Brand Finance Investment Analyst Survey” polled more than 200 financial analysts who “cover publicly listed companies in the United States and United Kingdom.”

The purpose? To understand how analysts factor marketing into their assessment and valuation of the companies they cover. The survey had three findings that stood out to me:

1. Financial analysts say brand strength is a top factor

According to the report, “Strength of brand/marketing” is the factor most frequently cited by analysts (at 79%) when asked how they appraise and analyze the companies they cover. This is cited ahead of leadership quality (76%) and technological innovation (72%).”

Comment: A brand is a promise. It’s a perception. It exists in our minds. And a brand is bigger than marketing. All the other factors considered – leadership, innovation, profitability, sustainability, and employees – all influence the awareness and strength of a brand. In other words, it takes a good company and good marketing to build a valuable brand.

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2. Many financial analysts believe advertising is an investment

More financial analysts “perceive advertising as an investment (37%)” than those that believe it’s “a cost (24%).”  Another 38% have a foot in both camps and “state it is a mixture of both.”

Comment: This is an advertising association, so the question is naturally focused on advertising. It’s not a stretch to believe that financial analysts see “marketing” and “advertising” as synonymous when the reality is that the latter is a subcomponent of the former.

It’s still a pretty amazing finding because financial analysts are indicating they believe advertising has a long-term influence on growth. Investments rarely lead to quick wins, so the analyst community is saying that spending on advertising affects a brand far beyond the parameters of a campaign.

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3. 90% of financial analysts think marketing spend should be capex

“When asked whether they thought marketing spend should be treated like Technology R&D, where it is capitalized, nearly 90% of analysts said they believe marketing spend should be placed in capital expenditure either all (56%) or part of the time (33%).”

Comment: This is the finding that floored me – because capitalization comes down to how companies treat expenses. If marketing costs are classified as capital expenditures and not operating expenditures, they move from the income statement to the balance sheet. This is the exact opposite of what has happened with software-as-a-service (SaaS).

In the premise tech environment of yesteryear, most corporate tech spending used to go on the balance sheet because these are assets. For example, if you buy a computer, it has value, you could sell it if you had to, just like other assets on the balance sheet – office buildings owned, furniture, and even invoices that haven’t been paid.

This makes some sense to me. There’s already a spot for “brand” on the balance sheet – and it’s called goodwill. This is often highlighted in M&A deals where the purchase price is above the book value of the company.

This would be a more liberal application of the concept: All the content a company has made – that’s a library of information. That library has a quantifiable value.

Think about it this way: if your company truly does content marketing, the right way, with subscriptions, then those email subscribers have value. What did marketing spend to obtain those email addresses? $100 per email? $200? There’s a tangible value too and an easily agreed methodology for assessing that value.

Moving marketing off the income statement would instantly make businesses look more profitable – and then companies would think differently about marketing because it’s literally an “asset” on the balance sheet.

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A caveat for marketers

I’m not recommending marketing knock on your CFO’s door and suggest they classify marketing spend at capex right away. There are stringent laws and accounting rules that must be followed.

Indeed, even if rules change like this came to pass, I’d expect some marketing spend will still in fact be classified as OpEx; some things have a longer shelf life than others. However, the notion that there is support among financial analysts for a motion like this is a sign that the way the corporate world views marketing is changing.

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I first learned about this report from Marketing Charts. The full report is freely available online – and worth your time perusing – there is no registration form: Brand Finance Investment Analyst Survey.

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Image credit: DALLE – “Draw a picture in the style of van Ghoh that describes [text from the post]

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