What is an Advertising Sales Ratio?

The Ratio-to-sales budget method is to budget advertising expenses according to a certain percentage of sales in a certain period of time. Its advantage is that advertising expenses are closely related to sales revenue, and it is simple and easy to implement. This is a widely adopted method. ^[1]

Sales ratio method

1. Formulate promotional expenses based on the company's "affordability".

2. Promote the management to consider the relationship between promotion costs, sales prices and unit labor.

3. If each competitor formulates promotion budgets at approximately or the same ratio, it can promote market competition to become more stable.

1, mistakenly regard sales as the "cause" rather than its "effect";

2. The budget is based on the availability of funds, not on market opportunities;

3. It is not encouraged to continuously change the budget in order to reverse sales in a special period, which will also have an adverse effect on long-term planning

And there is no reasonable basis for selecting a specific percentage, apart from past experience and competitors' practices.

(1) Determine financing needs based on total sales

1.Determine sales percentage

2.Calculate assets and liabilities under projected sales

3. Expected increase in retained earnings

Increase in retained earnings = projected sales × planned sales net interest rate × (1-share interest rate)

4.Calculate external financing needs

External financing needs = estimated total assets-estimated total liabilities-estimated shareholder equity

(2) Determine financing needs based on sales increase

Financing needs = increase in assets-natural increase in liabilities-increase in retained earnings = (percentage of asset sales x new sales)-(percentage of liability sales x new sales)-[planned net sales rate x planned sales x (1-dividend Payout rate)]