Net working capital. Net working capital is equal to current assets less current liabilities. Current assets are those assets that are expected to be converted into cash or used up within 1 year. Current liabilities are those liabilities that must be paid within 1 year; they are paid out of current assets. Net working capital is a safety cushion to creditors. A large balance is required when the entity has difficulty borrowing on short notice. For Beta Manufacturing Company in 20×5 is:

Net working capital = Current assets ‑ Current liabilities;
= $800,000 ‑ $340,000;
= $460,000;

In 20×4, net working capital was $398,000 ($760,000 – $362,000). The increase in net working capital is a favorable sign.

CURRENT RATIO The current ratio expresses the relative relationship between current assets and current liabilities. The current ratio is computed as follows using data taken from the balance sheet of the Beta Manufacturing Company, Exhibit 2-3 of Chapter 2:

It is convenient to set the computations in the following format:

20×5 20×4
Current assets $800,000 $760,000
Current liabilities 340,000 362,000
Current ratio 2.35 2.10
The 20×5 ratio is interpreted to mean that there is $2.35 of current assets for each dollar for each dollar of current liabilities. This represents an improvement over 20×4. A rule of thumb suggests that a 2:1 ratio is ordinarily satisfactory, but this is by no means a necessarily reliable relationship. Consideration must also be given to industry practices, the firm`s operating cycle, and the mix of current assets. A very low current ratio would ordinarily cause for concern since cash flow problems appear imminent. An excessively high current ratio could suggest that the firm is not managing its current assets properly.

Quick (aciD-Test) RATIO A quick measure of the debt-paying ability of a company is referred to as the quick ratio or acid-Test ratio. The quick ratio expresses the relationship of quick assets (cash, marketable securities, and accounts receivable) to current liabilities. Inventory and prepaid expenses are not considered quick assets because they may not be easily convertible into cash. The acid-Test ratio is a more severe Test of a company`s short-term ability to pay debt than is the current ratio. A rule of thumb for the quick ratio is suggested as 1:1. Again, industry practices and the company`s special operating circumstances must be considered. The 20×5 and 20×4 acid-Test ratios of the Beta Manufacturing Company are computed as follows:

20×4 Quick ratio =($384.000/$362.000)=1.06For each $1 of current liabilities in 20×5, there is $1.30 of quick assets available to pay the obligations. There has been a significant improvement in the quick ratio.

Note:
Short-Term Creditors. A significant decline in the quick ratio indicates deterioration in the company`s liquidity, which could indicate the company`s inability to satisfy its maturing debt immediately, if it had to do so.
Financial Management. A lower quick ratio may mean that the company will have greater difficulty borrowing short-term funds. A very low ratio may indicate that the company will be unable to meet its short-term debt payments.

It is important to understand how various transactions affect particular ratios and net working capital. Selected transactions will be used to demonstrate this issue. Assume that a company has an acid-Test ratio of 2:1. The following transactions occurred and their effect on the acid-Test ratio and on net working capital is shown:

Acid-Test Ratio Net Working Capital
1.An account payable is paid in cash + 0
2.An account receivable is collected 0 0
3.Inventory is purchased for cash - 0
4.Inventory is purchased on account - 0
5.A cash dividend is declared - -
6.Land is purchased for cash - -
7.Land is purchased for common stock 0
8.Marketable securities are sold for cash at a loss - -
9.Marketable securities are purchased for cash 0 0
10.Bonds are purchased for cash and held as a long-term investment - -
11.Common stock is issued at discount for cash + +
12.The cash dividend declared earlier is distributed + 0
Other Liquidity Ratios. Two other popular liquidity ratios that a short-term creditor might be interested in are: the cash ratio and the cash burn rate. The cash ratio, also known as the doomsday ratio, is a more severe Test of liquidity than the acid-Test ratio. The cash ratio is computed by dividing cash by current liabilities:

(CASH/CURRENT LIABILITIES)

20×5 20×4 Trend
$40,000/ $340,000= 0.18 $30,000/ $362,000= 0.08 Improving
Note: This ratio is most relevant for companies in financial distress. The doomsday ratio name comes from the worst case assumption that the business ceases to exist and only the cash on hand is available to meet credit obligations. Suppose that a company is facing a strike and cash inflows begin to dry up. How long could the company keep running? One answer is given by the cash burn rate:

Cash burn rate = ([Current assets] / [Average daily operating expenses])

In 20×5, total operating expenses were $1,371,000 ($1,070,000 cost of goods sold + $301,000 operating expenses).

The daily average expense was $1,371,000/365 = $3,756.16 per day. The burn rate is thus =$800,000/$3,756.16= 212.98 days. Based on this, the company could hang on for about 7 months.

For 20×4:
The daily average expense = ($ 1.034.000 + $ 276.000)/365 = $3,589.04 per day
The burn rate = $760,000/$3,589.04 = 211.76 days.

This suggests that the burn rate is about the same.

Note: This ratio is most relevant for start-up companies that often have little in the way of revenues. A high value indicates no need for outside financing. It may also suggest that the company is in the mature or declining phase of the corporate life cycle.

The overall liquidity trend shows a slight improvement as reflected in the higher net working capital. Current and quick ratios display an improvement although they are behind the industry norms (see Exhibit 8-1 in Chapter 8 for industry averages). Further, cash-related ratios show a sign of improvement, as measured by the cash ratio and cash burn rate.

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However, in selling, the several variables affecting the sale, such as customer behavior, competitive activity, the weather, and general economic conditions, cannot be controlled. Furthermore, each customer is different from all others in some way. Hence, each sales situation is uniquely different, and the salesperson`s approach must be varied according to the specific circumstance that prevails in each case. For these reasons, selling is not a science and will remain an art as long as there are varying circumstances and individual differences. But, this does not mean that the salesperson can be careless and lackadaisical in her approach to selling. On the contrary, the varied and ever-changing circumstances make it all the more necessary for her to be alert and well organized.

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Each year more and more companies are operating on the basis of this “marketing concept.” Those who adopt this marking approach make important changes in their methods, usually with improved results. They focus on satisfying the consumer, but they also zero in on the accomplishment of the company`s objectives – increased sales volume, larger share of the market, but above all, if the company is to survive, adequate profits. All aspects of the business are integrated to achieve these goals. No longer is production allowed to become an end in itself or to dominate company polices.

In short, the marketing concept envisions a total system of operation in which satisfying the consumer leads to profitable sales. Satisfying the consumer is the means of achieving long-run as well as immediate profits. The customer, then, becomes the pivot supporting all the activities of the business. Implementation of this philosophy requires teamwork by all those in marketing research, product planning, sales forecasting, advertising, selling, physical distribution, sales analysis and control, and other related marketing activities. Selling plays a key role in this combined effort because a customer is not satisfied nor is a profit made until the product or service is actually sold.

Business today is also influenced by more competition, both domestically and from abroad. There are more rigid cost controls, and more and better information is now available regarding the products and services we buy-particularly over the Internet. Furthermore, labor, material, and operating costs have greatly increased, and profit margins are therefore narrower. All of these conditions have made the work of the salesperson more important and complex. Accordingly, selling today requires more knowledge and skill.

The modern salesperson must not only be skillful in selling her product or service but must also be able to show the individual customer how to use the product or service in solving her particular needs or problems. If she sells a product to a merchant, she may also be required to show the merchant how to retail the product and be prepared to advise her on activities ranging from choosing a store location to developing inventory methods, preparing advertising, analyzing consumer behavior, setting prices, and others. With this expansion in the activities of selling, the modern salesperson of today must be knowledgeable in many areas of business and be capable of adjusting to a multitude of varying circumstances.

It has helped make the United States one of the most productive economies in the world.
It has given our country the highest standard of living in the world.
It is the major objective of every business enterprise and the only function that generates direct revenue and profits. In this sense, then, it is the heart of our business economy.
It helps to maintain the spirit of competition, which is the basis for a free enterprise system.
In today`s mass society, “the world will not beat a path to your door,” and selling becomes the bridge for introducing new products and services.
When a new product or service is introduced by a competitive firm, a company offering an established product or service will often rely on improved salesmanship to retain its share of the market.

Nature of Personal Selling and Sales Management

Personal selling involves the two-way flow of communication between a buyer and seller, often in a face-to-face encounter, designed to influence a person`s or group`s purchase decision.
Personal selling also occurs by telephone, through video teleconferencing, and the Internet between buyers and sellers.
The tasks involved in managing personal selling include: (1) setting objectives; (2) organizing the sales force; (3) recruiting, selecting, training, and compensating salespeople; and (4) evaluating the performance of individual salespeople.
Personal Selling in Marketing

Salespeople match company interests with customer needs to satisfy both parties in the exchange process.
Salespeople represent what a company is or attempts to be and are often the only personal contact a customer has with the firm.
Personal selling may play a dominant role in a firm`s marketing program if a firm uses a push marketing strategy.
Creating Customer Value through Salespeople: Relationship and Partnership Selling

Salespeople can create customer value in many ways:

Identifying creative solutions to customer problems.
Easing the customer buying process.
Following through after the sale.
Relationship selling is the practice of building ties to customers based on a salesperson`s attention and commitment to customer needs over time. It:

Involves mutual respect and trust among buyers and sellers.
Focuses on creating long-term customers, not one-time sales.
Partnership selling (or enterprise selling) is the practice whereby buyers and sellers combine their expertise and resources to create customized solutions, commit to joint planning, and share customer, competitive, and company information for their mutual benefit, and ultimately the customer. It:

Relies on cross-functional business specialists who apply their knowledge and expertise to achieve higher productivity, lower cost, and greater customer value.
Complements supplier and channel partnering.
Relationship and partnership selling represent another dimension of customer relationship management (CRM).

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Innovation fuels success in selling today.
Sales effectiveness is enhanced through technology. Sales management must be smart and nimble and provide technology-centered solutions to support the sales effort.
Leadership is a key component in sales management success.
Sales management is a global endeavor.
Ethics underlies all selling and sales management activities.

It is the salesperson`s responsibility to keep abreast of all current advertising conducted by her company. She must know the content of each ad and when it appeared. She should be able to explain to dealers the uses and advantages of advertising and show them how it can help them move the product off their shelves after she has sold it to them. The following are some common points she can mention: (1) advertising increases demand for the product or service. A dealer can sell advertised products more quickly than unadvertised ones because the consumer is presold to a certain extent and is already aware and informed about the product; (2) advertising creates faster turnover of inventories, and faster turnover means lower operating expenses and greater profits; (3) through advertising and branding, consumers can identify quality products that they wish to buy again. Such identification also helps to establish a good reputation for the dealer who handles the product; (4) advertising not only helps the customer to identify products, but also provides her with valuable information about their quality and performance.

Advertising also helps the salesperson in many ways:

It develops customer interest and helps to presell products and services.
The salesperson can use advertising to emphasize and reinforce sales points she mentions in her presentations.
Advertising reaches the masses and serves as a means for securing new leads and contacts. Thus, it often reaches some people whom the salesperson, because of distance or other circumstances, is unable to contact.
Sometimes the salesperson is unable to call on all her customers as often as she would like, and advertising helps her sell between calls.
The presentation of new ideas and information through advertising stimulates interest and increases motivation in the salesman herself.
To use company advertising effectively, the salesperson should carry copies of current advertisements to show to prospective buyers. She should also be well informed on her company`s total advertising program and be able to explain its uses and benefits to the buyer. Sometimes a buyer will ask questions on how she can tie her efforts in more effectively with the advertising campaigns, and the salesperson should be able to give the buyer appropriate suggestions. It is also the salesperson`s responsibility to get the buyer to use any direct mail, point-of-purchase, or cooperative space advertising her company provides. Finally, she should obtain the buyer`s reaction to, and suggestions concerning, her company`s advertising in order to make it more effective.

It is recognized that the salesperson`s knowledge of her company, her product, competitive products, and current advertising will vary with her experience and training. It sometimes takes months and even years to prepare for a particular sales position. Furthermore, it is a continuing process, for markets and products are constantly changing. To keep abreast of these changes is an important responsibility of the salesperson, which will greatly determine her success or failure.

Indicate whether each of the following statements is true or false by writing “T” or “F”.

The salesperson serves as a personal representative of the company and should be well informed about its history, growth, and development.
It is enough that a salesperson thoroughly understands her company and its products in order to be successful.
Once a salesperson learns all about her company`s products, she can concentrate on other problems and not study her own products any further.
Advertising is an aid to the salesperson, and she should carry copies of current advertisements to show to prospective buyers.
Answer

True. A salesperson should know all about her company, especially its pricing policies, discounts, delivery, credit, and other services.
False. Being informed about her own company and products is not enough for a salesperson. She must also be well informed about the products or services offered by competitors in order to discuss the relative advantages and disadvantages.
False. Most products are periodically changed and improved, and keeping up to date on product knowledge is a never-ending process.
True. Advertising helps the salesperson by increasing demand for products, establishing a good company image, providing consumer information, reaching people the salesperson cannot, and stimulating and motivating the salesperson herself. The salesperson should use these ads to support her presentation. The salesperson should also provide feedback from the customer to make future ads more effective.

What are the objectives of advertising?

The objectives of advertising are to educate, convince, and remind target markets.

• Educate. Educational advertising is essential in the early stages of product or service introduction. Education advertising informs the target consumer about the advantages of a particular product or service and how it can be useful.
• Convince. In competitive markets it becomes essential to convince consumers about why one product or service is more advantageous than another in terms of features, services, price, or status.
• Remind. In mature markets it is necessary to continuously remind consumers to use a particular brand or service. It is also useful for overcoming buyer`s remorse, and consumer second thoughts about a purchase, by reminding them of the strengths of a particular product or service.

How is the advertising message developed?

Developing advertising is a creative process. The basic purpose of an advertising message is to stress the positive aspects of a product or service. This is done by collecting and analyzing consumer responses and consumer data. Several advertising variations should be developed and tested; however, the reality is that the costs for doing this are prohibitive.

Nonetheless, an advertisement serves several functions. First, it catches the consumer`s attention by using a catchy introduction or headline. Here is where effective headlines make a difference. Once the advertisement has the consumer`s attention, the copy should make its message clear.

Which media should be chosen?

The major media markets include newspapers, television, radio, direct response, magazines and outdoor media which include billboards, buildings, buses, and other outside advertising space. The marketing manager seeks to have the best fit between the media and the target market. The basic objective is get the maximum impact for each advertising dollar. This is based on the effectiveness of the ad and the audience size provided by the media for the products and services. Impact can be given a numerical value to rate the specific exposures in a particular medium. Additionally, outcomes have to be continuously evaluated to determine if effectiveness is changing over time.

Other variables include the media`s effectiveness in targeting specific geographic areas. The reach of the media is the number of consumers who are exposed to the advertising, while the frequency is the number of times the audience is exposed to the advertising message. The total number of exposures can be calculated as follows:

Total Number of Exposures (E) = Reach (R) x Frequency (F)

The total number of exposures is known as the gross rating points (GRP) which is used as a measure for rating the media. This figure is usually calculated for an estimate of the percent of the target market that specific media actually reaches.

EXAMPLE 3.6

A marketing manager wants to know what the gross rating points will be for a television ad when its reach is 75% of the target market with an average frequency of 5.

GRP =75 x 5

GRP = 375

What is the cost-per-thousand media index?

The cost-per-thousand index is a method of evaluating the cost effectiveness of the media based on its reach in thousands and the cost of an exposure. The formula for calculating the cost-per-thousand index is:

Cost Per Thousand (CPM) = Exposure Cost x 1000

Reach

EXAMPLE 3.7

A marketing manager wants to compare the CPM for a 30-second advertisement of instant decaffeinated coffee in two different nonprime TV network shows serving the same target market.

Network Show A has 3,825,000 viewers who regularly drink decaffeinated coffee and charges $45,500 for the advertisement. Network Show B has 2,785,000 viewers who regularly drink decaffeinated coffee and charges $37,500 for the advertisement.

Network Show A CPM =($45,500 x 1000) / 3,825,000 = $11.90

Network Show B CPM = ($37.500 x 1000) / 2,785,000 = $13.46

In this example, Network Show B charges a higher price per thousand viewers for the advertisement.

How is media timing decided?

Marketing managers have to decide between long-term and short-term media timing schedules. In long-term timing the marketer considers such factors as seasonally, competitive factors and product characteristics including repeat buying patterns. Short-term timing considers such factors as the availability of financial resources, the launching of a new product or service, and unique market situations requiring rapid response advertising.

How is advertising impact measured?

Because of its extremely expensive nature, it is essential to measure the impact of advertising to ascertain its effectiveness. Advertising effectiveness is measured using pre and post-testing methodologies.

What is advertising pre-testing?

Pre-testing is an extremely cost-effective method to measure the ability of advertising to get its message to the target market group prior to actually launching a full campaign. Direct consumer group evaluations are a pretesting method where consumers rate various types of advertisements. Other types are evaluation scales that measure consumer responses including their ability to recall information from advertisements. Laboratory tests measure physiological responses such as pulse, blood pressure, respiration, etc., as a result of using different types of advertisements.

What is advertising post-testing?

Post-testing is normally used to measure the changes in brand familiarity and preference. Advertisers hope to have a substantial increase in brand awareness as the result of advertising, and post-testing attempts to measure the extent to which the advertiser has been successful. In post-testing the consumer`s readership is tested to determine what advertisements were actually read, while recall tests are performed to determine what respondents recall about advertisements they read or saw.

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