The Financial Implications of Advertising as an Investment

John B White and Morgan P Miles

It is the day of cost cutters, and if advertising is viewed as a cost, then advertising will be cut too.

Danaher and Rust, 1994

Capitalizing brands, or putting them on the balance sheet, is still a controversial subject.

Broadbent, 1993

The assets that really count are the ones accountants can't count ...

Stewart, 1995

... long term has come to be considered one or two quarters.

Cook, 1996

One objective of advertising is to increase the stock of an organization's intangible assets, such as its level of brand equity, ultimately enhancing the mutual reinforcement of the 'consumers' experience of the brand and the added values built by previous advertising' (Jones, 1995b). Corporate decision makers are still perplexed about the appropriate financial framework for analyzing advertising costs, and unfortunately, so are academics. The critical issues typically pertain to the intertemporal or multiperiod effects of an advertising expenditure as it contributes to what Jones (1995) refers to as the brand's 'internal momentum.' This issue often suggests the question: Should the decision to commit funds to an advertising campaign be treated as a business expense, and rationed as a component of a single year's working capital expenditure; or should advertising expenditures be analyzed as an investment with multiperiod effects utilizing a capital budgeting decision framework? The implications that arise from the two different possible conclusions greatly impact the timing and magnitude of advertising expenditures.

PURPOSE