Financial Management of Brands
Branding involves complicated decisions to be made and financial management aspect of a brand can be explained as follows:
- Indicate in balance sheet as an intangible asset of the firm-
Brand generates income for the firm and cash flows can be generated in the future as well. In other words brand is considered as a source of income to the firm which is an asset to the firm. And also building the brand has consumed funds of the firm which has to be represented in the balance sheet as a asset/investment. Indicating brand value in the balance sheet gives advantages such as:
- The actual value of the firm is indicated- Most of the time brand is the most valuable asset a firm owns as people purchase the brand not the good. Therefore the true value of the firm has to be represented by valuing the brand.
- Capital Gearing is controlled- When a brand is recognized as an asset in the balance sheet the corresponding equity/shareholders fund has to be recognized in the balance sheet. Increase in shareholders fund reduces the percentage of debt (gearing level) giving a better picture of performance of the company.
- Carryout investment appraisal for branding expenses-
Since the brand is a future cash flow generating asset expense on building the brand has to be treated as an investment. Therefore before making the investment on brands managers have to carryout investment appraisal activities by forecasting future brand value & future cash flows (future cost & income involved in branding) and find out net present value. In carrying out investment appraisal for branding expenses future costs and income has to be estimated.
- Assist Branding decisions though out product life cycle-
Brand is used to manage the product life cycle of a product and use of brand in each stage is explained below:
- Introduction- When a product is newly introduced to the market a mature/established brand name has to be used to generate demand for the product, increase awareness and reduce the fear of purchasing a new product.
- Growth Stage- In the growth stage of the product there will be competitive pressure from substitute/me too products and a strong brand name will eradicate rivals from the market by creating entry barriers.
- Mature Stage- The brand act as a source for differentiation required in the mature stage of the product. And brand also supports introducing new products to retain market share in the future.
- Decline Stage- Product has to be discontinued when the mature stage is received to preserve the brand name.