What Are Advertising Costs?
Expenses associated with promoting a brand, product, or service constitute advertising costs in financial accounting. Ads in print and online media, broadcasts, radios, and direct mail advertisements are all covered.
Understanding Advertising Costs
On a company’s income statement, advertising costs will typically be classified as sales, general, and administrative expenses (SG&A). Sometimes these costs are recorded on the balance sheet as a prepaid expense and then moved to the income statement when sales are generated directly related to those costs.
An organization must believe that specific advertising expenses are tied to future sales before it can record those expenses as assets. These advertising expenses are moved from the balance sheet (prepaid expenses) to the income statement (SG&A) as sales are made.
A business owner is usually not surprised by advertising costs. Advertising costs are often budgeted for by many businesses. As noted by the Small Business Administration, most companies set their marketing budgets based on revenue.
The average small business owner spends just 1% of their revenue on advertising. In 2020, advertising expenditures for manufacturers and wholesalers will be closer to 0.7% of annual revenues.
There is no guarantee that a business will get a return on investment with advertising just by spending the money. Therefore, business owners need to spend their advertising budgets where the audience is likely to consist of potential customers. Depending on the media outlet, some offer a discount of 40%–50% for advertising in slots that have been left open due to cancellations.
A business must maximize the ROI of its advertising costs, regardless of how much it spends on advertising. Advertising opportunities abound, so it can be hard to choose from them all. Creating a program around business goals is your best bet.
Example of Advertising Costs
In the case of a direct mail campaign, for example, if a company knows future sales are due to that campaign, it will record the cost of the campaign on its balance sheet as an asset, a prepaid expense. Over time, as the campaign is successful, the direct mail expenses will move from the prepaid expense category to the advertising category.
In order to demonstrate the impact of those advertising expenses on sales, the company must be able to demonstrate direct links between them. This may be done by using historical data. It means, for example, that if the company knows it received 100,000 responses when it sent out 1 million pieces of direct mail in the past, it may apply this ratio to future direct mail sales.
Why do companies spend money on advertising?
The purpose of advertising is to increase sales of a company by increasing brand awareness and informing customers of new products. Research shows that advertising has a positive effect on revenue.
How much should a company spend on advertising costs?
The advertising budget of a company should maximize the return on advertising dollars. Budgets should be created with a message that will resonate with target audiences.
Advertising cost efficiency can be measured in a number of ways. Ad-to-sales ratios, for instance, are calculated by dividing advertising costs by overall sales for a given period.