Advertising is a marketing tactic used by companies to promote a product, service, or cause. This tactic involves using media and other channels to spread awareness among customers. Through advertising, companies can influence existing customers and make new ones. Usually, it includes promoting products and services that companies provide. Its objective is to reach people that will invest in a company’s products and services.
Advertising can be significantly crucial to increasing business and profits. Nevertheless, it is also a cost that can impact those profits adversely. However, this expense can also lead to an increase in sales in the future. For most companies, incurring advertising expenses is crucial in reaching a wider customer base. The costs borne on advertising can differ based on the type of campaign a company runs. Similarly, it depends on the channel used for it.
Overall, advertising is a necessary expense in running and promoting a company and its operations. However, companies must determine how much to spend on this process. For most companies, this limit comes from their budget. Most companies include an advertising budget that can be significantly essential in establishing their advertising expenses. Therefore, it is crucial to understand what it is.
What is the Advertising Budget?
An advertising budget is an amount that companies set aside for future promotional activities or strategies. It includes an estimate of a company’s expected expenses that will relate to its advertising campaigns. Usually, this budget falls under the marketing department’s scope. However, the limit will depend on the strategic decisions made by the company’s management.
The advertising budget also represents the money that a company is willing to set aside for its marketing goals. Usually, this budget is a subset of a larger sales budget. That sales budget is also a part of a company’s marketing budget. Therefore, advertising is a part of the sales and marketing efforts in which companies indulge. Any spending in this area can significantly improve future business, subject to some conditions.
An advertising budget can be as brief or comprehensive as companies want to make it. For example, it may include the total amount that the management should spend on promotional activities. In contrast, it may also involve a detailed description of the sources where this money would go. This budget also depends on the company’s needs and historical performances.
A company’s advertising budget usually encompasses spending on its advertising plan. This plan usually includes sales targets, product facts, competitive situation, creative platform, marketing information, etc. This budget states the proposed advertising expenses that the company must incur in the upcoming period. Similarly, the advertising budget constitutes the cost of executing the advertising plan.
Overall, the advertising budget represents the amount of money a company will spend on promotional activities. It is a part of a larger budget and falls under the marketing department. Usually, this budget depends on several factors and will differ from one company to another. The advertising budget includes the cost of executing a company’s advertising plan.
What is the Process of Preparing an Advertising Budget?
There are several steps involved in preparing an advertising budget. As mentioned, this budget is usually a part of a company’s overall budget. However, the advertising budget may include various steps, which differs from one company to another. In most cases, companies start their budget by creating an advertising goal based on its objectives.
A company’s advertising objective will differ based on its overall goals. Usually, this process involves assessing its current position and where it wants to be in the future. Once it determines its advertising objective is, it will establish the activities that will help achieve that objective. As mentioned, it is also a part of the advertising plan.
After determining the activities for achieving the advertising goals, it is crucial to prepare the advertising budget. This process involves preparing the components for that budget. Usually, these components will differ from one company to another. This process takes longer since it includes estimating the various aspects of the advertising budget.
Once companies prepare the advertising budget, they will need to get it approved. Usually, this process occurs at a lower level. Therefore, it is crucial to get the approval of the senior management before finalizing the budget. Once approved, companies will allocate funds for activities that fall under the advertisement plan or the budget.
The last process within creating an advertising budget is monitoring actual expenses against the budgeted amount. A budget does not provide any benefits unless companies use it as a benchmark to ensure no deviations exist from it. Once the period is over, this process becomes a base for the upcoming year’s budget. Companies can learn from this budget to make changes to the future advertising budget.
What are the Methods for Preparing an Advertising Budget?
There are several methods that companies may use to create an advertising budget. These methods play a significant role in how much a company’s advertising budget will be. Some of those methods include the following.
- Percentage of sales. With this method, companies set the advertising budget as a percentage of past sales. In some cases, companies may also use estimated revenues for the future to establish this amount. However, this method is basic and used by smaller companies.
- Competitors or industrial average. With this method, companies use the same advertising budget as their competitors. In some cases, they may also use the industrial average and adjust it for their own needs.
- Market share. Under the market share method, companies set their advertising budget based on their market share. Usually, this method results in a higher budget for companies with a higher market share.
- Unit sales. With the unit sales method, companies set their advertising budget based on the number of sale units. However, this method requires a separate budget for every product or service.
- Objective. In most cases, companies use their goals to set their advertising budget. This method requires them to determine those objectives first.
What Are the Advantages and Disadvantages of the Advertising Budget?
The advertising budget can have various advantages and disadvantages. The most primary benefit includes helping companies understand the requirements for their advertising plan. Through this, companies can allocate budgets through the necessary activities that can boost future business. Similarly, an advertising budget helps provide a benchmark against which to monitor actual costs.
Similarly, an advertising budget can ensure a company meets its advertising goals and plans. These objectives are crucial in helping companies increase revenues in the future. If done correctly, it can significantly boost business for the future. Lastly, the advertising budget is critical in achieving a competitive advantage by outperforming the competition.
However, the advertising budget may also have some disadvantages. Usually, these disadvantages relate to how a company prepares and uses this budget. The first primary disadvantage involves incorrect advertising budgets. If these budgets are not precise, they can harm future business rather than improve it. Similarly, it can provide an inaccurate benchmark against which to measure actual performance.
The advertising budget can also be a costly process. As mentioned above, there are several steps involved in preparing this budget. Companies can choose to use a simple method to do so. However, other processes may involve more time and costs. Similarly, the advertising budget may remove any creativity or flexibility related to spending on promotional activities.
Conclusion
For most companies, advertising is a necessary expense in achieving more sales in the future. Usually, these costs relate to an advertising budget. This budget sets the limit that companies can spend on promotional activities. There are several steps involved in preparing an advertising budget. Similarly, companies can use several methods to do so.
