Page 78 - Finance for Non-Financial Managers

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The Income Statement: The Flow of Progress
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These are all costs that a company incurs to find something
new to sell. A company that can afford to spend more for R&D
has a better chance of staying ahead of its competitors. Having
better products sooner than others should provide an edge, at
least for a while. As you can see, a company will be motivated
to allocate as much of its resources as possible to R&D in the
belief that it will pay off in sales. R&D is a cost the company
incurs before it will have the opportunity to make a sale and
then, as it’s making sales, to ensure that sales will continue. In
other words, R&D is a cost of doing business that must be
financed out of the gross profit.
Sales and Marketing Expenses: Positioning the Company to
Sell Something
We noted earlier that direct costs of making a sale, such as
commissions for salespeople, are often reported as a part of the
cost of sales. Beyond those costs directly related to making a
sale, substantial effort and cost goes into creating and maintain-
ing a sales and marketing presence.
Marketing costs are all those expenditures a company
makes to find out what people want to buy from it, to interest
people in its products, and to create prospects for the compa-
ny’s sales force. Typically, none of these costs are directly relat-
ed to making a sale, yet they’re necessary to create a steady
flow of prospective buyers for the salespeople. Market research,
brand development, and test marketing are all examples of
marketing costs.
Selling expenses, by comparison, are the costs of actually
selling the company’s products and services. This includes put-
ting salespeople in the field to call on prospects and get orders
or on the telephone to take orders. It includes distributing sales
brochures, advertising, trade shows, and all the support costs of
the sales organization. Sales and marketing, then, is another
cost of doing business.