Advertising Budget - Affordable or Fund Available Method (A&BM 26Sept2020)

Advertising Budget

 

Methods for Setting Advertising Budget

The budgets are essentially predetermined at the top level who generally fails to get a clear-cut field level picture and hence the models under this approach have no true theoretical basis.

Several methods are used for setting advertising budget. Depending upon internal situations of the company, the suitable method is followed. Every method has its merits, demerits, and applicability.

 

(1) Affordable or Fund Available Method:

This is, in real sense, not a method to set advertising budget. The method is based on the company’s capacity to spend. It is based on the notion that a company should spend on advertising as per its capacity. Company with a sound financial position spends more on advertising and vice versa.

Under this method, budgetary allocation is made only after meeting all the expenses. Advertising budget is treated as the residual decision. If fund is available, the company spends; otherwise the company has to manage without advertising. Thus, a company’s capacity to afford is the main criterion.

This is a very simple method of budget allocation. After the budget has been allocated in all the areas i.e. all the other expenses have been taken care of the company then allocates the left-over money for the advertisements. This method is also called “All you can afford”. Those companies, which follow this method, consider advertisement as an expenditure and no expectations on returns are associated with this method.

These firms believe that advertising is tactical and not strategic and hence does not need much attention. Companies use this method, at the level of their affordability. Small businesses often use this method with the logic that the company cannot spend more on advertising than the amount it has left after the other expenses.

Another logic is that the products should be good in itself and then it will sell automatically without much of advertisements. This method is clearly an outcome of no sound decision making. The company could be overspending or under spending a well. The fact that some firms follow this method is a clear indication of their lack of knowledge and poor understanding of the role of advertisements.

 

Limitations:

Following are the limitations of the method:

(a) The method completely ignores the role or need of advertising in the competitive market environment.

(b) In long run, it leads to uncertain planning as there is no guarantee that the company will spend for advertising.

(c) Except company financial position, other factors like company’s need for advertising, consumer base, competition, and so forth are ignored.

(d) This method only guides that a company should not spend beyond its capacity.

(e) This is not a method in real sense.

(f) There is possibility of bias in deciding advertising amount.