Effect of Advertisement Expense in Overall Profit of Company

This report investigates the relationship between advertisement expenses and overall company profit, using Telstra as a case study. The introduction highlights the significance of advertisement expenses, which are crucial for boosting profits but can erode net profit if not managed effectively. The report explores the conceptual framework of advertisement and demand generation, emphasizing how advertisement creates market awareness and product differentiation. It also analyzes the impact of advertisement expenses on profit, considering factors beyond advertising that influence profit generation. The literature review examines advertisement expenses from an accounting perspective, highlighting that advertisement expenses are indirect and their effectiveness depends on various factors. The methodology involves secondary data analysis of Telstra's financial statements from 2017 and 2018, comparing profits against advertisement expenses. The report concludes that while advertisement is essential, its success in ensuring profits is contingent upon factors like product quality, pricing strategies, and the competitive landscape. The report also highlights that advertisement expenses alone do not ensure profits in all situations, and the success rates of advertisement in ensuring profits are largely dependent to the successful implementation of the direct expenses like procurement of superior materials (purchases) and acquisition of talented workforce directly involved in production process (wages).

Running head: ADVERTISEMENT AND PROFIT
Effect of Advertisement Expense in Overall Profit of the Company
Name of the Student:
Name of the University:
Author Note:

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Table of Contents
Introduction:....................................................................................................................................2
Conceptual framework:...................................................................................................................3
Advertisement and demand generation:......................................................................................3
Advertisement expenses and profit:.............................................................................................4
Literature review:.............................................................................................................................5
Advertisement expenses and profit from accounting perspective:..................................................5
Advertisement and cost diversification to ensure profits:...........................................................7
Methodology:...................................................................................................................................7
Gantt Chart:.....................................................................................................................................8
Reference:........................................................................................................................................9

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Introduction:
Advertisement expenses are one of the most important expenses which companies bear to
boost their profits. However, increase of advertisement expenses at a higher rate than the sales
figures actually eats into the net profit. Graham Jr, and Frankenberger (2000) visited this
relationship between advertisement expenses and profits. They pointed out that multinational
companies spends immense amount of money to advertise their products in the global market in
the pursuit of creating demand for the respective products in the market. For example, Telstra,
the leading Australia information and telecommunication company earned profit after tax of $m
3529 in 2018 while its advertising expenses stood at $m 344 which was 9.74 percent of the profit
earned for the period attached. The company earned $m 3874 in 2017 (more than 2018) while its
promotional and advertisement expenses stood at $m 330 which was 8.5 percent of the profits
(Attached). Thus, it can be inferred from this comparison between the financial results of Telstra
for two consecutive financial years that though the company pumped capital towards
advertisement, it did not gain on profit generation. In fact, its increasing promotion and
advertisement along with all the other mentioned expenses eroded its profit generation in 2018.
The company earned lower profits in 2018 compared to 2017 inspite of increase capital
investments in various operations (Telstra.com.au, 2019). The ultimate aim of this immense
advertisement expenses is to generate supernormal profits which would enable the company to
diversify all the expenses including advertisement expenses and earn immense net profit after
tax. Bessen (2016) explores this relationship between advertisement expenses and profits. The
author points out that direct expenses deducted from sales give gross profit. Indirect expenses
like advertisement expenses and losses are deducted from the gross profits to obtain net profits.
Thus, the relationship between advertisement expenses and net profits cannot be directly

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established since the two are not proportionate. The aim of the research is to establish the
impacts of advertisement expenses on profits. The former is the independent variable with the
latter depending on it.
Research question: How does advertisement expense affect in overall profit of the company?
Conceptual framework:
Advertisement and demand generation:
Advertisement enables the companies enable companies to create demand for their
products in the market in order to attract customers. Zavesky et al. (2016) mention in this respect
that advertisement enables companies to create awareness in the market about their products
which in turn creates demands. Navin, Zennadi and Harrison (2015) point out that advertisement
enables companies to create strong image in the market about their quality of their products
which in turn attract customers. This is because in order to attract customers, it is very important
for companies to differentiate their products of their competitors. Haider et al. (2019) throw light
into the matter more closely by pointing out that today in order to give tougher competition to
their respective competitors, most of the leading companies market products with similar
attributes to the products of their competitors. Thus, in in this respect it can be mentioned that it
is very easy for one company to poach consumers from their competitors. Cristea and Nguyen
(2016) though do not contradict the opinion of the previous authors, point out that the
competition between the companies within an industry to gain product differentiation is a real
challenge which calls for aggressive advertisements. The leading multinational companies with
global financial base are able to amass to create innovative products which are able to gain
differential status in the market. Moreover, these leading companies advertise their products so
aggressively, that they are able to attract immense consumer bases. The smaller companies on

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the contrary are neither able to manufacture products as innovative as their multinational
counterparts nor able to advertise their products to gain product differentiation. The outcome of
this uneven competition to advertise products to gain product differentiation and demand
creation, generally favours the multinational companies. The smaller companies in spite of
incurring immense advertisement expenses are not able to create sufficient demand. Demand
creation in the market generally attracts immense customer base and profit. Thus, it can be
pointed out that advertisement expenses do not always leads to profit.
Advertisement expenses and profit:
The discussion on the relationship between advertisement expenses and profits can be
initiated by an analysis of the article titled, ‘How can tourist attractions profit from
augmented reality?’ by Cranmer, tom Dieck and Jung (2018). They point out that companies
belong to highly competitive industries like tourism have to bear immense advertisement
expenses in order to attract immense numbers of prospective customers which would enable
them to gain a sizeable base of actual customers. Thus, the immense amount of advertisement
expenses actually aim to acquire new customers for companies. Porter and Kramer (2019) point
out in this respect that advertisement expenses are not only borne to attract customers for new
products but also to retain existing customers. Cristea and Nguyen (2016) can be reiterated in
this respect to point out that maintaining product differentiation is a recurring need which
companies have to meet. Failure to retain product differentiation can lead to severe losses.
Advertisement enables companies to create and retain product differentiation in the market to
retain customers which in turn generate high profits. Tadajewski (2016) points out that though
advertisement expenses are important for companies to generate high profits, the two variables
are not always proportional. This is because profit generation in companies is not dependent on

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the advertisement expenses alone, it is dependent on other factors as well. The other factors
which impact profit generation in companies are quality of products in question, pricing
strategies of the products, goodwill of the company owning particular products as well as new
product development by the competition firms. It can be pointed out that failure of companies to
meet these parameters can also lead to fall in profits. Thus, marketing expenses in this case
become non-product or less profitable expenses which fail to generate the expected profits.
Literature review:
Advertisement expenses and profit from accounting perspective:
The advertisement expenses are one of the most important expenses which business
organizations bear to generate profits. Advertisement as per Cristea and Nguyen (2016) enables
business organizations to generate demands for their products. Advertisement enables business
organisations to create awareness about their products in the market which in turn create the
demand. The companies as a result are able to sell their products to a huge base of customers and
generate high profits. Hence, apparently it can be pointed out that advertisement expenses enable
companies to generate high profits. Venieris, Naoum and Vlismas (2015) contradict this
apparent symmetrical relationship between advertisement expenses and profits in their work
titled ‘Organisation capital and sticky behaviour of selling, general and administrative
expenses’. They point out that contrary to general perception, advertisement expenses are related
to several other expenses like costs of intangible assets or IPR and expenses incurred to partner
with appropriate advertisement partners. Ball, Khan and Oyelude (2018) point out that
advertisement expenses which companies bear are themselves combination of different expenses
like Facebook expenses, expenses to book slots in newspapers and magazines as well as to book
slots on television, radio or both. Moreover, as Chukwu (2018) points out, companies have to

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advertisement on the internet in form of pop-ups which would attract customers’ attention. Thus,
it can be pointed out that advertisement expenses alone erode a large proportion of the gross
profits which companies earn. Thus, it can be pointed out that business organizations in order to
ensure high profits cannot depend on advertisements alone. They have to ensure that company
has to comply with the other parameters like manufacturing products of superior quality,
appropriate pricing and ethical operations in the market in order to ensure that the advertisement
expenses actually enable them to generate high profits. Ruiz et al. (2016) point out that
advertisement from accounting perspective is an indirect expense. The companies in order to
manufacture products have to employ human resources by paying wages and procure raw
materials. They also have to incur logistics costs to procure the raw materials. The wages,
material costs and carriage inward are direct costs which are direct impact on the quality of the
goods or services. Failure to efficient execution of any of these direct costs would affect the
quality of the products and their value creation capability to customers (Woodside, 1999). For
example, failure to acquire high quality raw materials would prevent the companies to
manufacture high quality finished products. The similar fact would apply for wages. If business
organizations are unable to provide sufficient wages to employ skilled manpower in sufficient
amount, it would directly impact the quality of the products. It can be pointed out that high
advertisement expenses in these cases may enable the concerned firms to generate profits in the
short run, but in the long term, the profit generation rate would dwindle compared to the
advertisement costs, thus rendering the latter unproductive. The companies concerned
consequently generate low net profits in spite of earning high gross profits. Thus, it can be
pointed out that advertisement expenses alone though generally expected, do not ensure profits
in all situations. The success rates of advertisement in ensuring profits are largely dependent to

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the successful implementation of the direct expenses like procurement of superior materials
(purchases) and acquisition of talented workforce directly involved in production process
(wages) (Duffy, 1995).
Advertisement and cost diversification to ensure profits:
Advertisement can enable companies to diversify their expenses, both direct as well as
indirect, in order to generate profits. Morgan et al. (2015) mention that the profit generation of
companies are not dependent on internal quality and cost controls alone. In fact they are heavily
impacted by changes in the external market environment like introduction of new products by
competitors. Gaur and Delios (2015) point out in this respect that advertisement expenses can in
fact enable companies to diversify their direct as well as indirect costs. The companies which
sufficient financial resources can advertise their products in the foreign markets to create demand
for their products. They would be able to attract immense consumer base which they would be
able to cater to in order to generate high revenue. The revenue bases which companies create in
the foreign markets provide them to diversify their all other expenses both direct expenses as
well as indirect expenses (Eagle & Ambler, 2002). Thus, it can be inferred from the analysis that
advertisement expenses can provide substrata to diversify all expenses which automatically
pushes up the rate of net profits generated.
Methodology:
The researcher in order to find the relationship between the two variables namely,
advertisement expense and profit generation has collected secondary data from the financial
statements of Telstra, the chosen Australian company for the period 2018. The researcher
compared the profits generated against the advertisement expenses Telstra incurred for the
periods 2018 and 2017. The researcher adopted secondary analysis in order to obtain sufficient

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data to carry out profound research on the topic. The research was made challenging due to the
fact that relationship between the two variables namely, advertisement expenses and profits is
not proportional in all situations. The relationship varies from situation to situation. Thus, there
are several works assenting to the relationship between the two variable as well as dissenting to
it.
Gantt Chart:

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Reference:
Ball, D. R., Khan, H., & Oyelude, O. (2018). Rebranding a Special Needs School Through
Marketing and Entrepreneurship: An MBA Capstone Consulting Case Study.
Bessen, J. E. (2016). Accounting for rising corporate profits: intangibles or regulatory
rents?. Boston Univ. School of Law, Law and Economics Research Paper, (16-18).
Chukwu, M. E. (2018). AN ASSESSMENT OF FACEBOOK AND RADIO
ADVERTISEMENTS ON THE PURCHASING HABITS OF GODFREY OKOYE
UNIVERSITY STUDENTS. AN ASSESSMENT OF FACEBOOK AND RADIO
ADVERTISEMENTS ON THE PURCHASING HABITS OF GODFREY OKOYE
UNIVERSITY STUDENTS.
Cranmer, E. E., tom Dieck, M. C., & Jung, T. (2018). How can tourist attractions profit from
augmented reality?. In Augmented reality and virtual reality (pp. 21-32). Springer, Cham.
Cristea, A. D., & Nguyen, D. X. (2016). Transfer pricing by multinational firms: New evidence
from foreign firm ownerships. American Economic Journal: Economic Policy, 8(3), 170-
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Duffy, M. (1995). Advertising in demand systems for alcoholic drinks and tobacco: A
comparative study. Journal of Policy Modeling, 17(6), 557-577.
Eagle, B., & Ambler, T. (2002). The influence of advertising on the demand for chocolate
confectionery. International Journal of advertising, 21(4), 437-454.

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Gaur, A., & Delios, A. (2015). International diversification of emerging market firms: The role
of ownership structure and group affiliation. Management International Review, 55(2),
235-253.
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Telstra.com.au. (2019). Retrieved 24 July 2019, from
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/2018-Annual-
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