What Are Advertising Costs?
Advertising costs are a category in financial accounting that covers expenses associated with promoting an industry, entity, brand, product, or service. They cover ads in print media and online venues, broadcast time, radio time and direct mail advertising. Advertising costs will in most cases fall under Sales, General & Administrative (SG&A) expenses on a company's income statement.
Understanding Advertising Costs
Advertising costs are sometimes recorded as a prepaid expense on the balance sheet and then moved to the income statement when sales that are directly related to those costs come in. For a company to record advertising expenses as an asset, it must have reason to believe those specific expenses are tied to specific future sales. Then, as those sales occur, those advertising expenses are moved from the balance sheet (prepaid expenses) to the income statement (SG&A).
- Advertising costs are a category in financial accounting associated with promoting an industry, entity, brand, product, or service.
- Advertising costs are sometimes recorded as a prepaid expense on the balance sheet and then moved to the income statement when sales relate to those costs come in.
Example of Advertising Costs
For example, if a company launches a direct mail campaign and it knows that 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 customers respond to the campaign, those direct mail expenses will be moved from the prepaid expense category to the advertising cost category.
Most business owners budget for a certain amount of advertising costs, which the U.S. Small Business Administration says should amount to 7-8% of total annual revenues.
The company must be able to demonstrate that those advertising expenses are directly related to those sales. It may use historical data as evidence to do so. That is, if the company knows, for example, that in the past when it sent out 1 million pieces of direct mail, it received 100,000 responses, it may apply this ratio to future sales coming from a future direct mail campaign.
Advertising costs are typically not a surprise to a business owner. In fact, many will have budgeted for a certain amount of advertising costs. The U.S. Small Business Administration recommends that businesses that make less than $5 million per year spend at least 7 or 8% on advertising. However, many business owners feel this is too much. Consequently, many small business owners report spending as little as 1% of their annual business income on annualizing. If you single out manufacturers and wholesalers specifically, the number is closer to around 0.7% of annual revenues spent on advertising.
However, simply spending the money is no guarantee that a business will get the return on investment they want with their ad expenditures. As such, business owners need to make sure they're spending their advertising budget in the right places, where the audience is likely to include potential buyers of their product or service. Some media outlets offer 40 or 50 percent discount for running ads in slots left open due to cancellations.
Whatever a business spends on advertising, the point is to maximize the ROI of advertising costs. This can be difficult because there is no shortage of advertising opportunities out there to consider. The best bet is to settle on a set of business goals and build a program around those.