Chapter 15: Financial Analysis for Product Management

CHAPTER 15: FINANCIAL ANALYSIS FOR PRODUCT MANAGEMENT

Chapter Focus

Our contention is that product managers need to be skilled in accounting and finance, particularly cost accounting. As most business people and academics know, the term “profit” is vague and subject to a variety of definitions. The purpose of this chapter is to provide aspiring product managers with some basic tools to understand income statements and to convert them into information that is useful to them.

The following four topics are covered in this chapter:

1. We discuss a concept called the iceberg principle. It is really very simple but powerful: aggregate numbers often disguise significant problems. Product managers selling multiple SKUs should always be analyzing their lines for weak performance and for possibilities of pruning the line.

2. As noted above, product managers must be familiar with different notions of profitability. Instructors should encourage students to take appropriate accounting courses as preparation for their careers. Through a simple example, we demonstrate how decision-making can vary tremendously depending upon how one looks at the numbers. In addition, depending upon the prior exposure of the students to other financial analyses, instructors may wish to include break-even and other kinds of analyses in the coverage.

3. The issue of control is also important for product managers. This is particularly important for analyzing product performance during and after the planning period.

4. Another key topic for marketing students is capital budgeting. There are many areas of product management decision-making that are at odds with financial calculations, for example, advertising spending and investments in customer service. Financially oriented managers want to know whether the return is greater than some “hurdle” rate while product managers need to understand that perspective and make their own arguments. In addition, marketing personnel often make the forecasts used as inputs for cash flow projections.

Cases

There are no cases that exactly replicate the kinds of analyses shown in this chapter. To do that, the instructor can easily construct some problems similar to the one shown in the book.

Several cases, including the following, give students some exposure to a variety of financial accounting issues:

AT&T Paradyne (Harvard; #9-195-165)

Cambridge Software Corporation (Harvard; #9-191-072)

Cantro Corporation (Virginia; #UVA-M-80).

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