Doug Davidoff
Anyone who knows me, knows I’m a huge believer that business acumen is both lacking in salespeople, and is the number one criteria for success today. Increasingly, businesses are becoming aware that salespeople are not enough to cut it. We must transform the sales force into businesspeople-who-sell.
While there are many attributes that contribute to building business acumen for salespeople, understanding financial statements is certainly at the top of the list. Understanding the financial implication of their value proposition is critical for salespeople to be able to effectively lead customers and prospects to making decisions that are mutually beneficial. Here are five key metrics every person involved in sales should understand and master.
1. Profit vs. Cash Flow
As the saying goes, “Profit is an illusion, cash flow is reality.” There is a significant difference between profit and cash flow, and salespeople who don’t fully understand this difference are at a HUGE disadvantage, and have virtually no chance to be viewed as anything more than a peddler.
One of the biggest surprises for people gaining business acumen is the understanding as to how the growth of a business is one of its greatest dangers. When you understand how the cost of growth is accounted for, and its impact on cash flow you gain a new understanding to the barriers customers face when funding your offering. The reason for this is how accounting standards record revenue and expenses.
For example, if a business makes a capital expense, even when paying for it up front, accounting principles require that the business expense the item of the anticipated useful life. This results in profit being (often widely) greater than the actual cash flow. It's not unusual for a fast growing business, while showing healthy profits to actually be experiencing negative cash flow.
Salespeople who can engage in this conversation are much more likely to earn a seat “at the table,” and to help navigate the sales process to a successful conclusion.
2. Gross Margin vs. Net Margin
In sales training workshops I often share the three most important concepts for any businessperson:
- Revenue/Sale Price
- Cost of revenue/Sales
- The difference between the two is gross margin
Every salesperson must understand how their offering contributes to their customer’s revenue and costs. (On a side note, they must also understand how their approach with customers impacts their revenue and costs.) Gross margin is a critical number as it represents the money a business has to fund its ongoing operations. An effective sales presentation will show how your offering will give your customer more funds to run their operations.
Gross margin differs from net margin in that margin represents what a company has earned after accounting for all expenses and costs of operations. Net margin is the equivalent of profit in most cases. In a business that is well run, the ability to increase gross margins will increase net margins by a multiple. Understanding this is the key to any effective business case and value proposition.
3. Current Ratio
Current ratio tells you if a business has enough money to pay off its short-term debts. In general, the higher the ratio, the better the financial health of the company. By knowing this ratio, you can see if your customer/prospect may be facing any capital emergencies, or — if it has a higher ratio — it has the capital available to reinvest in other parts of the business.
As a sales person, I know that a company with a high current ratio can both afford to make investments more easily than average companies, but may actually be looking for ways to put their cash to use more quickly and effectively. This would have a dramatic impact on how I position my offering as well as how I would review the alternative solutions my customer/prospect may be considering. Conversely, a business with a low current ratio may need to find alternative financing (for example I may propose leasing rather than purchasing) or may simply not be in a position to be able to do anything - no matter what the value of my offering may be.
4. Asset Turnover
Asset turnover is figured out by dividing the total sales of a company by the assets it has (Asset Turnover = Sales ÷ Assets). This is a measurement of how quickly a business is able to sell its products. If capital is tied up in unsold inventory, the business can’t invest in other areas. The higher the asset turnover ratio, the better return the business is receiving on its money.
5. Return on Investment vs. Return of Investment
One of the most overused (and misunderstood) acronyms used in sales is ROI. ROI can mean two distinctly different things.
- The Return of Investment is a measurement of how long it will take for a business to recoup the cost of an investment/purchase through increased revenue, decreased costs or a combination.
- The Return on Investment is a measurement of the total value of the investment or purchase.
For example, if your product will enable a company to reduce its costs by $500,000/year, has a lifetime impact of 7 years and costs $750,000 to acquire:
- The return of investment is 18 month or 1 ½ years.
- The return on investment is 366% ($3,500,000 impact for a $750,000 cost).
There are other uses for ROI, but understanding these two will put you towards the head of the class. The Bottom Line By no means am I saying that you will use all five of these measurements in every sales interaction. What’s critical is not whether you use these measurements specifically, but that you have the ability to discuss these measurements. Your ability to have a financial conversation will allow you to open doors and influence the highest levels of your customers/prospects and separate you from your competition. The understanding will give you more influence and command through the sales process. This will translate into faster sales times and less price pressure (which means a higher asset turnover, gross margin, net margin and current ratio for your business).
