If you are having trouble justifying your fees then you need to ACTUALLY understand Return on Investment (ROI) – it is the key to earning higher costs and your clients still thinking you are excellent value.
Here is an outline of key concepts on how to approach your sales meetings from an ROI perspective. It’s simple and painless and also makes selling easier!
Sales specialists take return on investment (ROI) very significantly, especially when selling business-to-business. They know from bitter experience that their own prospects want to see a return on their costs, whether capital or operating costs.
As a business developer you cannot take the risk that some accountant sitting in an office, with no clue regarding the finer points of your product or service, misses out on some more subtle benefits. The business enterprise developer needs to take charge of the figures to ensure the accountant sitting in the back office has all the numbers plus calculates the correct ROI.
Another reason to consider an interest in ROI is to make sure you are not wasting your time trying to close a project with a poor ROI. You may use ROI as a way of qualifying the sale and not wasting time that could be spent finding prospects with a much better prospect for ROI.
ROI is all about cash flow
If you make an investment it indicates shelling out some cash in the expectation of having more cash back. It’s all about income. In more complex projects, like purchasing a new machine, you will have cash runs relating to the purchase of the machine and additional operating costs and then some form of cash benefits such as increased sales or reduced costs. Some ROI calculations can be calculated on the back of an envelope but most require a good Excel spreadsheet to total up all the cash inflows and outflows. The important thing about the cash flows is that they are done over time as opposed to being lumped altogether.
Incremental Cash Flows
The only thing that matters in ROI calculations is how cash flows will change because of your decision. In simple isolated purchases you might be able to calculate the pregressive cash flows directly but in more complex investments you do a full cash flow of the affected parts of the business and compare that with an alternative cash flow as a result of the change. Calculating the difference between your two will give you the incremental cash flows.
Cumulative Incremental Cash Flow
Cumulative cash flow is simply the net of all money flows up to one point in time. In order to at the cumulative incremental cash flow you can easily see where “payback” occurs. This is when any initial outlay has been fully recovered. The payback period will be the amount of time it takes to achieve payback.
One of the most simple and yet best indicators is the payback period. This tells you how long it takes to get your money-back. It is normally expressed as a way of measuring time, for example 3. 5 days, 6 months, or 2 years. Projects that can show a fast payback are normally appeared on favourably. It should be possible to look at the cumulative incremental cash runs and see the point at which the change from bad to positive occurs. There is also a way in Excel of calculating payback periods using cell formulae.
Jason has a decision to make. He’s the chance to save money on his monthly cell phone bills. He has found a new provider that can save him about fifty percent on his monthly phone bills. There is, however , a large set up charge which he must pay for. His initial outlay is £300 but he saves £50 per month on his phone bills. What is the payback period?
The answer is 6 months.
Simple ROI Calculation
RETURN ON INVESTMENT % = 100* (Incremental advantages – incremental costs)/Incremental costs
The easiest ROI calculation is just a straight computation of net benefits over project costs. Its OK for short projects of a finite length but not much use for projects like the one above with ongoing benefits. Where do you draw the line? Which includes 3 years of benefits would give another return to 2 years.
Net Present Worth (NPV)
Would you rather have cash at this point or cash later? If I were to offer the choice of £100 now or £100 in 2 years time after that most people will go for the £100 right now. Its money in the bank – much less risk and it can be earning interest or be used to finance additional projects. What if the choice was £100 now or £800 in two years time? You might be inclined to wait for the larger payment although £800 in 2 years time will probably not be really worth the same as £800 today. This is because pumpiing will eat away at the value. Net present value helps to convert future net cash flows in to what it might be worth in today’s money terms. This helps in making investment choices between projects of differing timeframe.
If you ever need to calculate NPV then I suggest you seek out an accountant who would get incredibly excited at the prospect! Believe me, it will create their day! If you are selling components of a capital nature then you may want to invest in an Excel template for example Financial Metrics Pro by Remedy Matrix (solutionmatrix. com). You can download a free lite version if you are in least bit curious!! The process of calculating NPV is called discounting and an incremental cash flow that has gone through the particular discounting process is known as a discounted income. A company will have their own internal price they use for discounting projects which is based on the cost of raising finance.
Internal Rate of Return (IRR)
The prospect of calculating IRR gets accountants even more excited!! It’s a calculation functions out a rate of return of the future income stream. It successfully discounts the cash flow and confronts a single rate of return at the same time. The calculation effectively works out the particular return from immediately reinvesting any cash flows arising from the task. A company assessing a proposal can expect the IRR to be more than their own cost of raising finance or even its not worth the trouble (financially anyway). If the company has competing projects then they will evaluate the IRRs. There is an Excel formula (=IRR) for calculating the IRR and Financial Metrics Pro furthermore includes IRR as one of its metrics.
ROI and the sales process
In case ROI is so important for the prospect then it makes sense to seek prospects with a higher likelihood of ROI and weed away those prospects that are unlikely to get the customers accountants excited! The initial reality find stage of the sales process is the time to get as much info as possible to be able to assess the early likelihood of a good ROI. The prospect will normally be pleased to help so that they aren’t wasting time. You can get an idea from the relevant cash flows by considering the implications to the specific business places affected by your product or service.
Discovering the APR
The incremental cash flows essential to determine ROI come from the difference between your future cash flows and the present status quo.
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It is as important in the sales process to uncover the cost of continuing with business as usual as it is to discover how the business will change following a choice to go ahead. APR is a simple aide memoire to make sure you uncover the main elements areas of cash flow influence.
A – Alternative
P — Price
R – Return
The business developer should be sure to use open up questions and an open mind to discover the required detail.
What would be the alternative to going ahead with the project? This is about discovering the cost of the status quo. What are the main areas of current or even future pain that will occur when there is a decision to do nothing? Just obtaining this information alone is normally good enough to qualify a lead and overcome most price objections.
What would be the costs associated with going ahead with the project? The business developer should be careful not to just consider the deal price but should also investigate the roundabout costs that the prospect will incur as a result of going ahead with the choice. For example , the price of replacing a software program for a large organisation will usually be much more that the investment within the software. There will be costs associated with migration to the new software such as user approval testing, training, project management, also process re-engineering. The business developer must be thorough in this area as this is the area that this accountants focus on.
What would be the returns arising from going ahead? This can be the increases in revenues or reduction in costs. Many of the cost reductions will become clear as a result of discovering the choice.
‘No Brainer’ ROI
You can have hours of fun doing return on investment calculations! The best type of ROI is what I actually term a ‘No Brainer’. May decision that can be made without much thought at all, let alone doing full ROI calculations. The payback period can be less than a year and the cost of the alternative, the price and the returns are all very clear. Business developers would make a lot more progress developing accounts if the 1st sale to a new prospect includes a ‘No Brainer’ ROI to it. When the account is established and a good relationship has developed then it will be much easier to obtain access to the information that would be required for a more complex project.