If you are having trouble justifying your fees then you need to REALLY understand Return on Investment (ROI) – it’s the key to earning higher charges and your clients still thinking you might be excellent value.
Here is an outline associated with key concepts on how to approach your sales meetings from an RETURN ON INVESTMENT perspective. It’s simple and painless and actually 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 particular prospects want to see a return on their costs, whether capital or operating expenses.
As a business developer you cannot take the risk that some accountant sat in an office, with no clue in regards to the finer points of your product or service, does not show for out on some more subtle benefits. The company developer needs to take charge of the quantities to ensure the accountant sitting in the back again office has all the numbers plus calculates the correct ROI.
Another reason to consider an interest in ROI is to ensure you are not wasting your time trying to close up a project with a poor ROI. You may use ROI as a way of qualifying a sale and not wasting time that could be spent finding prospects with a far better prospect for ROI.
ROI is all about cash flow
If you make an investment it implies shelling out some cash in the expectation of getting more cash back. It’s all about cash flow. In more complex projects, like purchasing a new machine, you will have cash flows relating to the purchase of the device 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 again of an envelope but most require a good Excel spreadsheet to total up all of 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 as a result of your decision. In simple isolated assets you might be able to calculate the incremental cash flows directly but in more complex investments you do a full cash flow of the affected parts of the business and evaluate that with an alternative cash flow due to the change. Calculating the difference between your two will give you the incremental cash flows.
Cumulative Incremental Cash Flow
Total cash flow is simply the net of all cash 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 may 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 several weeks, 6 months, or 2 years. Projects that can show a fast payback are normally looked on favourably. It should be possible to check out the cumulative incremental cash runs and see the point at which the change from negative to positive occurs.
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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 phone bills. He has found a new supplier that can save him about fifty percent on his monthly phone bills. There is certainly, however , a large set up charge which he must pay for. His initial outlay is £300 but he will save £50 per month on his phone expenses. What is the payback period?
The answer is usually 6 months.
Simple ROI Calculation
ROI % = 100* (Incremental advantages – incremental costs)/Incremental costs
The easiest ROI calculation is just a straight computation of net benefits over task costs. Its OK for short projects of a finite length however, not much use for projects such as the one above with ongoing advantages. 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 then most people will go for the £100 right now. Its money in the bank – much less risk and it can be earning attention or be used to finance some other projects. What if the choice was £100 now or £800 in two years time? You might be inclined to wait for your larger payment although £800 within 2 years time will probably not be really worth the same as £800 today. This is because pumpiing will eat away at the worth. Net present value helps to translate future net cash flows in to what it might be worth in today’s cash terms. This helps in making investment choices between projects of differing duration.
If you ever need to calculate NPV however suggest you seek out an accountant who would get incredibly excited in the prospect! Believe me, it will make their day! If you are selling components of a capital nature then you may wish to invest in an Excel template like Financial Metrics Pro by Option Matrix (solutionmatrix. com). You can down load a free lite version if you are within 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 rate they use for discounting projects that 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 a 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 will certainly expect the IRR to be greater than their own cost of raising finance or its not worth the trouble (financially anyway). If the company offers competing projects then they will evaluate the IRRs. There is an Excel method (=IRR) for calculating the IRR and Financial Metrics Pro furthermore includes IRR as one of its metrics.
ROI and the sales process
When ROI is so important for the prospect it makes sense to seek prospects with a higher likelihood of ROI and weed out those prospects that are unlikely to have the customers accountants excited! The initial reality find stage of the sales process is the time to get as much details as possible to be able to assess the early probability of a good ROI. The prospect will usually be pleased to help so that they are certainly not wasting time. You can get an idea of the relevant cash flows by taking into consideration the implications to the specific business places affected by your product or service.
Discovering the APR
The incremental cash flows necessary to determine ROI come from the difference between the future cash flows and the present status quo. It is as important within the sales process to uncover the cost of ongoing with business as usual as it is to discover how the business will change following a decision to go ahead. APR is a simple aide memoire to make sure you find out the main elements areas of cash flow impact.
A – Alternative
P — Price
R – Return
The business enterprise developer should be sure to use open up questions and an open mind to discover the required detail.
What will be the alternative to going ahead with the task? This is about discovering the cost of this self-destruction. What are the main areas of current or future pain that will occur when there is a decision to do nothing? Just locating this information alone is normally good enough to qualify a lead and get over most price objections.
Exactly what would be the costs associated with going ahead using the project? The business developer should be careful not to just consider the deal cost but should also investigate the indirect costs that the prospect will incur as a result of going ahead with the decision. For example , the price of replacing a software system for a large organisation will normally be much more that the investment in the software. There will be costs associated with migration towards the new software such as user approval testing, training, project management, even process re-engineering. The business developer needs to be thorough in this area as this is the area the accountants focus on.
What would be the returns arising from going ahead? This could be the increases in revenues or even reduction in costs. Many of the cost cutbacks will become clear as a result of discovering the choice.
‘No Brainer’ ROI
You can have hours of fun doing return on investment computations! The best type of ROI is what I term a ‘No Brainer’. May decision that can be made without much thought at all, let alone doing full ROI calculations. The payback period will be less than a year and the cost of the alternative, the price and the returns are all obvious. Business developers would make a lot more progress developing accounts if the first sale to a new prospect includes a ‘No Brainer’ ROI to it. Once the account is established and a good connection has developed then it will be much easier to get access to the information that would be required for a more difficult project.