The higher up the food chain you get in most organizations, the more strategic your sales effort needs to be, and the more your financial savvy will come in handy. No, you don’t need a degree in accounting. But understanding how to read and interpret annual reports and financial statements can have a high payoff.
After all, every business runs on financial data, and the information you uncover in a company’s balance sheet and income statement will:
- Tell you a lot about whether the company is truly a prospect for your services, or on a slippery financial slope without the capacity to pay its bills in a timely way.
- Make a sale easier, because you can tailor your value proposition directly to the way your solution will impact their financial situation.
- Change the conversation in the C-suite to a strategic one, in which you come off as more than just another sales rep.
The good news: Financial statements all look the same, whether you are calling on GM or a small biotech firm that just went public. The Securities and Exchange Commission (SEC) requires public companies to file their balance sheet, income statement and cash flow statement regularly. You can get copies from a company’s website or at www.sec.gov/edgar. (Private company financials will look the same, but the owners may be reluctant to reveal specifics. In that case, you can use industry averages or a comparable public company as a starting point for strategic discussions.)
How their balance sheet helps you sell
The balance sheet is a “snapshot” listing a company’s assets, liabilities and net worth on a specific date, most often the end of the year. It’s called a balance sheet because assets must equal the sum of liabilities plus owner’s equity (aka net worth).
There’s a wealth of information you can extract, but the key numbers for any prospect are:
- Working capital. Subtract liabilities from assets to see if there is too little, which can make it tough for a company to pay its bills. Shrinking working capital year after year is not a good sign. Of course, if your offering will help improve a company’s working capital situation, that can become part of your value proposition.
- Inventory. A company with high inventory numbers may not be selling its products fast enough. On the other hand, too little inventory can mean the company is short of capital needed to make more. If your product or service will reduce inventory carrying costs, that’s part of the value you can deliver — it will reduce operating costs and improve working capital.
- Debt to equity. If you divide total liabilities by owner’s equity and the ratio that results is greater than 1.0, the company is highly leveraged, and likely has too much debt to be able to get bank financing. That can be deadly if your project needs to be bank-financed. But just maybe you can “wear the white hat” if you orchestrate a creative solution that solves their problem a different way.
You can look at all this data by: (1) benchmarking it against industry averages or data from comparable companies, and (2) comparing the current position to prior years.
Both approaches are useful, but the second is easier. It will reveal key trends that show you whether or not the company is headed in the right direction. Those trends will likely have a big influence on the prospect’s priorities and strategic direction.
For example, a company whose working capital is trending down is going to be less interested in long-term capital-intensive proposals; they’re probably looking for a quicker fix to replenish capital or at least stop the bleeding. You can do a similar analysis to see how changes in assets, inventory debt and shareholder equity are affecting company health — for better or worse.
What the income statement reveals
An income statement shows how a company is performing over a period of time, typically a calendar quarter or a year. Basically, are they making money or losing it? As with balance sheets, income statements look the same. The top line shows revenue from all sources. When you subtract cost of goods sold (COGS) the result is gross profit. Next you subtract various categories of expense to arrive at net profit (AKA net earnings).
Step one is to figure out the company’s profit margin, because your deal is most likely going to affect their profit margin in one or more ways. (Note: Profit margin is the percentage that results when you divide net profit by total revenue.)
Since your offering will either reduce costs or improve revenues, profit margin is a key metric you want to be able to discuss. Knowing the company’s current margin, the historic trend and the average margin for their industry gives you a much different story to tell in terms of how your solution will help. That’s the kind of conversation the C-suite will want to have.
The same approach applies to any line on the income statement. For example, if your offering will reduce cost of sales, operating costs, interest expense or taxes (expressed as a percentage of revenue), that will have a clear impact on profit margin. Your ability to address these issues using the company’s own trends and numbers puts you well ahead in terms of demonstrating your value. The tone of the conversation is going to be much different from what it would be if you talked in vague generalities.
Financial ratios help, too
When you can zero in on issues based on an analysis of prospects’ financial reports, you begin to move away from “just another vendor” towards a higher level relationship — in part because your competition doesn’t invest the time or effort. It’s particularly effective to use comparative financial ratios as part of the sales process.
For example, let’s say you sell a software solution that helps manufacturers reduce the time it takes to collect their accounts receivable. The key metric for receivables is Days Sales Outstanding or DSO (which equals Accounts Receivable/Sales x 365). Let’s say the industry average for DSO is 41 days, and your prospect’s financials show an average of 51. Your value proposition would address how you can improve their DSO, which will (1) boost cash flow, (2) let them pay less interest on funds they need to borrow, and (3) take advantage of prompt-pay discounts on goods or services they buy.
Of course, DSO is only one of many financial metrics you can look at from a company’s annual report or financial statements. Here are a few more:
- Return on Assets (ROA). Divide net income (shown on the income statement) by total assets (shown on the balance sheet). In general the higher the percentage the better. If the ROA is low compared to others in the market, and you are selling capital equipment that will generate revenue, that can trigger a good conversation.
- Asset turnover. Divide revenue by total assets; the higher the resulting number, the better. If you can increase revenue while assets remain the same, or reduce assets while keeping revenue high, you’ll get their attention.
- Days in inventory. (Inventory/cost of goods sold x 365). In this case, a high number is not so good. It means there’s a lot of cash tied up. But of course if your solution helps inventory turn faster, or speeds time-to-market, you’ll get to tell your story in the C-suite.
When you frame your discussions around the way your offering impacts profit margin, DSO or return on assets — especially when compared to industry averages — you touch directly on the strategic issues that matter to the C-suite, where the emphasis is on the future, growth, the “next big thing” and how the company is doing compared to its peers. You are on the way to trusted advisor territory.
Source: Based on “Using a Prospect’s Financial Statements to Sell,” an e-book by Michael Nick. To learn more visit www.roi4sales.com
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