Financial-Literacy | Deliberate Selling

For Executive Hunters Only

Selling higher up means selling smarter, with greater focus, and much deeper awareness of the customer. It also means selling to people who speak the financial language of investment decisions, tradeoffs, and comparisons.

You might have a terrific offering that they’d love to have, yet while they know you’re much better than the other vendors, its not clear that you’re the best investment they could make overall.

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Financial Literacy for Zebra Hunters

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The number of times a project pays for itself over its lifetime. A 582% ROI over 5 years indicates that the project pays for itself almost 6 times (5.82 times to be exact) over the five yer useful life of the project.

The stream of expected cash converted into value in terms of today’s dollars. An NPV of $2.8 million means that the stream of expected benefit worth $3.7 million over a five year period is worth $2.8 million when converted to todays dollars (using a discount rate of 10 percent). In other words, $3.7 million of value spread out over 5 years is the equivalent of $2.8 million today. Choosing an appropriate discount rate is crucial to the believability of the NPV calculation. A good practice of choosing the discount rate is to decide the rate that the capita needed for the project could return if invested in an alternative venture. If for example, the capital required for a project can earn 10 percent elsewhere, use this discount rate in the NPV calculation to allow a direct comparison to be made between your project and the alternative.

The dollar amount of benefit created over the life of the project after removing all costs. These include the cost of the client’s personnel to install and run a solution, as well as the cost of capital used to purchase the solution. Because EVA considers the latter, some think EVA is the truest benefit calculation. A $2.3 million, 5 year EVA indicates the project will return $2.3 million over five years, considering all costs, including that of the capital used to purchase the solution (in this example we use 10 percent as the cost of capital). Even if the money is not borrowed, financiers will estimate a cost of capital based on what they could make investing the same dollars in the bank, on other low risk options, or elsewhere in the business.

The interest rate you expect to make on your investment in a capital project. An example of IRR is the interest rate a bank pays for the user of your money. A five year, 185 percent IRR means the project will generate a 185 percent return over 5 years.

The exact number of months it takes to get all the money back that will be invested in the project. A payback period of eight months, for example means that a buyer will get their investment back eight months after writing you a cheque. The longer it tales to get the money back, the greater the risk that the project will never pay for itself or have a positive overall return.

Direct savings are hard cost reductions. A dollar of direct savings is a dollar that goes directly to the bottom line (contributes to earnings before interest and taxes, or EBIT). Indirect savings are savings and revenue generated from areas such as productivity gains. CFOs will sometimes prevent you from including indirect savings or productivity improvements in various Capital Allocation Requests (CAR) calculations because they are harder to definitively quantify. Nonetheless, indirect savings should in many cases still be added to direct savings to calculate the expected project benefit.

EBIT is what financial people use to measure our solution’s value or contribution to profit. For example of your solution generates labor cost savings of $1, that $1 is a direct contributions EBIT. If your solution improves productivity, there may be a direct or an indirect contribution to EBIT because your solution helps directly increase sales, and indirectly reduces costs. The $1 of sales increase has to be reduced by material, labor, and other costs required to produce that $1 of product. So $1 in sales increase reduced by costs leaves us with something less, perhaps $0.10. The $0.10 would be the direct contribution to EBIT. If your solution allows the same number of people to do more work, there is an indirect contribution to EBIT. Why indirect? Because your prospect will still pay their more productive people the same amount, before and after the implementation of your solution.

A TCO is a financial estimate designed to help assess direct and indirect costs related to the purchase of any capital investment. It is a form of full-cost accounting limited to costs clearly associated with any given solution. A TCO assessment ideally offers a final statement reflecting not only the cost of the purchase but also all aspects in the further use and maintenance of the solution considered. This includes the the cost of training support personnel and the users of the system, and more. For example, the decision to buy a given solution may result in the following TCO analysis: the greater initial price of a high-end solution after including all costs - implementation, product training, consulting, change management, and cost of capital - should be balanced by adding likely repair costs and earlier replacement to the purchase cost of the cheaper bargain brand. As you can see, the initial price becomes just the beginning of the life cycle of costs.

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