Finance 101 for Sales and Marketing Professionals: Lesson 6 – Industry Variations

This is the last topic in the Finance 101 Series.  So far, everything that we have discussed was from the perspective of companies that carry inventory such as manufacturers, distributors, and retailers to name a few.  Today, I am going to move away from the product oriented world into the services world.  There are several types of services that must be considered separately, even from each other.  They all follow the same accounting laws and procedures, but they use different names and sometimes calculations to determine their performance or position.  I am going to cover the following industry variations in this blog post:

1. Professional Services (Think accountants, lawyers, and business consultants)
2. General Services (Think repair services, industrial services, and consumer services)
3. Financial Services (Think banks and mortgage companies)
4. Public Sector (Think government agencies, non-profits, DOD)

Professional Services                                  

There are two distinct differences in the financial buckets for the professional services industries.  Since they don’t sell goods, they don’t have Cost of Goods Sold.  Instead, they call it “Cost of Services”.  The expenses associated with their billable resources usually land here.  The second change is in the area of inventory.  Since services are not inventoried, this bucket won’t be used at all.  Other than these two changes, professional services organizations should be treated just like their commercial and industrial counterparts.

General Services

There are two distinct differences in the financial buckets for the general services industries as well.  Since they don’t sell goods either, they don’t have Cost of Goods Sold.  They also call it “Cost of Services”.  The expenses associated with their billable resources usually land here.  The second change is in the area of inventory.  Services are not inventoried, but spare parts and supplies often are inventoried.  This bucket will therefore be renamed “Supplies”.  Other than these two changes, general services organizations should be treated just like their commercial and industrial counterparts.

Financial Services

This is where things start to look a little different.  The ratios themselves are no longer based on revenues, but instead, average assets.  Banks manage assets so it is good for them to understand their performance metrics in terms of the assets under management.  Instead of dividing expenses by revenues, you will divide them by the average assets for the period.  Revenues themselves are split into two distinct groups, “Interest Income” primarily from loans and “Non-Interest Income” primarily from fees.

Banks don’t have cost of goods sold but they do have an interest margin or “Spread” between their interest income and their “Cost of Interest”.  They still have expenses for selling, general , and administrative activities, but they have been renamed “Non-Interest Expenses”.

On the balance sheet, a greater focus is placed on cash.  Cash does not generate income, so you want to keep comparatively low cash balance that still meets any legal requirements for funds availability.  Banks inventory loans and not goods.  The loans generate income and should therefore be maximized. Since they bear interest, they are no longer classified as receivables.  Deposits are the least expensive way to back up loans and should also be maximized.

Public Sector

In the public sector, everything you see is treated differently.  These organizations are not selling anything and they are not trying to make a profit.  Base on what you have learned, I can translate the Income Statement (Sources and Uses of Funds) buckets as follows:

The Revenue Growth bucket becomes the “Receipts Growth” bucket.  Receipts can come from benefactors, donations, fees, and grants.  Even when a public sector organization does sell something, it is recorded under receipts growth.  Cost of Goods Sold becomes “Program Costs” which are generally characterized as all of the expenses that go to directly benefiting the constituents.  There are no selling expenses so this area is changed to be simply, “Management & General” in order to capture all of the other expenses.

The balance sheet is run similar to a commercial or general services company with only some minor name changes.  Accounts Receivable will become “Net Receivables” and Inventory will once again be referred to as “Supplies”.

Summary

Over the course of these 6 blog posts I have talked about how a typical company operates.  I showed you how basic transactions are recorded and then grouped into buckets.  I showed you how to create financial statements from scratch.  I reviewed the most common financial ratios that you will encounter in business.  I discussed how to find opportunities hidden in the numbers and today I showed you how to adapt your new knowledge to additional industries.  In my next blog post, I will get back to more direct sales topics, beginning with “Connecting with Prospects”.

-Bruce A. Brien, CEO, Stratascope Inc.

Finance 101 for Sales and Marketing Professionals: Lesson 5 – Analyzing Financial Statements

Everything that we have talked about in the previous 4 posts will come together in this one.  We have to ask the fundamental question about our financial results; what do they mean?  There are three ways that we can look at the results.  First, we can look at them in a vacuum, without regard to trends or comparisons.  In doing so, we can only answer the simplest of questions.  Did the organization make money?  Do they have sufficient assets to fund future activities?  Do they owe more than they own?  It is difficult to go beyond a simple analysis without looking at trends and comparisons.

The first thing that I have to do in order to analyze an organization’s performance is to rationalize the results so that we can compare them to prior results or other organizations.  Specifically, we need to take size out of the picture.  We do this by restating our financial statements as a percentage of revenues for all of the Income Statement items and the resources needed to support each dollar of revenue for all of the Balance Sheet items.  We did this in the last lesson, but I wanted to reinforce the point here.  I like to look at both the trend and the comparison at the same time for each metric.  I think it gives me the best perspective.  That’s how I’ll cover things here as well.  I am going to cover one financial ratio for each bucket that we have looked at so far, going over the ratio, its calculation, some characteristics and some thoughts on discussing each metric.

Revenue Growth

Formula: 

Revenue Growth % = (Current Rev– Prior Rev ) / Prior Revenue

Characteristics:

• Revenue growth % shows us the growth in revenue from the prior year.
• Usually bigger is better.
• Watch for unusual growth due to business combinations or mergers.
• Watch for negative cash flow caused by working capital trends being negative or very poor. (More on this one later)

Things to Consider:

• Is growth keeping pace with prior years?
• Is revenue growth able to maintain market share in comparison to other organizations?

Operating Profit Margin

Formula:

Operating Profit Margin = (Revenue – Cost of Operations) / Revenue

Characteristics:

• Operating Profit Margin or “Profitability” shows us the % of Revenue that is left after operations.
• Cost of Operations usually includes Cost of Goods Sold, Selling, General and Administrative expenses, R&D etc. Usually all costs associated with running the business are included except for taxes, interest, and special items.
• Positive is always best. A negative profitability % is an indication that the Company is losing money.

Things to Consider:

• We mainly focus on whether or not costs are direct or indirect.  It is also important to consider whether or not they are fixed or variable.  High fixed costs can be a sign of inflexibility.  Exceptionally high variable costs may make it difficult to realize any economies of scale.
• If you are working with operating margins that fluctuate just above or below zero, you may want to switch to Operating Costs as a percentage of revenues for any trend comparisons, it will give you a truer picture.
• Also known as “Operating Income”, “Profit Margin”, “Profitability”, “Operating Income”, “Operating Income Margin” or “Operating Margin”

Cost of Goods Sold (COGS)

Formula:

Cost of Goods Sold % = Cost of Goods Sold / Revenue

Characteristics:

• This metric tells us what % of each dollar of revenue it takes to produce the product or service.
• Cost of Goods Sold includes things like raw material costs, labor, heat, light and power to run the plant and certain indirect costs like plant supervision and the cost to purchase the materials.
• Be aware that each company may not classify costs exactly as indicated above and that there may be differences in classification between companies in your comparative group. Most times if there is an obvious difference in classification in COGS the other metric being impacted will be Selling General and Administrative (SG&A) expenses.

Things to Consider:

• Watch out for companies that continue to adjust their accounting model towards and away from activity based costing.  They could be trying to muddy the waters by moving expenses from one pocket to another.  In the end, they own all of the pockets.
• When this occurs, look to the “Operating Profit Margin” instead.
• The inverse of this metric is widely known as “Gross Margin”

Selling, General, and Administrative Expenses (SGA)

Formula:

Selling General and Administrative Expenses % = Selling General and Administrative Expenses / Revenue

Characteristics:

• This metric tells us what % of each dollar of revenue it takes to cover SG&A expenses. Usually lower is better.
• SG&A consists of general expenses like office expenses and payroll, sales and marketing costs etc.
• Be aware that each company may not classify costs exactly as indicated above and that there may be differences in classification between companies in your comparative group. Most times if there is an obvious difference in classification in SG&A the other metric being impacted will be Costs of Goods Sold (COGS).

Things to Consider:

• Watch out for companies that continue to adjust their accounting model towards and away from activity based costing.  They could be trying to muddy the waters by moving expenses from one pocket to another.  In the end, they own all of the pockets.
• When this occurs, look to the “Operating Profit Margin” instead.

Liquidity Ratio and The Cash Conversion Cycle (CCC)

Formula:

Liquidity Ratio = (Cash + Collections) / Accounts Payable

Cash Conversion Cycle = Days in Inventory + Days Sales Outstanding – Days Payable Outstanding

Characteristics:

• In the treasury and cash management world, people will refer to a “Liquidity Ratio” which is a measure of a company’s ability to pay its debts.
• For the CCC, lower is better because more of the organization’s cash requirements for AR and Inventory are being financed through AP.
• The CCC ratio indicates how many days of working capital must be financed either with cash or debt.

Things to Consider:

• Watch out for negative trends here, they can quickly put a company out-of-business
• Understand the difference between a negative trend (The CCC is getting bigger) and a negative CCC (the organization is producing working capital and not consuming it).

Days Sales Outstanding (DSO)

Formula:

Days Sales Outstanding (DSO) = Accounts Receivables / (Revenue/365)

Characteristics:

• Usually lower is better – be careful to understand the peculiarities of the industry you are working in.
• Watch for large sales at year end which will impact the metric.
• Watch for the granting of extended credit terms which will have an impact.

Things to Consider:

• Comparisons are very important here because customers within specific industries tend to pay along similar patterns.  If this metric is out of sync when compared to peers, it might be a good place to start
• DSO is restricted to non-interest bearing items and therefore does not include any financing or credit card businesses

Days in Inventory (DII)

Formula:

Days in Inventory (DII) = Inventory / (Cost of Goods Sold/365)

Characteristics:

• This Metric tells you how many days of inventory the company is holding at the end of the period.
• Usually lower is better.  Be careful not to go too low and cause out of stock issues.
• Watch for major purchases of inventory at period end.
• Watch for cyclical businesses whose inventory will fluctuate at different times.
• Some people prefer inventory turns – Just divide 365 by your DII to get turns

Things to Consider:

• Good inventory control requires a balancing act that involves accurate forecasting, scheduling and execution, along with low allowances for spoilage, quality issues, and theft.
• Too much inventory is costly to maintain while too little inventory can result in unsatisfied demand.

Fixed Asset Utilization (FA)

Formula:

Fixed Asset Utilization $ = Net Fixed Assets / Revenue

Characteristics:

• Usually lower is better – that means they have less money spent on fixed assets.
• Fixed assets consist of things like plant, equipment, motor vehicles, computers etc.
• Be careful of companies who lease their facilities and equipment.
• Be careful of companies who outsource much of their production.
• Some companies require a much larger investment in fixed assets.

Things to Consider:

• Investing in fixed assets is usually an investment in the future and the value of the investment will depreciate over time (this is a good thing).
•  As investments depreciate, the return on the investment increases
• Watch for companies that may be at the beginning of an investment that they are still expecting returns from
• Also watch for companies that are showing a great return but have not invested in the future and are therefore not prepared to react to market opportunities.

Days Payables Outstanding (DPO)

Formula:

Days Payable Outstanding = Accounts Payables / ((cost of operations – depreciation) / 365)

Characteristics:

• Potential difficulties matching receipts with Purchase Orders.
• Invoice payments to vendors may not be timely- resulting in missed discounts and/or late fees.
• Possible poor visibility of third party logistics activity for inbound consigned or VMI inventory locations.
• Receivers may not be easily matched to supplier invoices

Things to Consider:

• For most organizations, this metric is set by either policy or circumstance and there is usually not much that can be affected by process change or technology. 
• The impact of improving the payables process is usually felt in SGA.

Equity and Total Value Created (TVC)

Formula:

Equity $ = Total Equity / Revenue

Total Value Created (TVC) = Net Operating Profit – Capital Charge

Characteristics:

• The Capital Charge represents a fair return to creditors and investors
• Any positive number is good, value for the owner/investors is being created
• Any negative number is not good and indicates that value is being destroyed
• The TVC trend can tell us a lot about the direction that a company is heading

Things to Consider:

• Equity refers to the portion of our assets that are not financed by our suppliers or creditors.  It includes money invested in the business as well as any retained earnings from operations that have been kept in the business.  As equity is mostly concerned with ownership and what belongs to them, the primary equity ratios are geared towards potential and current investors.
• When we look at overall performance, we try to combine both the performance and the position.  We do this by taking an additional charge on the income statement for the condition of the balance sheet.  A company that has a lot of equity or too much debt will be carrying a high capital charge.  A leaner company with less debt and fewer investments will carry a smaller capital charge.

Summary

So now how do you find the opportunities hidden in the numbers?  That’s a very good question.  Opportunities are found where a company is performing differently than their peers or where a company’s trend is in a different direction than we would expect.  When I find a difference that is destroying stakeholder value, I know that I have found the place to start asking questions.  At Stratascope, we use a bubble chart to put all of the ratios side by side so it is easy look for the low hanging fruit.  The lower the bubble is, the more room there is for improvement, the larger the bubble is, the more value there is in addressing the opportunity.  See the image below:

 

Performance Comparison Bubble Chart

It is important to note that while I use the terms “value” and “opportunity” and “improvement” with you, it is highly inappropriate to express our assumptions this way to our prospect.  Great! So how do you use this stuff? … It’s all in the wording.  Instead of saying “You appear to have a significant opportunity to lower your costs.” – Which, even though it is better than “You have a Cost of Goods Sold problem” it is not as good as “I can see that you are managing your direct costs differently than some of your competitors.  Can you share your perspective on the situation?”  This way, we are not assuming there is a problem, we are observing a fact and soliciting an opinion. This can be powerful stuff in a sales conversation that can lead to a serious amount of insight being disclosed by your prospect.  Use it carefully and you will be rewarded!

In my next post, I will show you how we can adapt our model to meet the needs of other specific industry types so that we can analyze and speak to the performance of any organization with which we are dealing.

-Bruce A. Brien, CEO, Stratascope Inc.

Finance 101 for Sales and Marketing Professionals: Lesson 4 – Building Financial Statements

I apologize for being a little late with this lesson, so let’s get right to it.  I have talked about many of the operational processes that go into a business and how those transactions affect specific buckets.  When I want to pause and look at the business from a distance, we can back up and assemble a set of financial statements from the buckets that we have been using.  It is really easy.

First, I can build the Income Statement which shows our performance over a period of time.  I have a simple formula that we can use.

                                Revenues – Expenses = Income (which becomes Equity)

Our Expenses are made up of our Cost of Goods Sold and our Selling, General, and Administrative Expenses.  I can expand the formula to include this information:

                Revenues – (Cost of Goods Sold + Selling, General, and Administrative) = Income (which becomes Equity)

We can even take the formula one piece at a time and use the interim result for additional analysis.  The interim number is called Gross Profit. Our fully expanded formula will look like this:

                (Revenues – Cost of Goods Sold) = Gross Profit (- Selling, General, and Administrative) = Income (which becomes Equity)

Now I just need to fill in the numbers from our table to get the results I need:

                ($630,000 – $260,000) = $370,000 (- $170,000) = $200,000

We can even make it look like a financial statement by simply reformatting the formula vertically:

Revenues	$630,000
Less Cost of Goods Sold	$260,000
Gross Profit	$370,000
Less Selling, General, and Administrative	$170,000
Income	$200,000

If I want to compare this statement to others from prior periods or other organizations, I will need to use percentages (of revenue) in order for the comparison to work.  It will look like this:

Revenues	$630,000	100.0%
Less Cost of Goods Sold	$260,000	41.3%
Gross Profit	$370,000	58.7%
Less Selling, General, and Administrative	$170,000	27.0%
Income	$200,000	31.7%

 

I can use the same concepts to create the Balance Sheet which represents a picture of our position at a point in time.  This time I’ll show you the fully expanded formula right away, and instead of using percentages, we will restate our balance sheet in terms of the resources needed to produce each dollar (or euro, etc…) of revenue.  Here is the formula:

(Cash + Accounts Receivable + Inventory) = Current Assets (+ Fixed Assets) = Total Assets (- Accounts Payable and other Liabilities) = Equity (which was adjusted with our income)

I can fill it in from the buckets as follows:

($450,000 + $250,000 + $220,000) =  $920,000 (+ $500,000) = $1,420,000 (- $220,000) = $1,200,000 (The original $1,000,000 plus the income of $200,000)

And represent it as a Balance Sheet below:

Cash	$450,000	$.71
Accounts Receivable	$250,000	$.40
Inventory	$220,000	$.35
Current Assets	$920,000	$1.46
Fixed Assets	$500,000	$.79
Total Assets	$1,420,000	$2.25
Accounts Payable and Other Liabilities	$220,000	$.35
Equity	$1,200,000	$1.90
Liabilities + Equity	$1,420,000	$2.25

 

Now I have a set of financial statements and some ratios (in the percentages and the resources required) that I can use to analyze the business.  It will be important in the next lesson to have built the foundation the way that we have.

In my next post, I will show you how we can analyze financial statements to identify areas of opportunity.  These are the same opportunities that you will need to understand how your own company’s offerings address.  Hopefully things are starting to come together for you.

-Bruce A. Brien, CEO, Stratascope Inc.

Finance 101 for Sales and Marketing Professionals: Lesson 3 – Completing a Business Cycle

You have seen how a set of basic business transactions can be directed into buckets that we can track throughout a month.  Most of the transactions that companies will capture throughout a month will fall into the same buckets that we have been working with.  The difference being, that in the real world, each bucket has many compartments in it to capture a finer level of detail.  Management not only needs to know how much money was spent on overhead, but more specifically, how much was spent on marketing programs, and even more specifically, radio advertising.  Regardless of how many compartments or sub-compartments a company creates, overhead expenses are still overhead expenses.  That being said, we are not going to get bogged down with details.

We do need to add some more beef to our transaction set in order to give it a more realistic feel.  This may feel like a fire hose.  Don’t focus on the volume or the details.  Just look at one or two of the transactions and you will see that they are similar to what we have just done in the previous lesson.  Let’s start recording:

1. We bought more raw materials on credit so we owe the supplier some money (ACCOUNTS PAYABLE: +$100,000)
2. We now own more raw materials (INVENTORY: +$100,000)
3. We sold some machines to a customer on credit (REVENUE: +$180,000)
4. Our customer owes us the money for the machines (ACCOUNTS RECEIVABLE: +$180,000)
5. We shipped the machines to the customer (COST OF GOODS SOLD: +$80,000)
6. We no longer have the machines that we shipped (INVENTORY: -$80,000)
7. We pay our employees to build more machines (CASH: -$60,000)
8. Our work (labor) added more value to the inventory (INVENTORY: +$60,000)
9. We incurred some general business expenses on credit (SELLING, GENERAL & ADMINISTRATIVE: +$120,000)
10. We owe various suppliers for the business expenses (ACCOUNTS PAYABLE: +$120,000)
11. We use cash to pay some of our suppliers (CASH: -$100,000)
12. We no longer owe our suppliers what we paid (ACCOUNTS PAYABLE: -$100,000)
13. We bought more raw materials on credit so we owe the supplier some money (ACCOUNTS PAYABLE: +$100,000)
14. We now own more raw materials (INVENTORY: +$100,000)
15. We sold some machines to a customer on credit (REVENUE: +$250,000)
16. Our customer owes us the money for the machines (ACCOUNTS RECEIVABLE: +$250,000)
17. We shipped the machines to the customer (COST OF GOODS SOLD: +$100,000)
18. We no longer have the machines that we shipped (INVENTORY: -$100,000)
19. We can collect cash from our customers (CASH: +$180,000)
20. Our customers no longer owe us what they paid (ACCOUNTS RECEIVABLES: -$180,000)
21. We pay our employees to build more machines (CASH: -$60,000)
22. Our work (labor) added more value to the inventory (INVENTORY: +$60,000)

Hopefully you can see that patterns are beginning to form and while thousands of transactions will be recorded every month, they will all be similar, falling into and out of the same buckets over and over again.  Great, now that we have that all straightened out, let’s take a look at where our buckets ended up after all of that activity:

Revenues	$630,000	We have sold machines to several customers	Cash	$450,000	We paid more of our suppliers, but also collected more cash
Cost of Goods Sold	$260,000	We shipped the machines and recorded the cost	Accounts Receivable	$250,000	We collected some cash but more is owed to us
Selling, General and Administrative	$170,000	We have recorded different types of business expenses	Inventory	$220,000	We shipped some inventory to customers and built more
			Fixed Assets	$500,000	We still own our fixed assets
Equity	$1,000,000	We still owe the owners their investment	Accounts Payable	$220,000	We paid some of our bills but we still owe some of our suppliers

 

Most months don’t end on a perfect cycle of paying and collecting so it is common to see balances in all of the buckets.  At any point, the company will store raw materials, finished goods, and work that is currently in progress.  We are now at a pretty good point to call our month complete.

In my next post, I will show you how financial statements are built from the bucket balances and ultimately as a result of the operational transactions.

-Bruce A. Brien, CEO, Stratascope Inc.

Finance 101 for Sales and Marketing Professionals: Lesson 2 – Operational Transactions

In order to understand the financial performance of an organization, you have to build a basic knowledge of how the activities of the organization feed the performance metrics.  If that sounded a little bit like we are going to talk about accounting, we are, but I promise to keep it fairly simple.  I have already talked about all of the buckets that we will use to categorize the activities of the business.   We just need to walk through the basic activities of the business to see where the money goes.  We can do this by starting a fictitious company called AnyCo and following its activity.

In order to start AnyCo we need some money (also referred to as capital).  We can get the money from some investors (also known as owners).  We need to note two facts so far:

1. We got cash from our investors (CASH: +$1,000,000)
2. We gave our investors equity for their cash in order to record their ownership (EQUITY: +$1,000,000)

Next, we are going to need a plant, some equipment, computers, and other stuff (also called fixed assets or property, plant and equipment or PPE).  This activity will generate a couple of additional notes:

1. We will pay for the fixed assets with cash (CASH: – $500,000)
2. We now own some fixed assets (FIXED ASSETS: +$500,000)

Now we need to build some machines to sell.  Again we’ll keep it simple.  We are going to buy some raw materials, hire some workers and pay them to build the machines, and use some additional resources like electricity and heat.  The above activities need to be recorded:

1. We bought the raw materials on credit so we owe the supplier some money (ACCOUNTS PAYABLE: +$100,000)
2. We now own some raw materials (INVENTORY: +$100,000)
3. We pay our employees to build machines (CASH: -$50,000)
4. Our work (labor) added more value to the inventory (INVENTORY: +$50,000)
5. We pay for our electricity and other resources (CASH: -$10,000)
6. Our resources added more value to the inventory (INVENTORY: +$10,000)

Great, we got our business off the ground and even built something to sell.  At anytime, we should be able to step back and see how we are doing by looking at our buckets.  I will use the table below to show our progress:

Revenues	$0	We have not sold anything yet	Cash	$440,000	We paid for our fixed assets, our labor, and utilities
Cost of Goods Sold	$0	We have not shipped anything yet	Accounts Receivable	$0	We have not sold anything yet so no one owes us anything
Selling, General and Administrative	$0	We have not recorded any miscellaneous costs	Inventory	$160,000	We purchased materials, added labor and consumed resources
			Fixed Assets	$500,000	We bought a plant and equipment
Equity	$1,000,000	We still owe the owners their investment	Accounts Payable	$100,000	We still owe our supplier for the materials

 

Let’s continue on to just a few more activities and then we can call it quits for today.  We are ready to sell our products!  Again, let’s keep things simple.  We’ll launch marketing program to create awareness.  Our successful marketing program will lead us to our first sale which will be on credit terms.  Time to record the activity:

1. We launched a marketing program on credit (SELLING, GENERAL & ADMINISTRATIVE: +$50,000)
2. We owe the Marketing Services Company for the program (ACCOUNTS PAYABLE: +$50,000)
3. We sold some machines to a customer on credit (REVENUE: +$200,000)
4. Our customer owes us the money for the machines (ACCOUNTS RECEIVABLE: +$200,000)
5. We shipped the machines to the customer (COST OF GOODS SOLD: +$80,000)
6. We no longer have the machines that we shipped (INVENTORY: -$80,000)

Now let’s pay our suppliers for the raw materials that we purchased earlier and the advertising from above.  We can also collect from our customer at this time.  Let’s record:

1. We use cash to pay our suppliers (CASH: -$150,000)
2. We no longer owe our suppliers what we paid (ACCOUNTS PAYABLE: -$150,000)
3. We can collect cash from our customers (CASH: +$200,000)
4. Our customers no longer owe us what they paid (ACCOUNTS RECEIVABLES: -$200,000)

We are starting to look like a business, selling products, paying bills, and collecting cash!  Let’s step back again and see how we are doing by looking at our buckets:

Revenues	$200,000	We sold some machines	Cash	$490,000	We paid our suppliers, but also collected some cash
Cost of Goods Sold	$80,000	We shipped the machines and recorded the cost	Accounts Receivable	$0	We collected everything owed to us
Selling, General and Administrative	$50,000	We launched a marketing program	Inventory	$80,000	We shipped some inventory to a customer
			Fixed Assets	$500,000	We still own our fixed assets
Equity	$1,000,000	We still owe the owners their investment	Accounts Payable	$0	We paid all of our bills

 

OK, we are off to a great start.  We have covered all of the basic transactions of the operations of the business.  Hopefully, you were able to follow this, and you think it has been pretty simple.  Next time, we’ll turn on the fire hose and simulate the rest of the month.  Don’t worry; we’ll be analyzing financial statements in no time.

In my next post, I will take you through completing a business cycle.

-Bruce A. Brien, CEO, Stratascope Inc.

Finance 101 for Sales and Marketing Professionals: Lesson 1 – The Framework

I have been asked many times by a countless number of sales and marketing professionals to put the field of “Finance” in basic terms that they will understand.  Finance and accounting can be very complicated, extremely dry, and usually boring.  Sales and Marketing professionals don’t do very well with the combination of complicated, dry, and boring.  If they did, they wouldn’t be in sales.  In any event, I will do my best over the next month, through this blog, to help you build the basic financial and business acumen that you should have to carry a business conversation with your prospects or clients.  I’ll try to put everything into basic terms with examples.  When I can’t, I’ll try to provide you with a clear definition.  Up front, I apologize to the accountants in the audience (some of whom are in my employ) and would ask them not to quibble over my skipping areas that I don’t think are very relevant to sales and marketing professionals.

Let’s begin with the basic financial statements.  Different industries will use different models and formats to record their business.  In order to keep things simple, we will confine our discussion to commercial and industrial manufacturers, distributors, and retailers.  After we have a basic knowledge in place, we can discuss other financial models for professional services, general services, banking, and the non-profit public sector. For most industries, we need to focus on the Income Statement and the Balance Sheet.

The Income Statement tracks an organization’s performance over a period of time.  It tells us how the organization has performed in the past.  Remember, past performance does not guarantee future success, or failure, it only tells us what happened.  The Balance Sheet tracks how well an organization is prepared to address the future.  The Balance Sheet is a position document that shows where the organization is at a point in time, what assets and liabilities (responsibilities) it has available to address the challenges of its marketplace.  Performance and position are the keys to understanding a business’s operational success.

When business transactions occur, they can change both a company’s performance, and its position.  For industrial and commercial industries, the operational areas that can be affected are below:

The Income Statement (performance) breaks down into three operational components as follows:

• Revenues (Often called Sales or, in Europe, turnover) – representing the market value of goods and services that have been shipped or delivered to customers
• Cost of Goods Sold (Cost of Sales) – represents the costs incurred to procure, build, and deliver the products
• Selling, General, and Administrative Costs (Overhead) – represents the other costs to run the business, i.e. sales, marketing, accounting, legal, HR, research and development, and services

There are also other non-operational expenses like depreciation, taxes, and special items that are better left to the accountants.

The Balance Sheet (position) breaks down into five operational components as follows:

• Cash – Cash as well as any other liquid (easily accessible and convertible to cash) investments
• Accounts Receivable – What the customers owe for the products and services they have received
• Inventory – The materials, the work-in-progress, and the finished goods along with any labor and other resources that went into them
• Fixed Assets – The property, plant, equipment, computers, and patents of an organization would all be classified here.
• Accounts Payable – This is the amount that we owe our creditors under basic trade terms (not loans or any interest bearing stuff – leave that to the accountants)

The final non-operational component that we need to be concerned with is equity.  Equity is the beginning and the end of every commercial business.  The owners of the business put equity in to get the business started and any profits (income) left at the end of the period are moved to equity as well.  If the company loses money, it comes out of the equity as well.

That completes the framework that I’ll use to discuss each of the upcoming topics around finance for sales and marketing professionals.

In my next post, I will look at the basic operational transactions that drive a business.

-Bruce A. Brien, CEO, Stratascope Inc.

Benchmarking: What’s in it for sales?

Recently, I was afforded the opportunity to speak to the Philadelphia Chapter of FEI, Financial Executives International.  After breakfast, I was asked to speak for about 45 minutes on the importance of benchmarking company performance against peer performance.  Stratascope had provided each company with a benchmark report that highlighted their performance across several important operating metrics as compared to their peers and the leaders in their industry.  SAP America had sponsored the event.  I thought the session went well.  The group was lively and interactive.  All of the CFOs and Finance VPs in the room acknowledged the importance of benchmarking.  That reason alone is why it should be important to you as well.  You need to care about the same things that your clients care about.

So why do they care?  There are several key reasons.  In today’s climate of rapid economic change, market conditions continue to evolve at a dizzying pace.  None of last year’s internal benchmarks for growth or profitability seem to apply.  The only place to find metrics for the same economic conditions is to look at your industry peers.  The second reason points to the diminishing time to market in many industries.  Barriers to entry in most industries are falling away, opening the door for new competitors accelerated by technological advances.  Even Microsoft Chairman Bill Gates has been quoted as saying that his company could be out of business in 18 months if they did not continue to innovate.  Peer benchmarking helps companies quickly identify these external pressures.  The third reason is that benchmarking puts performance in perspective.  If your DSO drops from 85 days to 55 days, is it because you did something right, or is it because the industry that you sell to started paying sooner?  Benchmarking can tell you.

Now that we know why they care, why should you care?  You should care for the same reasons, but from a different perspective.  If your offerings help companies be more nimble, enjoy better visibility into their business, or quickly adapt to change, then you want to talk to companies that have experienced the rapid change of reason #1.  You want to help them close the gap.  If you can help your prospects fend off the competition, defend their customer base, or get their offerings to market more quickly, you want to talk to companies that are seeing reason number #2.  If neither of those reasons pushes you to act, there is always reason #3.  By putting performance in perspective, you will put yourself in a position to question your prospects management decisions and initiatives.  I don’t mean for you to question whether or not they made the right decision or investment, but to question the decision itself.  For example, if your benchmarking tells you that one company has higher (not better or worse) costs than another similar company, it is only proper for you point out the difference (it is fact), and ask them why?  It may be by design, they may see it as a competitive advantage, it may be part of their image and value, or it may be an issue that they would like to address.  By simply asking why, you open the door for meaningful dialogue with your prospect or client.

Benchmarking can be a great door opener or conversation starter.  Use benchmarking to articulate your observations and then ask for an explanation.  Before you know it, you will be talking about them and their business, which is right where you want to be.

In my next several blogs, I will begin a series of shorter posts that focus on basic business acumen for sales and marketing professionals.

-Bruce A. Brien, CEO, Stratascope Inc.

What type of infrastructure is needed to support a small sales organization?

Let’s begin with what I mean by small.  I consider a small sales organization to have fewer than 10 people in sales and lead generating marketing combined.  We have 5+ people here at Stratascope.  With regards to infrastructure, I am going to relate our experiences and why we are happy with our choices, as I am sure there are other approaches and certainly other vendors to choose from.  I have several customers in the CRM and related technologies space and I am not in a position to use all of them.  I am also not endorsing particular products in this blog; I am merely providing specific evidence of what we are working with.  That being said, I would like to focus more on which pieces of infrastructure we have in place and why, as opposed to which vendor choices we have made.

Let’s begin by breaking down the areas where we needed to add infrastructure and where we plan on adding it in the future:

Category	Infrastructure Need	Rationale
Marketing	Asset Production Software (i.e. video capture, audio capture, presentation software, publication software)	We needed to be able to communicate our message across multiple media formats.  We also wanted to componentized our asset catalogue for multiple re-use scenarios.  We are currently using PowerPoint, Publisher, Snag-It, and Camtasia Studio.
Marketing	Document Management	We needed a mechanism to store, update, access, and deliver our sales and marketing assets to our prospects, customers, and partners.  We are using salesforce.com.
Marketing	Communications and Social Media	We needed vehicles to actually carry the message and brand out to the public via the web, e-mails, and social media updates.  We also need to capture social media activity to generate leads. We use Constant Contact for our e-mail campaigns.  We are monitoring and can be found on Twitter, LinkedIn, Facebook, and YouTube.
Marketing	Contact Identification and capture	We needed immediate access to reliable contact information on potential leads via both capture and lookup.  We use Jigsaw for contacts.
Sales	CRM service	We needed to be able to track leads and lead follow-up, opportunity management, and account management.  We use salesforce.com for our CRM service.
Sales	Research Portal	We need to be able to research our prospects and customers, prepare for client interactions, and articulate our value.  We use our own Stratascope Research Portal.
Sales	Lead Scripting	We needed an automated mechanism to follow-up on leads, script calls, leave messages, send follow-up e-mails.  We use Lead Insight.
Sales	Collaboration	We need to be able to present our offerings, communicate our value, and demonstrate our solutions.  We use Microsoft LiveMeeting.
Sales	Lead Management (future)	Our next step is to increase our lead traffic through the use of industry related content directed at specific landing and lead capture pages on the web.  As our lead volume increases, we will need to track and score leads.  We have not made a decision yet.

 

As you can see, the portfolio of technology quickly adds up.  In each case, we had done our research, determined the need and rationale before jumping in.  Where necessary, we have customized the services to meet our needs.  As we are a SaaS company, we have focused on using as many “cloud” based services as possible.  We believe in the model.  Our monthly burden per sales and marketing person for all of the above support amounts to just under $700 per month.  That means that we could only hire one more inside sales person if we did not automate the support of our team at all.  The value speaks for itself.  As we grow, my goal is to keep that number in check, $750 per headcount per month in sales and marketing infrastructure support.  I am confident that without the support, our productivity would drop in half (at least!).

As you look at your own organizations and costs, think through the rationale behind the infrastructure, before you leap into the technology.  That’s what we did, and it seems to be working.

I will be speaking at the “Financial Executives International” breakfast seminars in Philadelphia and Boston over the next two weeks so I’ll be blogging about those events and company benchmarking in general during that timeframe.

-Bruce A. Brien, CEO, Stratascope Inc.

Selling to the CFO: What to do if he/she picks up the phone

You have all been told to sell high!  Sell to the C-level.  Sell to the CFO, that’s where the money is.  Easier said than done, right?  In my experience, you can’t sell to the CFO anyway, so stop trying.  You can help the CFO buy from you, but isn’t that the same thing?  Not even close.  Your relationship with a CFO needs to be that of a trusted resource, a source of valuable information and insight that he/she will call upon when dealing with the recommendations and protests of others.  Calling the CFO is easy, just pick up the phone and dial.  Leaving a message isn’t too difficult either as you can script that (highly recommended).  You can follow-up with e-mails and meeting requests, all of which are pretty easy and can be driven by templates.  But what will you do if they answer the phone?

I follow several basic rules when I talk to CFOs.  First of all, don’t call unless you have something to talk about.  That means, if you don’t have anything going with that account yet, the CFO is not the place to start.  There is one exception to this rule that I will talk about later.  The second rule is to keep the conversation brief (you are showing respect for their time).  The third rule is to be direct, which also respects their time.  The fourth rule is that you must provide them with an easy exit to the conversation.  The fifth or final rule is to close the conversation by opening a communication channel with them.

Great, now you’ve got a set of rules, but what should you say?  My own conversations with CFOs usually go something like this.

1. “Hello Ms. Johnson, this is Bruce Brien with Stratascope.  I called to ask you a few questions about the sales enablement project that we are working on with Bob Harrington.  Do you have a few minutes to give me your unique prospective?”
2. “Thank You, I’ll be brief.  From your prospective, what is the specific business problem that you are trying to solve with this initiative?”
3. “What are the consequences of doing nothing?”
4. “When would you like to have a solution in place?”
5. “How much do you think the solution will cost?”
6. “Do you have any questions that you would like to ask me at this time?”
7. “Thanks again.  Would it be alright if I called you again, if I need to ask any more questions?”
8. “Thank you. Have a nice day”

There were a total of eight questions and/or statements on my side of the conversation.  Each one has a specific purpose.  Let’s look at them.

In the first item, I let her know who I am, who I’m with, who I’m working with, what I’m working on (rule 1), and I simply ask for a few minutes of her time (rule 2).  The fact that she answered the phone tells me that she has at least a little time available.  If I get turned away, I know that this project is not really high on her radar yet and I can use that information to better plan my resources.

The second item gets right to the point (rule 3).  From her perspective, what is the problem?  Only the solution to the problem as she sees it will get funded, regardless of how much the evaluation team is on your side.  You will need to restate your value in her terms, even if the line of business sponsors see the value differently.

The third item is the most important question in the dialogue.  The answers that I have received have ranged from “nothing” (this project will not get funded) to “I will get fired” (this project will get funded) with many variations in between.  Be sure to detect the emotion in the answer as well, more is better.  Her answer tells me how emotionally involved in the outcome of the project she is.  I’m sure you can see how valuable that can be.

The fourth item can be a real eye opener if you are dealing with tire kickers.  “Next December (2010)” tells you that this project is in its infancy and should be nurtured as such.  “Yesterday” tells you that this problem is serious and that they need to get something done soon.  If your initiative will need Board approval, you will need the CFO to put it on the agenda, so her sense of urgency is paramount to your success.

I usually get shut down on the fifth item and that’s ok.  I don’t expect her to start negotiating with me during this call.  I ask the question to let her know that I am thinking about cost from her prospective (the whole initiative) instead of price from mine (my piece of the project).  In the unlikely event that I am even given a ballpark, it will give me a feel for where we are at and how far we have to go on the price/value equation.

The sixth item gives her an “out” from the conversation (rule 4).  She will appreciate it.  It will also help you avoid any uncomfortable dead spots in the conversation or asking about her dog or boat.  She will most likely take your out and move to close the conversation.

In the seventh item, we are thanking her for her time, while simultaneously opening a dialogue that we can take advantage of if the project takes a wrong turn later on (rule 5).  We have officially established a “working relationship” with the CFO!

We close with a simple pleasantry and hangup.

By planning your conversation with the CFO, you will accomplish everything that you need to at this point in your selling process.  The CFO will typically view the conversation as a success and a breath of fresh air.  From their perspective, it did not take long, it did not waste their time, you listened (a rarity), and there were no awkward moments.  You have introduced yourself and proven to be respectful and credible in your questions and directness.  You now have a conduit to the CFO which you will undoubtedly need later.

On a final note, my exception to rule #1 about having started a dialogue with someone else, occurs when you have been issued an RFP or RFI.  In either case, do not open the document!  Once you do, you are bound by its rules such as “Only talk to the project manager (i.e. gatekeeper).”  Before you ever open an RFP, call the CFO and conduct the dialogue above, changing the opening statement as follows:

“Hello Ms. Johnson, this is Bruce Brien with Stratascope.  I received notice today that I will be assigned an “RFP” from your company.  Do you have a few minutes to give me your unique prospective?”

By calling first, you have not broken any rules.  The CFOs knowledge and awareness of the RFP will tell you more than anything in the RFP.  You will also have established a method of uncovering conflicts between the RFP and the stated goals of the CFO which you can use to your advantage when necessary.

I have always found this approach to be successful and I hope you do as well.

In my next blog, I will begin talking about some of my partners that I rely on for the infrastructure that we have in place as a small sales organization.

-Bruce A. Brien, CEO, Stratascope Inc.

Competitive Intelligence: Your sales teams need to know what they are up against

There are several reasons to keep a current portfolio of insight on each of your competitors.  The obvious reason is to know what you are up against.  Equally important is your ability to differentiate your own offerings.  You differentiate from your competitors, which you can only do if you know what they offer.  The third reason is to make sure that you are never blindsided by their news.

Tracking competitive information has never been easier.  Fifteen years ago, enterprise software vendors used to hire independent firms to uncover what their competition was up to.  With today’s internet access, you can easily set up an “information receiver” for each company.  Start with their website, which will have two of the most important pieces of information that you need to follow.  All of their solution offerings, even their features and benefits should be clearly stated on their website.  This information will be kept fresh and can be used to make sure that your own messaging stays differentiated.  You may even need to respond to a differentiating development that they have announced.  They will also use their website to trumpet their success.  You need to know when they announce a major win or when they receive an industry award.  If all you do is track their website, you will be way ahead of where you are if you don’t.  You don’t have to stop there.

As social media outlets continue to grow, your competition will continue to explore new venues to communicate their story.  You should be following them on twitter, Facebook, any blogs that they own, industry specific social media forums, and even YouTube.    This is where up-to-the minute information will be cast.  You should know that your competitor is hosting a public webinar tomorrow and you should know how it went based on their tweets.

The third avenue for tracking your competition can be easily set up as a series of clearly articulated RSS feeds.  You should set up feeds on both Google and Bing at a minimum by searching their news feeds for your competitors name and then clicking the RSS button in your browser.  You might also want to search for their name and the word “problem” or “issues” in order to keep abreast of these types of developments separately.  If your industry has its own news forum, you should be tracking that as well.

To summarize, you should have a portal (or intranet) where a page has been created for each competitor.  On that page should be the following:

1. A link to their website solutions section
2. A link to their website news section
3. Updates from social media sites
4. RSS feeds (multiple feeds and search criteria)

Now that you know what they are doing, you need to respond to it.  On each page of your competitive intelligence intranet, there should be an internal set of discussion threads available for your own community of expertise to add their insight.  Product management should be able to respond to new features and benefits, ex-employees of the competitor may have other insights, and your management team should be providing insight as to how to position your company and offerings against the current landscape.

I would also recommend that you create an industry portal within your competitive intelligence intranet to capture news and developments at that level.  This is also where new players will pop-up that you will want to track.  In a rapidly evolving competitive environment, it is critical to be “plugged in”.

I have enjoyed discussing sales enablement for the last several weeks.  In my next post, I will move on to a new set of topics, the first being, “Talking to a CFO: What to do if he or she answers the phone!”

-Bruce A. Brien, CEO, Stratascope Inc.