Building Financial Acumen as a Sales Professional

“I just closed a deal with a 60 percent gross margin!” a new sales hire proudly told me early in my sales management career. I nodded and said, “That’s great. What’s the net margin? The salesperson looked confused and asked, “Net margin, what’s the difference?” I laughed and said, “Gross margin is like your commission before taxes. But the net margin is what you take home after taxes.” This article explores basic financial terms and why sales reps need to learn them.

As a principal of a sales training organization, I’ve learned that the more competent I am with finance and accounting, the better I can communicate value. When we launched Janek nearly two decades ago, I was worried about bookings and revenue numbers. As we grew, concepts like the time value of money, profitability, and risk vs. return became more important and clearer to me. Most sales reps prefer to avoid competing on price. Salespeople need to have a strong understanding of financial concepts to provide value to clients. Here are a few I wish I had known earlier in my career.

Term and Volume Deals

When selling to a larger company, the decision-maker often leverages their size to obtain a deep discount. The sales rep is eager to accommodate because they believe a deep discount is the only way to win more business. However, the account rarely turns into a whale account, and the sales rep is left scratching their head.

The solution is a term and volume deal. A term and volume deal is a pricing arrangement in which a buyer and a seller agree on a fixed price for a specified quantity over a specified period. The price is lower than the standard, but the buyer agrees to a certain volume level within the term.

The benefits of term and volume deals for buyers include lower prices, more predictable costs, and improved cash flow. For sellers, the benefits include more predictable revenue, the ability to forecast more effectively, and a long-term relationship with a customer.

Term and volume deals deliver value to buyers and sellers. However, until the sales rep can articulate the benefits concisely, they are left hoping the account will grow. And every sales rep knows hope is not a strategy.

Serve the Customer Better

Salespeople can benefit from learning financial concepts to better understand their customers’ economic perspectives and provide informed solutions. For example, most sales reps understand ROI–return on investment. As such, it’s the one term every sales rep shares when they want to communicate value.

Unfortunately, it’s a concept that is often misused. A sales rep once told me their solution would provide a 10,000 percent ROI in the first month. I said, “Really, how’s that?” They replied, “You invest $10,000, and you’ll get back $100,000.” This sales rep lost all credibility because they either misspoke or didn’t understand how to calculate ROI.

Here is the math breakdown of the above scenario:

ROI = (Profit / Investment) x 100

ROI = ($100,000 – $10,000) / $10,000 x 100

ROI = 900%

So, in this scenario, the ROI would be 900 percent. An ROI of 900 percent means that for every $1 invested, I would make $9 in return. Had the sales rep broken it down like that, I may have been curious. However, high returns require high risk, which is the next concept to consider.

Sell More by Understanding Risk

Warren Buffet once said, “Risk comes from not knowing what you’re doing.” He fails to mention that we always regret the risk we didn’t take. Risk is about managing trade-offs, and it comes in many forms, not just financial. It could include operational, reputational, and other forms of risk. When sales reps understand their customer’s risk concerns, they can tailor their solution to minimize those concerns and the perceived risk of doing business.

Sales reps should adopt the mindset that anything that puts their prospect at risk is a business opportunity. The most transparent way to uncover risk is to develop questions about the ramifications and consequences of the specific risk. Below is an example of the risk of lost sales:

“Mr. Prospect, have you ever calculated the cost of losing just one sale a week?

“No, I never really calculated that number.”

“I’m curious what your net margins are on an average deal?”

“On a typical deal, we hold about a $500 net margin.”

“So, one lost deal a week could be $2,000 in lost net margin monthly. How many sales reps do you have?”

“We have seven reps.”

“It sounds like the cost of each sales rep losing just one sale a week is more than you can afford.”

Discussing risk and the associated ramifications accomplished two things. First, it builds trust and credibility by demonstrating an understanding of the prospect’s business. Second, it makes the sales rep more influential with customers and prospects. Salespeople who understand risk can help clients identify the risks they may have never considered. Remember, prospects are more likely to find the budget when the problem is big enough.

Financial Objectives vs. Business Objectives

A firm’s business and financial objectives are different but related. When sales reps fail to separate the two, they limit their ability to make an impact. Business objectives include improving customer satisfaction, market share, and growth rates. Financial objectives are focused on financial performance, including revenue growth, profitability, return on investment, and cash flow.

Different companies and decision-makers may prioritize distinct objectives. If a company is focused on maximizing profits, it will accept more risk. If the company is concerned about profitability, it may want to do more with less. It’s essential for sales reps to understand the objective of the decision-maker before presenting a solution. Too often, sales reps have a slide deck presentation and jump into their pitch without a clear understanding of the decision-maker’s objective.

High-performing sales reps do not pitch products. Instead, they invest time in uncovering their prospect’s unique business and financial objectives. Uncovering objectives facilitates providing relevant and effective advice. At Janek, we call this a trusted advisor. The trusted advisor approach builds stronger relationships and guides the decision-maker to ensure resources are allocated in a way that supports their objectives.

Selling to the CFO

In complex sales, the CFO will likely be included in the decision-making process. This conversation with the CFO can be intimidating, especially if the sales rep needs help interpreting the jargon. Below is a list of financial jargon abbreviations that can be confusing:

• ROE is the Return on Equity. This measures how well a company is using profits. When a salesperson understands ROE, they can effectively communicate the potential impact of their product or service on the company’s financial performance. For example, they can demonstrate how their product or service can improve the company’s ROE by reducing costs, increasing efficiency, or generating new revenue streams.
• ROA stands for Return on Assets. It calculates how much profit a company generates for each dollar of assets it has invested. A higher ROA is better than a low one. ROA is a good metric to compare vendor performance.
• EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is a more nuanced metric than ROI. When sales reps understand EBITDA, it shows they are concerned about the company’s financial health. This allows the sales rep to have a deeper and more productive conversation with the CFO.

Another area that sales reps want to familiarize themselves with is regulatory compliance. There are many regulations and compliance requirements that impact business decisions, and salespeople may need to become more familiar with these. Here are some examples:

• Sarbanes-Oxley Act
• Dodd-Frank Wall Street Reform
• Foreign Corrupt Practices Act

As sales professionals, we need to be familiar with compliance-related questions. CFOs are responsible for ensuring compliance, so it’s common for them to ask detailed questions about this subject. While we may not be experts in this area, we need to be knowledgeable and able to speak intelligently about these topics to maintain a professional image.

Gain Insights from Financial Statements

A salesperson can benefit by reviewing publicly available financial statements of potential customers. The income statement, also known as the profit and loss statement, provides a snapshot of a company’s revenues, expenses, and profits over a specific period.

By reading the financial statement, a salesperson can gain insights into the following information:

1. Revenues: A salesperson can determine the company’s overall sales performance and growth trends by analyzing its revenue over time.
2. Costs and expenses: A salesperson can identify the company’s costs and expenses, including the cost of goods sold, operating expenses, and other expenses, which can help them understand the company’s financial priorities and challenges.
3. Net income: The net income is the income statement’s bottom line and represents the company’s profit or loss for the period. Knowing the company’s net income can help a salesperson understand its financial stability and ability to make new purchases.
4. Gross margin: The gross margin is a crucial indicator of a company’s profitability and can help a salesperson understand how efficiently it generates profits from its sales.
5. Operational trends: A salesperson can identify trends in the company’s revenue and expenses over time, which can provide insight into its overall business strategy and growth prospects.

Reading the financial statement helps salespeople understand a company’s financial situation and make informed decisions on pursuing it as a customer. It also facilitates informed conversations with decision-makers and helps them understand their financial needs and priorities.

In Conclusion

As the managing partner of a sales training company, I understand the importance of financial acumen in the sales process. Engaging in financial conversations with customers and prospects sets you apart from your competition and gives you greater credibility. Financial literacy translates into more influence, faster sales cycles, and fewer lost opportunities.

Armed with financial intelligence, salespeople can confidently recommend solutions and clearly communicate their offerings’ financial benefits. Financial knowledge not only benefits the salesperson but also strengthens relationships with customers. Sales success is often attributed to following a recipe. If that is true financial literacy is an ingredient sales reps need to deliver a succulent dish.