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Sales Prospecting: Key Performance Indicators

To nurture existing business and to win new business faster, it’s essential that key account managers and business development professionals approach the right targets.

While it’s important to do the necessary research to determine that your prospect actually has a need for your solution, it’s just as important to keep an eye on their financial performance to ensure that your target client has a budget large enough to invest in your solutions when prospecting.

It is therefore necessary that key account managers and business development professionals have at least a basic knowledge of corporate finance and the key performance indicators (KPIs) which appear on a company’s financial statements.

Of particular significance to account development planning and business development planning is a sales professional’s ability to analyse the buying organisation’s turnover, gross profit, net profit, share price and level of debt. We will now take a look at each in turn.

Turnover

This ‘top-line’ KPI is the amount of revenue generated by a firm over the accounting period. Look at ‘Revenue’, Turnover’ or ‘Sales’ on a company’s consolidated income statement to determine this figure. The consolidated income statement can be found in the annual and interim reports of all publically listed companies operating in countries with basic accounting principles. It should be noted that a change in turnover can result from a change in volumes of sales and/or a change in the average value of each sale (due to discounting or new product lines etc.).

It is important that you ascertain any changes in turnover between accounting periods. This will provide a good basis for you to determine whether the client can afford your solution now (and in the future) and can also be used (in conjunction with the below terms) to prepare for and anticipate objections related to price later on in the sales process.

Gross Profit

Gross profit is a company’s revenue minus its cost of goods sold. It therefore represents a company’s residual profit after selling its products and services and deducting the ‘direct’ costs associated with the production of those goods and services. To calculate gross profit: using the income statement, take the turnover (revenue) and subtract the cost of goods sold.

Also of interest is an organisation’s ‘gross margin’. This is useful because it represents absolute value and is used to represent profit as a percentage of turnover. A gross profit of £200,000, for instance, would represent a gross margin of 20% if the turnover was £1m.

When analysing a company, gross profit and gross margin are important indicators of firm performance. This is because they indicate how efficiently management utilises labour and supplies in the production process.

For example: Company A and Company B both have £1 million in sales. Company A’s cost of goods sold (COGS) is £900,000 and Company B’s COGS is £600,000. Company A’s gross profit will be £100,000 (10% of turnover) and Company B’s gross profit will be £400,000 (40% of turnover).

It can be deduced that, despite earning the same revenue, Company B spends less money to make the same amount of sales, and is therefore more efficient. However, you should keep in mind that gross profit margin varies significantly from industry to industry. A retailer may aim to make 15% gross profit, a restaurant 30% and a professional services company 40%. It is important to consider this when comparing firms across different industries before jumping to any rash conclusions.

Again, trends should be considered in the context of how earnings have changed. If gross profit has gone up from last year but revenues have come down (or vice versa), then you should look for (and ask) what the cause has been … and what the relevant leaders are planning to do in the future.

Net Profit

Net profit is a measure of the profitability of a company after accounting for all costs. In accounting, net profit is equal to: the gross profit minus operating, tax, and interest expenses; plus (minus) any one-off items that occurred during the accounting period.

A common synonym for ‘net profit’ when discussing financial statements is ‘the bottom line’. In simplistic terms, net profit is the money left over after accounting for all a company’s expenses (with the exception of dividend payments to shareholders).

Before a statement shows net profit on ‘the ‘bottom line’, it will often show other measures of profit, including:

EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) - a measure of the company’s profit after deducting normal operating costs, but before deducting interest, tax, depreciation and amortisation. This represents the profit as a measure after taking out all normal operating costs, but before taking out those costs that can skew the profit performance of a company depending on local taxation laws, asset valuation policies, borrowing policies…etc.

This profit measure is of particular interest in cases where companies have large amounts of fixed assets which are subject to heavy depreciation charges (such as manufacturing companies and telecommunications companies) or in the case where a company has a large amount of acquired intangible assets on its books and is thus subject to large amortisation* charges. Since these ‘skewing’ effects on company earnings do not factor into EBITDA, it is a good way of comparing companies within and across industries.

Operating profit or EBIT (Earnings Before Interest and Tax) - this refers to a company’s earnings before interest and taxes have been deducted but after depreciation of assets and amortisation have been deducted.

Pre-tax Profit or EBT (Earnings Before Tax) - calculated as operating profit after interest expenses, but before income taxes, have been deducted.

*Note: ‘amortisation’ is equivalent to depreciation for intangible assets e.g. brands, intellectual property rights, etc.

Below all of these measures in the income statement, net profit (or the ‘bottom line’) is calculated as the profit after ALL costs and taxation have been deducted (but before dividend payments to shareholders).

Share Prices

Unlike other KPI’s discussed so far, share price is a ‘snapshot’ measure, as opposed to a measure taken over a specific accounting period. Hence, the ‘current share price’ is the current price of a single ‘ordinary share’ in a company at a specific point in time.

Ordinary Shares (called ‘common stocks’ in United States) are a unit of corporate ‘equity’ (i.e. ownership) and are a type of security*. They are called ‘ordinary’ or ‘common’ to distinguish them from ‘preferential shares’ (UK) or ‘preferred stock’ (US). In the event of bankruptcy, ordinary / common stock holders receive their funds after preferential share / preferred stock holders, bondholders, creditors, etc. On the other hand, ordinary shares perform better on average than preferential shares or bonds over time in terms of total shareholder returns.

Holders of ordinary shares / common stock are able to influence corporate strategy through voting rights to establish corporate objectives and policy, share-splits, and electing the company’s board of directors. Some holders of ordinary shares also receive ‘pre-emptive rights’, which enable them to retain their proportional ownership in a company should it issue another share offering.
Additional benefits from ordinary shares include earning dividends and capital value (i.e. share-price growth) which combine to represent ‘total shareholder returns’. There is no fixed dividend paid out to ordinary share holders. Dividends are often dependent on earnings or cash which is allocated to shareholders by the management board.

Meanwhile, share price is totally dependent on the immediate perceived value that capital markets place on the shares. With millions of shares often trading in the equity markets in any one day, the market price of any company’s shares can be heavily affected by changes in the micro or macro environment. Hence, ordinary shareholders’ returns are uncertain and potentially volatile.

By analysing trends in the share prices of buying organisations, sales professionals can make significant assumptions about the company’s value and make more accurate predictions of the prospects’ ability to finance future investments.

*Note: A ‘security’ is generally an exchangeable and negotiable financial instrument representing financial value. Securities are broadly categorised into debt securities (such as banknotes, bonds and debentures) and equity securities, e.g. ordinary shares and derivative contracts, such as forwards, futures, options and swaps.

Debt

Debt is money ‘borrowed’ to finance operations and/or acquisition of assets. Many companies (and individuals) use debt as a method for making large purchases that they could not afford under normal circumstances (e.g. working capital to purchase stock, purchases of assets, such as equipment and buildings).

A debt arrangement gives the borrowing company an injection of capital (money) under the condition that it is to be paid back at a later date, usually with interest. Bonds, loans and commercial paper are all examples of debt. For example, a company may look to borrow £1 million so it can buy a certain piece of equipment. In this case, the debt of £1 million will need to be paid back (with interest owing) to the creditor at a later date.

To find out a company’s level of debt, look at the firm’s ‘liabilities’ on their consolidated balance sheet. Here ‘short-term’ or ‘current liabilities’ refers to debts and obligations held by the firm which are due to be repaid within a year, while ‘long-term’ or ‘fixed liabilities’ refer to debts and obligations which must be repaid over a period exceeding one year.

The measure of debt is important in its own right, but its level compared to ‘total shareholder equity’ is also a crucial measure. A high debt-to-equity ratio generally infers that a company has been aggressive in financing its growth with debt, as opposed to raising additional capital through share issues.

This is a bold strategy which can have ‘high-gain’ and ‘high-risk’ consequences. If a lot of debt is used to finance increased operations, the company with a high debt-to-equity ratio could potentially generate more earnings than it would have without external financing. If this were to increase earnings by a greater amount than the debt cost (interest), then shareholders will benefit as more earnings are being spread among the same amount of shareholders. Furthermore interest expenses, unlike dividends, are not subject to tax. By holding more debt than equity, a company is therefore able to pay less tax while still being able to positive growth opportunities.

However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and, hence, become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.

The debt-to-equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as car manufacturing tend to have a debt/equity ratio above 2, while personal computer companies usually have a debt/equity ratio of under 0.5.

Summary

It is important to consider these KPI’s in the context of previous years. Look out for financial performance trends and evaluate organisation’s plans for future years. Indeed, the board’s financial objectives may explain performance trends and provide you with a clearer overview of a buying orgnanisation’s ability to invest in your solution.

If these KPI’s have changed significantly since the previous year, you should investigate the cause. Has performance changed ‘organically’ via management practices or ‘inorganically’ as a result of a merger with another company, acquisitions of other companies or divesting (sale or closure) of parts of the company?

By knowing the ins and outs of your client’s financial position you can save a lot of time by ensuring that you pursue clients with a sufficient budget and you will significantly speed up the sales process by being able to more adequately counter and handle any price objections.

Written by: Steve Eungblut, Managing Director of Sterling Chase

Sales Prospecting: Key Performance Indicators