The Only 10 Business Savvy Metrics You Need to Quantify Value
By: Paul Hesselschwerdt
When working with Account Managers and sales people to help them become 'financially savvy', they often complain that they do not want to become Accountants. It's a fair point. When trying to quantify the impact that a supplier company’s products and services can have on their customer’s business results (which, by the way is our definition of Customer Value Creation), it may seem that an in- depth knowledge of finance is required. However we have found that a basic understanding of the following 10 financial metrics is all an account manager needs in order to identify, quantify and communicate customer value added:
From the Profit and Loss Statement,
- Revenue = Number of units of a product or service sold x Price per unit
- Cost of Goods Sold = Number of units of a product or service sold x Production Cost per unit
- Gross Margin = Revenue minus Cost of Goods Sold
- Research and Development Expenses = All costs (mostly people costs) that go into researching and developing new products and services
- Sales and Marketing Expenses = All costs (people costs, plus other out-of-pockets) spent for selling and marketing activities
- Administration Expenses = All remaining Overhead costs, i.e. money spent to keep the business running on a day-to-day basis
- Operating Profit = Gross Margin minus Research and Development, Sales and Marketing and Administration Expenses
From the Balance Sheet
8. Working Capital = Current Assets such as Accounts Receivable and Inventories, less Current Liabilities such as Accounts Payable and other short-term debts
9. Fixed Assets = Value of buildings, production equipment and other ‘hard assets’, less the amount of depreciation that has been expensed over the life of the assets
10. Cash Flow = Amount of Cash that has come into the firm through Operating Profit or out of the firm through Operating Losses, Plus or Minus the following:
- Plus depreciation and amortization expense because these are non-cash expenses
- Plus, if the company reduced its Accounts Receivables / Minus if Receivables went up
- Plus if the company reduced its Inventories / Minus if Inventories went up
- Minus if the company bought any Capital Equipment, like new computers or machinery / Plus if they sold any for cash
- Minus if the company paid off long term debt like bank loans, Plus if the company increased its long term debt
All of these financial metrics are published quarterly, usually with detailed explanations accompanying the figures, by all publically held companies. Many private companies and non-profits like hospitals publish these results annually.
And the most important financial metric for Customer Value? Creation?
I was recently teaching a group of sales and marketing people how to use these 10 financial metrics to define, quantify and communicate value-added for their customers. One key account manager asked which of these was most important. I think I surprised him by immediately saying “Gross Margin”. Think about it. Gross Margin is defined as Revenue from products and services, minus all of the costs required to produce those products or services. The greatest opportunities that suppliers have to create visible, quantifiable value for their customers is to enable their customers to sell more to their customers (increasing their volume and market share), and/or to enable their customers to increase prices to their end customers (increasing revenue value and margins). A supplier’s product features that enable better performance of their customer’s products; flexible designs that enable a customer to improve their Time To Market; Just In Time supply chains; zero-defect products and many other supplier benefits all significantly impact the customer’s Gross Margin, thereby creating quantifiable value for the customer.
Business Savvy Account Managers are constantly looking for ways to impact all 10 metrics for their customers. You can start by downloading our free Business Acumen Toolkit Business Acumen Toolkit and discovering how your company’s products, services and solutions can create real customer value!