P&L and Actionable Intelligence

In our training courses, we talk about why financial acumen knowledge is important. Moving your conversations from selling technical features to selling business solutions is only the first step. It is crucial to be able to articulate your understanding of the prospect's problems in their language. In fact, according to a Forrester Research report, “89% of executives considered their meetings to be failures because the salesperson didn’t understand the executive’s problem.” Given this level of mistrust by financial decision makers, you may want to rethink your strategy when communicating with the C-Suite.

I suggest you develop a solid foundation of financial intelligence.  Let’s begin with the income statement—often referred to as the profit & loss statement, the earnings statement or just simply the P&L. There are three sections to the P&L—revenue, costs, and profit. The design is pretty much the same all over the world in that revenue sources (sales) are at the top. They are usually summarized to a total revenue figure. Next are the costs (expenses). The primary costs are cost of goods sold (or COGS), followed by operating expenses like selling, general and administrative (SG&A) and research and development (R&D). Each of these expenses is important because they help us determine where the majority of the expense comes from.

Finally, the last section is profit—also known as earnings, margin or income. Net profit is calculated by subtracting all expenses from the total revenue. It should be noted that there are several profit lines in the P&L, including gross profit, operating profit, and net profit. Gross profit is calculated by subtracting COGS from revenue. Operating profit is subtracting operating expenses from gross profit. Each of these profit lines is important to understand when you are talking with a prospect about your impact on their economic health.

Typically, there are three years of data provided in a 10-K so you can look at trends.

Actionable Intelligence from the P&L

• Revenue trend: If revenue is trending up it shows the company is growing. You can calculate the growth rate and compare it to the industry growth rate for insight as to whether your prospect is growing faster, slower, or at the same rate.
•  Cost trends (i.e., SG&A or COGS): These are indicators of how well the company is managing expenses. You want to direct your conversation to your ability to help reduce these expenses. They have a direct impact on profit.
• Cost as a percent of revenue trend: Dividing a specific expense (like SG&A) by revenue, and comparing that percentage to prior years and an industry benchmark, is a great way to show specific knowledge about your prospect’s operating activities.  Does your solution help to reinforce a positive trend or redirect a negative trend?
• Operating or net profit: If the margin is trending down, this is a bad sign. It indicates that expenses growth is outpacing revenue growth. If your solution reduces expenses, this is an important line to review and discuss with your prospect.
• Interest coverage ratio: This calculation of operating margin divided by total interest paid indicates the prospect’s ability to make their current interest payments.  This, in turn, provides insight into the ability of your prospect to take on more debt (including investing in your solution).
• Depreciation trend: If depreciation is trending up, it appears they are investing in new assets. If it is trending down, maybe it is time that they should invest in your assets!

Discovering financial and actionable intelligence is a key methodology for arming yourself for a C-suite conversation.  And aligning your solution to business initiatives is fundamental to a business conversation.  The P&L is a great place to start.  After all, what company doesn’t want to grow revenue and/or increase profits?