Justify Your Fees – How to Workout ROI?

If you are having trouble justifying your fees then you need to ACTUALLY understand Return on Investment (ROI) – it is the key to earning higher fees and your clients still thinking you are excellent value.

Here is an outline of key concepts on how to approach your own sales meetings from an RETURN ON INVESTMENT perspective. It’s simple and painless and actually makes selling easier!

Sales experts take return on investment (ROI) very seriously, especially when selling business-to-business. They understand from bitter experience that their prospects want to see a return on their expenses, whether capital or operating costs.

As a business developer you cannot take those risk that some accountant sitting in an office, with no clue about the finer points of your product or service, misses out on some more subtle benefits. The company developer needs to take charge of the amounts to ensure the accountant sitting in the back office has all the numbers and calculates the correct ROI.

Another reason to consider an interest in ROI is to ensure you are not wasting your time trying to near a project with a poor ROI. You may use ROI as a way of qualifying a sale and not wasting time that could be spent finding prospects with a far better prospect for ROI.

ROI is all about cash flow

If you make an investment it indicates shelling out some cash in the expectation of getting more cash back. It’s all about income. In more complex projects, like purchasing a new machine, you will have cash moves relating to the purchase of the device and additional operating costs and then some form of cash benefits such as increased sales or reduced costs. Some ROI calculations can be calculated on the back of an envelope but most require a good Excel spreadsheet to total up all of the cash inflows and outflows. The main thing about the cash flows is that they are usually done over time as opposed to being lumped altogether.

Incremental Cash Flows

The only thing that matters in ROI calculations is usually how cash flows will change as a result of your decision. In simple isolated opportunities you might be able to calculate the incremental cash flows directly but in more complicated investments you do a full cash flow from the affected parts of the business and compare that with an alternative cash flow due to the change. Calculating the difference between your two will give you the incremental money flows.

Cumulative Incremental Cash Flow

Cumulative cash flow is simply the net of all cash flows up to one point in time. When looking at the cumulative incremental cash flow it is possible to see where “payback” occurs. This is when any initial outlay has been completely recovered. The payback period could be the amount of time it takes to achieve payback.

Payback Period

One of the most simple and yet most reliable indicators is the payback period. This tells you how long it takes to get your money back. It is normally expressed as a way of measuring time, for example 3. 5 days, 6 months, or 2 years. Projects that can show a fast payback are normally looked on favourably. It should be possible to check out the cumulative incremental cash moves and see the point at which the change from damaging to positive occurs. There is also a strategies Excel of calculating payback intervals using cell formulae.

Simple Example

Jason has a decision to make. He’s the chance to save money on his monthly cell phone bills. He has found a new supplier that can save him about 50 percent on his monthly phone bills. There is certainly, however , a large set up charge that he must pay for. His initial outlay is £300 but he saves £50 per month on his phone expenses. What is the payback period?

The answer is 6 months.

Simple ROI Calculation

RETURN ON INVESTMENT % = 100* (Incremental advantages – incremental costs)/Incremental costs

The easiest ROI calculation is just a straight computation of net benefits over project costs. Its OK for short projects of a finite length but not much use for projects such as the one above with ongoing advantages. Where do you draw the line? Including 3 years of benefits would give an alternative return to 2 years.

Net Present Worth (NPV)

Would you rather have cash now or cash later? If I would be to offer the choice of £100 now or even £100 in 2 years time then most people will go for the £100 today. Its money in the bank – much less risk and it can be earning interest or be used to finance other projects. What if the choice was £100 now or £800 in 2 years time? You might be inclined to wait for that larger payment although £800 in 2 years time will probably not be worth the same as £800 today. This is because pumpiing will eat away at the worth. Net present value helps to translate future net cash flows into what it might be worth in today’s money terms. This helps in making investment decisions between projects of differing duration.

If you ever need to calculate NPV however suggest you seek out an accountant who would get incredibly excited on the prospect! Believe me, it will make their day! If you are selling items of a capital nature then you may want to invest in an Excel template such as Financial Metrics Pro by Remedy Matrix (solutionmatrix. com). You can download a free lite version if you are in least bit curious!! The process of calculating NPV is called discounting and a good incremental cash flow that has gone through the particular discounting process is known as a discounted income. A company will have their own internal rate they use for discounting projects which is based on the cost of raising finance.

Internal Rate of Return (IRR)

The prospect of calculating IRR gets accountants even more excited!! It’s a calculation that works out a rate of return of the future income stream. It efficiently discounts the cash flow and confronts a single rate of return simultaneously. The calculation effectively works out the particular return from immediately reinvesting any kind of cash flows arising from the task. A company assessing a proposal may expect the IRR to be greater than their own cost of raising finance or even its not worth the bother (financially anyway). If the company has competing projects then they will compare the IRRs. There is an Excel formulation (=IRR) for calculating the IRR and Financial Metrics Pro furthermore includes IRR as one of its metrics.

ROI and the sales process

If ROI is so important for the prospect it makes sense to seek prospects with a higher likelihood of ROI and weed out there those prospects that are unlikely to find the customers accountants excited! The initial fact find stage of the sales procedure is the time to get as much information as possible to be able to assess the early likelihood of a good ROI. The prospect will usually be pleased to help so that they are not wasting time. You can get an idea of the relevant cash flows by taking into consideration the implications to the specific business locations affected by your product or service.

Discovering this

The incremental cash flows essential to determine ROI come from the difference between your future cash flows and the present status quo. It is as important in the sales process to uncover the cost of continuing with business as usual as it is to find out how the business will change following a choice to go ahead. APR is an easy aide memoire to make sure you uncover the main elements areas of cash flow influence.

A – Alternative

P : Price

R – Return

The company developer should be sure to use open up questions and an open mind to find out the required detail.

Alternative

What will be the alternative to going ahead with the project? This is about discovering the cost of this self-destruction. What are the main areas of current or even future pain that will occur if there is a decision to do nothing? Just locating this information alone is normally good enough in order to qualify a lead and get over most price objections.

Price

Exactly what would be the costs associated with going ahead using the project? The business developer should be careful not to just consider the deal cost but should also investigate the indirect costs that the prospect will incur as a result of going ahead with the choice.
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For example , the price of replacing a software system for a large organisation will normally be much more that the investment within the software. There will be costs associated with migration towards the new software such as user approval testing, training, project management, even process re-engineering. The business developer ought to be thorough in this area as this is the area that the accountants focus on.

Return

What would be the returns arising from going ahead? This is often the increases in revenues or reduction in costs. Many of the cost cutbacks will become clear as a result of discovering the choice.

‘No Brainer’ ROI

You can have hours of fun doing return on investment computations! The best type of ROI is what We term a ‘No Brainer’. From the decision that can be made without much thought at all, let alone doing full ROI calculations. The payback period will be less than a year and the cost of the alternative, the price and the returns are all very clear. Business developers would make much more progress developing accounts if the 1st sale to a new prospect has a ‘No Brainer’ ROI to it. Once the account is established and a good connection has developed then it will be much easier to get access to the information that would be required for a more complicated project.

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