ROI – For Pete’s Sake, Know What It Means!

By July 8, 2010Finance

This is the fourth post in a series about selling with Finance, the Universal Language of Business.

Critical question:  Would a CEO, CFO or C-Whatever-O rather talk to you about features, benefits, price and discounts or an ROI of 78% and $486 grand of positive net cash flow?

Hey!  Don’t wimp out on me!

Read this post and the rest of the financial series!  Learn the universal language!  It could easily become your single most powerful personal differentiator.  It will for sure open doors to you that will remain firmly and forever closed and locked to your financially illiterate competition.

ROI is one of the most mis-used and abused financial terms among sales reps.  Hearing something like “…an ROI of $500K,” or “…an ROI of 2 years,” is like hearing fingernails shrieking across a chalkboard.  Makes me wanna’ scream!  By saying, “ROI” when you actually mean, “Net Cash Flow,” “Cumulative Cash Flow,” “Payback Period” or “Break-Even Point,” you label yourself as one who doesn’t really know what he or she is talking about.  (Read and learn parts 2 & 3.)

Sorry if that felt like a slap upside the head…  But isn’t it better to get whacked while reading a blog post than to prove yourself less than savvy in a discussion with a customer CFO?

Simple ROI (Return-On-Investment) is the ratio of the money I gain vs. the amount I invest.  More strictly speaking, it’s the cumulative net cash flow divided by the cumulative investment over a given time period.  In the example below:

  • $233 +$268 +$229 = $730 is the amount of cash that will come in as a result of my proposal over the first three years
  • $339 + $301 + $229 = $755 is the amount of cash that will be invested over the first three years
  • $730 – $755 = ($25) is the net cash flow for the first three years (So far, I’m still in the hole)
  • ($25) / $755 = -3.3%

Ta-da!  The simple ROI over the first three years is -3.3%

As the example shows, the identical logic is used to calculate ROI over four and five years.

Let this sink in!  Consider again the question I posed earlier:  Would a CEO, CFO or C-Whatever-O rather talk to you about features, benefits, price and discounts or an ROI of 78% and $486 grand of positive net cash flow?

More questions:  Do you want to be a traditional, smile-slap-on-back sales rep fending off the rest of competitive hoards and working with customer middle management?  Or talking about making money in the cushy comfort of the C-Suite with the other grand muckety-mucks?

Join the discussion 6 Comments

  • Dan Collins says:

    Excellent Todd,

    Now let’s get down to the nitty gritty. The people that need to read this probably won’t. The people that did read it you probably already had. Getting salespeople to proactively become conversant in the business of business is fraught with rebellion and discounting sneers but it needs to be addressed with a passion. I commend you. Top Line / Bottom Line, ROI, cash flow and the above terms hit home with only those we have already converted – how do we get to the sales masses with this very important message? – and don’t say social media 🙂

    • Dan,

      You ask the $64,000 dollar question! I’ve gotten more blank stares over the years regarding financial topics than anything else, and yet everything in business is ultimately grounded in it. Don’t know how to fix it other than to continue to repeat the following mantra from the part 1 of the series:

      “Regardless of the customer’s country of origin, SIC code, or job responsibility, every single one of them is in the money-making business!”

      Todd

  • Leo Salazar says:

    Outstanding post, Tod,

    I concur with Dan: the people who need to read this probably won’t. They likely tuned out even before you wrote “Hey! don’t wimp out on me!” Which I loved, by the way (sure got MY attention).

    I work in the learning & development field and both you and Dan have put into words my biggest criticism of the profession: trainers don’t understand even the basics of business. What is ironic is that the biggest complaint that most corporate trainers have is that their work is irrelevant and that the CxO level doesn’t take them seriously. Well, what do you expect when you don’t speak or understand the basic language of business?!!

    Thanks for giving me more evidence, and ammunition, to carry on the fight.

    Yours,

    Leo

    • Leo,

      Thanks for the feedback and moral support! It’s great to know I’m not alone in beating the drum for financial literacy. Every business-person needs to know the basics.

      Todd

  • Bingo! Like Leo, I am an L&D professional hell bent on revolutionizing L&D. Leo is spot on! To address, Dan’s question, I think for most folks buying into the necessity for strong business acumen comes from a paradigm shift within the organizational culture and a strong WIIFM. Of course, a good L&D team who gets it too doesn’t hurt! Great article and comments.

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