Based on the analysis done by your team, the IRR for this investment is 67%.
Someone or something always comes out on top. And as you might guess, it’s true for the financial analysis and justification a sales rep can prepare and present. Internal Rate of Return (or IRR) enables a rep to use a single number to demonstrate the compelling wisdom of investing in his or her recommendations. IRR is one big, bad differentiator!
This is the sixth post in a series about selling with Finance, the Universal Language of Business.
- Part 1: Do you speak the universal language of business?
- Part 2: Selling With A “Net Cash Flow” Approach
- Part 3: Cumulative Cash Flow + Payback = Committed Customer
- Part 4: ROI – For Pete’s Sake, Know What It Means!
- Part 5: The Time Value Of Your Customer’s Money
OK, first I’ll give you a headache, then I’ll fix it. Here’s the definition IRR: The discount rate at which the Net Present Value of the Incremental Cash Flow is zero.
Let’s come at that from a different angle. You remember Incremental Cash Flow, right? We take the total amount of cash that comes in minus the total amount of cash that goes out for each year in our anlaysis. Like so:
Our customer winds up with an extra $486K cold cash at the end of five years. But from Part 5, we know that we need to adjust that number to account for the time value of money using the prevailing interest rate. Let’s say your customer’s cost of money is 10%. (That means any investment that returns more than 10% makes money.) If you were a wise guy like me, you might ask the following series of questions and then make a statement:
- What if you could show you an investment that would break even if you had to pay an exorbitant 25% interest rate?
- What if you could show you an investment that would break even if you had to pay an exorbitant 35% interest rate?
- What if you could show you an investment that would break even if you had to pay an exorbitant 45% interest rate?
Well by golly, you’re in luck! What I can show you is an investment that will break even if you had to pay a ridiculously usurious 67% interest rate!!!
We’re not selling vege-matics or Ginsu knives here, but do you get the point? Your recommended investment is so good that even at extremely high interest rates, your customer makes money. IRR and the wonders of spreadsheets give us:
Almost anticlimactic, isn’t it? That, in fact, is the true beauty of the Universal Language of Business. Take one small step at a time, use your spreadsheet and it ain’t that difficult. That said, wouldn’t it be cool if you get your hands on a spreadsheet that summarized and showed the real formulas for all six parts of this series? Right click here and “save as” to do just that!
Learn the language!!!