The Three Value Conversations by Erik Peterson & Tim Riesterer & Conrad Smith & Cheryl Geoffrion

Author:Erik Peterson & Tim Riesterer & Conrad Smith & Cheryl Geoffrion
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2015-10-25T16:00:00+00:00

Figure 8.2 Income statement.

Most income statements show three years of results. This is great because you’ll be able to look at trends. Looking at two years is good, but comparing results over three years is better.

Income statements may be analyzed horizontally, to see changes from period to period over those three years, and vertically, to see how specific line items have changed relative to revenue. You need to take a look at both the horizontal and the vertical analysis in order to get a clear view of what’s going on in the company.

Salespeople often think that the most important number is the bottom line—net income or loss (profit, one hopes). But that’s not true. You can’t change profit. What’s important is how you can affect every line that leads up to profit.

It’s helpful to convert numbers to percentages so you can easily compare apples to apples: How much did revenue grow (or fall)? How much did costs go up or down in comparison to revenue? Once you’ve converted everything into percentages, you will be able to easily discern how fast each category is either increasing or decreasing. You will want to start with an analysis of sales, then move on to each expense category. We’ve analyzed the income statement In Figure 8.2 to give you an idea of how you might look at this example to find opportunities.

Total sales. Total sales almost doubled between 2011 and 2013. That is really great, and if you didn’t know, you would have to be wondering how the company made such a significant gain. A reasonable guess would be that there was an acquisition. A quick check of the annual report or 10-K would validate this assumption if you didn’t know for sure. A closer look indicates that international sales are growing faster than U.S. sales. That might be because of the acquisition, or it could be for other reasons. You would definitely want to do some research and try to find out why. One final check would be to compare the company’s sales growth against that of the industry. Doubling sales growth in two years is great, unless you find out that the industry is growing faster. Always benchmark all results, metrics, and key performance indicators (KPIs) against industry norms.

Cost of sales (a.k.a. cost of goods sold, cost of product, or cost of services). Cost of sales rose from $3,476 million to $7,240 million in the same period in which sales doubled. This cost category is frequently the most misunderstood by salespeople. The word sales leads some salespeople to believe that these costs are those associated with selling (such as sales commissions). That’s not correct. These are the costs associated with making whatever it is that the company is selling. You are likely to see these costs identified in a number of ways, depending on the industry you are selling into. In order to get a real insight, you need to look at the results as percentages. In our example, cost of sales is increasing.

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