What makes a sale a sale? Well, depending upon your viewpoint, and your company, you’re likely to answer this question in a number of different ways. Surprised to know that companies define sales differently? Don’t be! I’ve come across a number of companies that simply didn’t establish the truest definition of a sale as part of their sales planning process. A sale is not what’s been ordered, or booked, on backlog, about to ship or even invoiced. A sale is only a sale when the customer pays. More importantly, the value of the sale is determined by how long it takes the customer to pay.
Yet, despite all of this, a number of companies don’t take the time to define what a sale means to their company or their sales force and even fewer include this definition in their sales planning. What’s the danger in all this and why does it matter?
Understand What a Sale Means
Anything can happen between the time a customer places the order, receives product and eventually pays for it. Orders can be cancelled, product returned, invoices disputed and companies can go bankrupt or even go on holidays. In fact, I could write a myriad of other issues I’ve come across in my career that explains why a sale is only a sale once the money is in the company’s hands.
A number of companies only count sales once they've been paid an even go so far as to only pay their salespeople commission once the company is paid. There are far too many things that can happen in between invoicing the customer and finally receiving payment. For this reason alone, make sure your company clearly defines what a sale is and why it is such an important part of your sales planning.
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Why do Companies Measure Sales Differently?
If you’ve ever heard of Enron, then it’s easy to see how companies can play around with their revenue and financial statements in order to skew the real value of their business. A number of companies refer to their sales or revenue as their backlog, their existing and future contracts, expected future sales and a whole whack of other convoluted ways to measure their sales and company value.
While these may play a role when companies try to secure financing or are up for sale, they simply have no place when it comes to determining your company’s sales totals. Consider your contracts and future sales as good to have, but don’t count your chickens until they hatch!
"So, if a sale is only a sale when your company has the money, what can you do to speed up the process and make it an essential aspect of your company’s sales planning process?"
1. Use Prompt Payment Discounts
Getting paid sooner not only closes the “sale” sooner, but it helps to protect your company’s gross profit. Every day an invoice goes unpaid is a direct cost to your business. This is because your company likely finances inventory. You have a yearly interest rate on business loans and credit lines, and this yearly interest rate can be applied as a daily interest rate or cost. It costs your company money every day your customers don’t pay. However, if you use prompt payment incentives, such as a net-10, 1% discount on invoice value, you’ll defeat this cost and close the sale sooner.
Perhaps the greatest source of fast and easy cash comes from customers who can’t secure credit with your business. That’s right! Those customers that can’t get credit are likely more profitable, on a per-order basis, than ones that do have credit. Granted, these accounts aren’t ones to build your business around and aren’t part of your long-term sales planning process. However, they ensure your company gets paid first and they are hardly ever concentrated on by your competition.
These “hard luck” customers need someone to service them. Getting paid up front not only makes the “sale” a sale, but it helps in cash flow as well and saves your company money.
3. Give Your Sales Team Power
At one time, I believed that sales people should never get involved in customer accounting issues. However, I saw the benefit of sales people who had clearly defined guidelines as to what payment terms they could negotiate and when. This not only positions sales professionals as decision makers in the eyes of their customers, but it also helps them close sales sooner. I’ve seen this first hand and can attest to why it works.
It doesn’t mean that sales people will manage the accounting portion of the customer in terms of invoices/receivables etc. It simply means that you give them the power to pursue initiatives (like the ones mentioned above) to get paid sooner and close those sales faster.
In my experience, I’ve seen the benefits when companies clearly define sales to their sales force. It gets them thinking about the true value of a sale and the impacts of time on gross profit. It also empowers sales people to make the time-sensitive decisions that need to be made in order to better manage the company’s sales and its customers. Make sure to clearly define what a sale is within your company’s sales planning.
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