Increasing Company Value with Martin Cunningham and Mark Kesti
Nov 6, 2023
Today’s article is a transcribed conversation, edited for brevity and understanding, of a webcast event.
Host:
Hello, everyone. I’m thrilled to be part of today’s conversation on increasing company value. We have two experts with us who represent different ends of the spectrum regarding bottom-line and top-line impact. Joining us are Martin Cunningham from Pro CFO Partners and Mark Kesti from Innovo Sales. We’ll delve deeper into their organizations later on. But now, let’s dive right in. Martin, could you briefly discuss the connection between sales and the broader strategic financial strategy? In many organizations, it’s common to view sales separately, asking, ‘Are we making more sales?’ But this isn’t always synonymous with ‘Are we increasing our profits?’ Could you help us understand the relationship between sales and the larger financial perspective organizations should adopt, emphasizing the importance of considering these aspects together?
Martin Cunningham:
You know, to address your question here, when I look at valuation, I generally focus on three key factors. Let me delve into each of them. First and foremost, we have improved profitability. Secondly, reducing risk is crucial, and thirdly, ensuring investor confidence.
When it comes to improving profitability, top-line growth plays a significant role. However, the CFO and financial professionals take that top-line growth and analyze it in various ways. This involves examining the analytics behind the financial statements, resource allocation, and pricing strategies to maximize revenue, exploring growth opportunities such as building recurring revenues, diversifying the customer base, product and service differentiation, managing cash flow effectively, and optimizing operational efficiency. This includes looking at seamless procedures, employee retention, and automation.
Reducing risk is another critical aspect that enhances company value. This is achieved through implementing robust internal controls, ensuring compliance with industry and regulatory standards, carefully managing debt and capital structure to prevent over-leveraging, employing hedging strategies to mitigate market fluctuations (especially in certain industries), contingency planning, providing accurate and timely financial reporting, and conducting thorough due diligence and audit activities related to valuation.
Lastly, let’s talk about ensuring investor confidence. The goal is to attract and retain long-term investors by communicating the organization’s vision, strategy, and value proposition with transparency and clarity. Raising capital is vital, and that involves negotiating favorable contractual terms preparing financial forecast models and analyses to showcase financial stability, growth potential, and competitive advantage, all supported by the information in the financial statements.
Host:
You’ve provided some valuable points, but Mark – they may not always be at the forefront of a VP of sales or a sales representative out in the field. The question now is, how do we paint the big picture? How do we ensure that the sales function remains mindful of these broader considerations, even as they dive into the tactical aspects of increasing the top line? How can we maintain that strategic perspective?
Mark Kesti:
Certainly, profits are a crucial metric, and they tie closely to compensation plans. These plans significantly influence behavior. Some of our clients opt for commission-based compensation tied to actual sales, but we encourage others to shift towards a margin-based compensation model. This change can lead to shifts in the types of deals pursued, ultimately resulting in an overall increase in margin.
On a related note, when we collaborate with clients, one of our initial steps is to analyze their existing customer base. For long-term customer relationships, especially considering transaction size, it often becomes apparent that some clients aren’t contributing the same margins as others. In such cases, there are two potential actions. Firstly, we can consider increasing their prices where possible, as this is within our control, unlike operational costs. Alternatively, we might need to part ways with those clients. It’s a challenging process, but sometimes, less is more in achieving profitability and a healthy margin.
Host:
I appreciate these insights that get straight to the practical side of things. Mark, you brought up the issue of margin desperation, and it’s something many of us can relate to. For instance, we often encounter situations where the pricing structure has shifted over time, but a long-standing client hasn’t kept pace with those changes. They’re still at previous price points. That’s a common occurrence. Another scenario is when we aim to strike a deal by offering attractive terms upfront, thinking it’ll lead to greater long-term benefits, but it doesn’t always turn out as planned.
Could you dive deeper into why we end up in these margin-related challenges? And not just the immediate adjustments, as you mentioned earlier. What cultural shifts can we introduce to prevent these issues from recurring? How can we break free from this cycle?
Mark Kesti:
From our perspective, it’s all about the front end—what we can do, what processes we can integrate into the sales process and early relationship building. For instance, consider something as straightforward as a quote request. What internal parameters must we adhere to for it to be a viable and profitable opportunity?
Another practice we employ at the outset is an “opportunity scorecard.” We recognize that not all opportunities are created equal. This scorecard, used in the early stages of our pipeline, helps us distinguish promising prospects from less promising ones. It’s essentially a simple 10-question Excel spreadsheet that objectively scores opportunities. If it yields a low score, that prompts a few actions. First, we need to identify the right questions to ask the prospect to get the necessary information, and this is primarily the responsibility of the sales team. Second, we may need to consider moving on from the opportunity if it doesn’t align with our criteria.
And as I mentioned earlier, compensation programs play a pivotal role in influencing behavior.
Host:
Martin, Mark has been talking about some really important operational stuff, like compensation and scorecards, which we’ve touched on at ProCFO Partners before. I’m curious about your thoughts on the mindset needed to embrace KPIs and analytics. Many organizations either don’t do it, do it inconsistently, or give up after a while. We need more than just big numbers; we need a dashboard that provides a real-time look into what’s happening in the organization.
Could you share some insights into the types of scorecards or analytics that could complement what Mark mentioned? And beyond that, what other parts of the organization should take on this analytical perspective? How can we make sure this isn’t just a one-time thing but becomes a continuous practice?
Martin Cunningham:
Absolutely, KPIs (Key Performance Indicators) and dashboards play a pivotal role in measuring not only the current state of the organization but also in aligning the mission, vision, and core values with our day-to-day operations. A well-structured dashboard provides us with real-time insights into our position and, when used effectively, should prompt the creation of a set of action items aimed at closing the gap between our current state and our desired goals. It’s a powerful tool for guiding our actions and decision-making.
Host:
When we talk about increasing company value, one crucial aspect is knowing our value right now. To work backward from big numbers, we need to understand what’s happening throughout the organization. Mark, could you share some insights on how we disperse KPIs within the organization and how they trickle down to individual salespeople? What should an individual salesperson think about, and how does this funnel upward to align with the broader organization?
Mark Kesti:
Certainly, Chris. To echo Martin’s point, every department, including sales, plays a role in executing the long-term strategy. It all funnels up to the organization’s goals. On the tactical level, when it comes to KPIs in sales, one of the primary metrics is activity KPIs. At its core, sales is about the number of quality interactions we have with the right audience who have problems or needs we can address. More interactions lead to more interest, quotes, and ultimately, sales. It all starts with activity in the right places with the right people. Additionally, having a CRM system in place is critical as it not only helps on the sales side but also feeds into operations and finance. Accurate forecasts, for instance, are crucial for future planning.
Host:
Now, this brings up a crucial point about data quality. Data is only as good as input, and adoption of CRM systems can be a challenge. Inconsistencies and gaps in data can lead to unclear pictures.
We also have an interesting question about behavior change driven by communication from top leadership. Martin, in the context of increasing company value, what kind of communications should be from the leadership team? How can they ensure that not only sales strategies but also data management expectations are consistently communicated and acted upon within the organization?
Martin Cunningham:
Absolutely, there needs to be a coordinated effort, and leadership teams must be on the same page regarding messaging within their specific departments. Finance, sales, and operations all need to align to achieve the organization’s objectives, whether it’s related to order fulfillment, profitability, or cash flow. Clear, detailed communication is key, outlining what we aim to accomplish, our current position, our desired destination, and the path to get there. When this communication strategy is well-executed, the results will naturally follow.
Host:
It seems like there needs to be a shared understanding of why something is important, and it’s not just a matter of using the carrot-and-stick approach. How can we cultivate a culture where everyone sees the value and aligns with the idea that this is better for all of us, rather than doing something just because the boss mandates it? How can we shift the thinking from an “us against them” mindset to a more collaborative one?
Martin Cunningham:
Absolutely, it should always be a collaborative effort. When developing these strategies and objectives, it’s essential to involve all interested stakeholders and gather their input. As a leadership team, you can then use this information to formulate a strategy and communicate it throughout the organization. Ownership should be distributed at all levels, ensuring everyone has a stake in the process and understands their role in driving results. Ultimately, each person, including sales teams, should be accountable for their contribution to meeting these requirements and achieving success. It’s about everyone working together toward common goals.
Mark Kesti:
I’ll agree with what Martin said. It’s crucial to understand how our company’s strategy applies to individual employees. What does it mean for each person, and why is it important to them? Additionally, we need to clarify how they can contribute to the strategy’s success. It’s essential to break it down to the individual level and help each employee understand their role.
Another practice we’ve implemented, which relates to compensation, is the use of Management by Objectives (MBO) on a quarterly basis for all employees. This approach focuses on strategic execution. We assign specific tasks or goals to each employee that align with the strategy. By doing this, we ensure that when all these individual contributions are combined, they support the execution of our strategy. It grants employees ownership, responsibility, and a clear understanding of the value they bring to our strategy.
Host:
This really highlights why we should keep going back to our strategy more often, not just once a year or when we first start the business. It’s also a reminder of how important it is to involve a wide range of people in shaping the strategy, not just those in the C-suite. When everyone feels like they have a say and a role in it, it makes a big difference.
And Mark, we’ve got a great question for you. Have you come across companies that stretch or make deals that don’t seem financially sound when they’re trying to scale up to higher-level customers? This is a common challenge as businesses strive to reach certain goals, and I’d love to hear your thoughts and advice on this.
Mark Kesti:
You know, in the world of sales, the hunt for revenue is always on, right? Salespeople are eager to bring in opportunities, even if they have to stretch a bit to make it work. Sometimes, they’ll convince themselves that a deal is a perfect fit for us, even when it’s not entirely the case.
But here’s the thing: those salespeople who occasionally stretch a bit are often the ones who bring in some really promising opportunities, so it’s not all bad. However, it all comes back to the importance of disciplined qualification.
When it comes to scaling, I’ve witnessed this scenario play out repeatedly. Businesses take deals purely for the sake of revenue, even if it’s not the best kind of revenue. They might assume that accounts will grow or expand into other areas within the company. But truth be told, it’s a risky path.
What’s needed is someone in sales leadership who can step in and say, “This doesn’t quite fit our strategy.” It’s a challenging but crucial aspect, especially when you’re in the scaling phase. Discipline in making these decisions, even when it’s tough, is absolutely critical.
Host:
You know, Mark, this makes me wonder about the traditional quota model, which to me feels increasingly outdated. It often focuses on hitting numerical targets without much thought to the bigger picture. It’s like, “How many X did I sell? Did I reach the quota?” It’s a rush to meet those sales targets, often right before the quarter ends, without much strategic thinking about the overall revenue or the long-term implications. Do you agree?
Mark Kesti:
Yes and no. It does raise concerns about the traditional quota model. Sometimes, sales teams get focused solely on meeting their numbers without considering the broader strategic impact. However, it’s also the responsibility of leadership to guide the sales organization’s focus in the right direction. For instance, if we want sales teams to prioritize higher-profit products or services over lower-margin ones, it’s on leadership to incentivize that behavior. This can be achieved by offering higher commissions or bonuses for selling higher-value, higher-margin offerings. Ideally, the deals brought in, even at the last minute, should align with the strategic model we’ve laid out. It’s about creating a framework and culture where the sales team’s efforts naturally contribute to the company’s overall goals.
Host:
Martin, Mark is raising some interesting things that connect to some of these other components in this sort of financial function. When talking about profitability, how should my leadership team or my my strategic team be thinking about responding in real time to things like profitability? Should we increase prices? Should this strictly be a function of some sales behavior? How do we not just revisit this every year, every three years or whatever? But how do we keep our pulse on that so that we can, as Mark is indicating, make the best decision so that salespeople can succeed not just for their quota but for the company? How do we how do we keep that sort of feedback loop going?
Martin Cunninham:
Yeah, that’s what the leadership team is really constructed to do – collaborate and, to Mark’s point, having that information at your fingertips allows for much more robust and thorough decision making, which hopefully leads to a more probable and better result. From a finance perspective, having accurate reporting, good analysis, and looking at which products or services are indeed more profitable is crucial. It might look deceiving on the surface that one product might be more profitable than another, but the underlying information suggests otherwise. So the role of finance is to support sales and operations to ensure that the costs are accurately measured, and profitability is accurately conveyed to the team to move forward tactically and follow through on some of these strategic objectives from a sales and operations perspective.
Host:
We’ve got a really good question that connects right to what you were saying, Martin. How do we make sure that as we’re talking about analytics and profitability, how do we ensure our forecasting and projections are realistic, and not constantly a stretch goal, or a healthy but realistic stretch goal? Mark, let me start with you on that.
Mark Kesti:
Well, you know, it’s like this: garbage in, garbage out. If we just let the salespeople handle everything, we’d be closing deals left and right by Thursday. Now, I don’t want to downplay their importance because we’re all valuable here. But it’s really about having a solid process in place. That’s the responsibility of the leadership team. Our aim is to make sure our forecasts are accurate. And let me tell you, a forecast is only as good as the moment it’s written down. Things change constantly, you know? But we should be shooting for a 90% to 95% accuracy range, something that’s realistically predictive.
It all starts from the beginning, making sure we’ve got genuine, qualified opportunities in the pipeline. That’s where the sales manager needs to step in and work closely with the team. We’re talking about a weekly review of that pipeline, asking the right questions, like budget, authority, need, and timeline. We want to be absolutely certain that we’re dealing with a real deal here. They’ve got the budget, they’re ready to spend, they have a specific need, and there’s a timeline for their decision. Plus, we’re talking to the right people who can approve or disapprove that decision.
Host:
Martin is all revenue created the same when it comes to company value?
Martin Cunningham:
You know, when it comes to revenue, it’s all about quality. Higher quality revenue includes recurring income, loyal customers, and a more profitable product mix. These factors contribute to sustainable revenue growth. On the other hand, relying on one-time big sales may give you a temporary boost, like a sugar high, but it’s not a long-term solution.
Host:
Mark, in certain service-oriented organizations, you can sometimes land a client who’s incredibly high maintenance and a drain on time and energy. This can lead to a situation where you might not realize how it’s affecting your profitability because you’re too focused on serving this demanding client. It’s a tricky issue.
Firstly, do you agree that this is a significant problem, and have you come across it often? And if so, how should we address it while considering the value of revenue, as Martin mentioned?
Mark Kesti:
Yeah, I had one boss, the president of the company when I was VP of sales. He used to say, “We love all of our customers, we just love some more than others.” And that’s entirely true. So yeah, it’s not uncommon to have that challenging client. The sales team might move on to other things unless they stay engaged with the customer experience after the sale. However, operations will let me know if there’s a problem. It’s all about communication.
Ideally, we should be meeting with the leadership team weekly to make sure the head of sales is aware if a client is costing us money or taking up too many resources. In those cases, the sales team needs to address the issue, even if it’s a difficult conversation.
Host:
Fire them, right? That brings us full circle, making sure you keep a comprehensive eye on things. Don’t just chase after the short-term highs. Martin’s “sugar high” analogy hits the mark. It feels great to land a big deal, but when you analyze it, it might not be as fantastic as it seems.
Thanks to both Martin and Mark for sharing their valuable insights today. Connecting with experts can be incredibly helpful. Thanks, everyone, and we look forward to inviting you to another conversation in the future.
