Most salespeople are well aware of the importance of reading their customers’ annual reports, but very few read beyond the Chairman’s Letter. As a result, they often miss one of the most important sources of information in the entire report: Management’s Discussion of Results.
If you wanted to assess the quality of a sports team, would you rely on the head coach’s plans and predictions for the coming season, or would you look at his explanation of last season’s results? That’s the difference between the Chairman’s Letter and Management’s Discussion.
The rationale for reading this section is quite simple: as a consultative salesperson, your principal purpose in life is to help your customers improve their business results. Every “to” goal requires knowledge of the “from”, and this is the section with the most complete information about the starting point.
This section is required by the SEC, so it is not written by the public relations department. By law, management is required to report on results of operations, capital resources, and liquidity and to discuss conditions and uncertainties that may materially affect their business. That means that you will typically find more “hard” information about business operations which can be useful in understanding the issues the company faces.
Better information will help you be a better consultant by making you more credible, improving your questions, and helping you identify more business improvement opportunities.
Here are some of the categories of information found in this section:
Major Business and Financial Events Both in the Past and Anticipated for the Future
These business events are discussed in more objective language than in the chairman’s letter, usually with explanations tying these events to the results shown on the financial statements that follow. For example, revenue increases (or declines) will usually be explained in terms of different product lines, price increases or volume growth, or geographical expansion. Often, when adding up all the revenue increases discussed, you will find that they total more than the total revenue growth. This can only mean that other areas not discussed had declines. That’s a way to read between the lines to find areas where there could be room for improvement or concern on the part of the company. If it is your job to solve problems for your customers, that job sometimes means uncovering the problems that they will not readily acknowledge.
Acquisitions and Divestitures
When evaluating revenue growth or decline, you must be aware if any dramatic changes in revenue are the result of fundamental changes in business operations, or merely the result of new companies having been acquired or divested during the year. If the change is due to acquisition, it may suggest a possible new source of business for you within your existing customer. If the change is caused by alterations in the company’s strategies, its execution of those strategies, or its markets, you can be sure these conditions will be uppermost in the minds of your customers, and you should be aware of them.
The CL often discusses business strategies, and the MD provides measures of progress toward achieving them. Since individual businesses or strategies will not show up in the consolidated financial numbers, this section is often the only place to find information about specifics. For example, I recently worked with a company that has proclaimed a very ambitious revenue target by a certain date, and by close reading, I was able to discern that they are highly unlikely to reach the target without making significant changes in their current sales practices.
Explanation of operating results
The final numbers you read in the financial section are very general summaries of literally millions of transactions, decisions, and business processes which occurred during the year. The explanation of operating results will help you understand the main factors which impacted revenue growth. For example, in a retail operation, was growth caused by opening new stores, or more productivity per store? Did its revenue grow more or less than its competitors’? How was revenue growth impacted by acquisitions or divestitures? Did growth come from shipping more units, charging higher prices, or some combination?
Details of operating results by geographic segment or business unit
Except when dealing with the most senior level management, most of the individual buyers you will work with are concerned with their particular patches. Management’s discussion frequently provides the detail that is not discernible in the consolidated numbers.
Key Business or financial measurements
One of the best ways to show that you’ve taken the time to understand your customer’s world is to use their own company-specific measurements. These often have more meaning to your buyers than goals over which they have little control, such as earnings per share.
In a competitive arena such as complex system sales, the winners are those who are willing to go just a little deeper and work just a little harder than their competitors. Read the Management’s Discussion section to get a leg up on your rivals.