Your household, the company you work for, or the business you own all depend on a steady cash flow. Money comes in, money goes out, and we depend on that cycle repeating itself monthly and annually. So why do we spend so little time talking about increased cash flow when we are selling energy efficiency projects? It may be that we really don’t understand our customer’s financial expectations.
I find that most sales people never talk about cash flow. Their tendency is to focus on simple payback and return on investment (ROI). While these are important financial metrics, neither of these provides a customer with a good financial view of the future when evaluating an energy efficiency project.
Businesses borrow money and reinvest profits and both of these are weighted on the cost of or return on their money. The calculation that represents this best is Modified Internal Rate of Return or MIRR. It’s a mouthful but it’s the most meaningful number you can provide to a financial decision-maker.
Modified Internal Rate of Return gives business owners a clear picture of their cash flow and helps differentiate a good investment from a bad one. It looks at the yearly savings, cost of the project, incentives, borrowing interest rate and the reinvestment return that the business expects to grow their business. It sounds complicated but with the right formula it really isn’t very difficult.
You may have lost projects in the past that have had a good simple payback or ROI and wondered why. The odds are that your customer had a better understanding of the financial picture or determined that their money would be better spent elsewhere. Take some time and learn about MIRR. It will add credibility to your proposal and help you to close more projects.