Wrestling With Finance Jargon in Business Literacy Training

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Profit is profit... what is there to discuss? Maybe alot. It often pays to ask, "What do you mean by that?"[/caption]During business literacy trainings we use Income/Outcome® business simulations to familiarize employees with fundamental concepts in finance, like:

• What is profit?
• What is a fixed cost?
• What is depreciation?

Profit is profit... what is there to discuss?

Maybe a lot.

It often pays to ask: "What do you mean by that?"

During business literacy trainings, we use Income|Outcome® business simulations to familiarize employees with fundamental concepts in finance, like:

• What is profit?
• What is a fixed cost?
• What is depreciation?

You might look at the list above and think:

"Profit is profit—what is there to discuss?!"

But we caution trainees that finance terminology can differ from one organization to the next—and for good reason.

One company (or division) might use a term one way, while another company (or division) might use the same term in a different way.

Crucial Questions

So we try to make a habit—and encourage others to make a habit—of asking a very basic finance question:

"What do you mean by that?"

I'll give you an example of how important this question is:

Today, someone brought up Return on Sales (also known as the Profitability Ratio).

This is how we define Return on Sales (at Income|Outcome):

Return on Sales = Net Income / Sales

Investopedia—which has an extensive finance glossary—defines Return on Sales somewhat differently:

Return on Sales = (Net Income - Interest - Tax) / Sales

To further complicate things, their ROS definition is similar to how we define Operating Margin, which is:

Operating Margin = Operating Income / Sales

So:

• Their Return on Sales = Our Operating Margin
• Our Return on Sales = Their Profit Margin

Ask: "What do you mean by that?"

We always tell people to ask for clarification when they hear finance terms like Profit Margin.

Any term with potential ambiguity is a:

"What-do-you-mean-by-that?" term.

The phrase reminds us that terms can have several meanings depending on the context.

Recognizing Differences

I've thrown various words and formulas at you here, and I know it's difficult to track.

That's the point.

We often use the same terminology and concepts but apply and define them differently.

My view:

People can use the same word or phrase and define it differently without being 'wrong'.

There are plenty of conflicting definitions that are commonly accepted in the business world.

That's why it's important to:

• Understand the underlying concepts
• Be confident when seeking clarification of specific words and phrases

And it always pays to ask:

"What do you mean by that?"

Your Turn

Have you run into situations where two people used a term differently?

• How did you realize it was happening?
• How did you resolve it?

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