Finance leaders fail to simplify their language at their peril
I’ve spent a good part of my career conducting seminars on finance for non-financial managers and professionals. At the start – but, thankfully, not the end! – of my seminars, participants will sometimes tell me that the subject of finance is “boring” or “confusing”, or that maths anxiety prevents them from wanting to get too involved with numbers. These comments come from people with solid work experience and educational backgrounds in non-financial fields of study, and from all levels of organizational responsibility.
So why does finance as a topic of business study rank so low on the ‘learning enthusiasm’ index, when knowledge of basic finance and accounting is so critical for businesspeople to have? Two reasons.
First, we in finance and accounting use a lot of initialisms, such as ROE, ROA, ROCE, EBIT, EBITDA, NPV, IRR and FCF.
Sure, every organization or function has its own brand of alphabet soup. But, when initialisms stand for a concept that is unfamiliar, people stop paying attention, or are perhaps too shy to ask further about their meaning.
Second, different financial terms are often used for the same concept. Over the years I’ve encountered different companies using the following initialisms for net profit (NP); net income (NI); net earnings (NE); net earnings after taxes (NEAT), net profit after taxes (NPAT) and net after tax income (NATI). Similar variations would apply to operating profit.
Now combine reasons one and two. How would you feel as a non-financial person if you were confronted with the following variations of two key financial measures:
1 ROC (return on capital) = ROCE (return on capital employed) = ROIC (return on invested capital)
2 NOPAT (net operating profit after taxes) = EBIAT (earnings before interest after taxes)
I could go on, but I think you can see from the non-financial person’s perspective that many of our terms become a kind of financial Tower of Babel, a morass of mutually unintelligible gobbledygook dooming the sector to eternal miscomprehension and endless confusion.
Okay, it is unrealistic to demand that the entire finance profession has only one term for net profit, or to ban accounting teams from using initialisms. And, assuming for the moment that we’re only discussing finance in English, there is still the Anglo-American difference in certain terms. Americans say “revenue”, “leverage” and “accounts receivable”, while Britons would generally say “turnover”, “gearing” and “debtors”, respectively. The classic problem of two nations separated by a common language isn’t going anywhere. What I am advocating, however, is for finance professionals to be a bit more aware of these reasons when making financial presentations, or when discussing financial planning and control issues with their non-financial, or transatlantic, counterparts.
If you notice a ‘deer in the headlights’ expression in your audience, it is wise to clarify or define certain terms, or to ask in an informal manner if there are any questions regarding the use of terms.
Suppose a company’s corporate objective is to improve its EBITDA margin, how can its people be expected to be effective in working towards this objective if they are not sure what the acronym stands for, what the difference is between this term and another one called ‘EBIT’, or why the company puts such a high priority on this particular financial measure? If you offer alphabet soup for dinner, expect more than a bellyache for dessert.
Phil Young PhD is an MBA professor and corporate education consultant and instructor