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FINANCE

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PHIL YOUNG

Finance leaders fail to simplify their language at their peril

Alphabet soup is poisonous Phil Young PhD is an MBA professor and corporate education consultant and instructor

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

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Q2 2017 Dialogue

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26/01/2017 16:32

Dialogue Q2 2017  
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