These days HR needs to understand and work closely with finance to ensure they’ll have the knowledge and ability to advance in the organization, but do you know what these financial phrases mean?
There’s little more embarrassing than not knowing what the three letter acronym means, or having to fake your way through a conversation so you can google terms later. HR consultant William Tincup put together a handy guide for some of the common, and sometimes strange sounding, terms that get thrown around the finance department.
How many of these did you already know?
- Acid Test: A stern measure of a company’s ability to pay its short-term debts, in that stock is excluded from asset value.
- Cashflow: The movement of cash in and out of a business from day-to-day direct trading and other non-trading or indirect effects, such as capital expenditure, tax and dividend payments. Meaning, do we have enough money in the bank account to pay $h!t on time? If so, cashflowin’.
- Cost Of Goods Sold (COGS): The directly attributable costs of products or services sold, usually materials, labor, and direct production costs. The key phrase is “directly.” COGS is actually quite important.
- Depreciation: The apportionment of cost of a (usually large) capital item over an agreed period. Come on now, you’ve been screwed at a dealership… surely you know what depreciation means. Surely.
- Fixed Assets: Assets held for use by the business rather than for sale or conversion into cash, e.g. fixtures and fittings, equipment, buildings. Just between us… CFOs generally like things that are fixed—assets, liabilities, expenses, etc. They hate surprises. Really hate surprises.
- Goodwill: Any surplus money paid to acquire a company that exceeds its net tangible assets value. Or, place where you donate the crap you couldn’t sell in the garage sale. Either way.
- Liabilities: General term for what the business owes. While not evil, liabilities are like the last Doritos in the bag. Inevitable.
- Net Present Value (NPV): NPV is a significant measurement in business investment decisions. You’ll need a PhD in Finance to figure out NPV… suffice to say, a dollar today is better than 110 cents in six months.
- Overhead: An expense that cannot be attributed to any one single part of the company’s activities. Well actually, you’re overhead.
- Return On Investment (ROI): Profits derived as a proportion of and directly attributable to cost or “book value” of an asset, liability or activity, net of depreciation. People in our industry lie about ROI all the time. Truth is, only the Loch Ness Monster knows how to truly calculate ROI. Let’s just call it guesstimate.
- Variable Cost: A cost which varies with sales or operational volumes, e.g. materials, fuel, commission payments. Remember what I said about fixed versus variable? CFOs hate anything that is variable… it messes up those pretty Excel spreadsheets. Kidding aside, cut out variable stuff in your budget… your CFO will love you.
- Working Capital: Current assets less current liabilities, representing the required investment, continually circulating, to finance stock, debtors, and work in progress. Like Cashflow, Working Capital is a great measure for the here and now. The Porridge Rule applies… too much working capital is bad; too little working capital is bad. It’s got to be just right.
What was missing from Tincup's list? Share the terms that had you scratching your head in the comments.