The 12 financial phrases every HR pro should know

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There’s no longer any debate about whether HR needs the financial know how to be a business partner, but that doesn’t mean everyone is prepared.

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.
  • kb on 2014-05-01 12:51:35 PM

    Providing definitions of common finance terms like this is a good idea, and the definitions are generally quite useful - you might add others such as "extraordinary items", "prepaids", "operating expenses" and "net income". I get that the comments at the end of each one are trying to inject humour but I think they are trying to hard and end up sounding smart ass in a way that detracts from the message.

  • LS on 2014-05-01 1:08:13 PM

    This article is completely inappropriate - I thought it must have been posted in error but I see it is still here.

  • Chris on 2014-05-01 1:20:20 PM

    Spoken like a true financial.... person, kb! Lighten up! I thought the end translations were very helpful. (Spoken like a true financial moron!)

  • Anne Marie Harris on 2014-05-01 2:48:02 PM

    I agree with Chris - people need to lighten up! This was funny and relevant. I knew most of the phrases, but it does show the disconnect between finace and HR!

  • Senor Yak on 2014-05-01 2:57:54 PM

    I find that many people particularly in HR do not know what EBITDA is. Often a good measure of cash generated and good for incentive compensation targets.

  • Chris on 2014-05-01 3:12:11 PM

    I love Google! Google taught me (HR person) that "...[Earnings Before Interest, Taxes, Depreciation, Amortization] is often used as an accounting gimmick to dress up a company's earnings. When using this metric, it's key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA." Really?

  • Katelyn on 2014-05-05 9:41:54 AM

    I thought this was light-hearted and funny...and educational at the same time. Work can be humourous...try and have some fun with the dry stuff, folks!! I feel bad for those who can't see past all the seriousness of life.

  • FR on 2014-05-05 12:30:13 PM

    Ah, I thought that it was an interesting tactic that Tincup used here. By injecting explicit humour into the article it allows for better retention and more buzz. Very Seth MacFarlane like.

    I graduated with a BBA and fortunately, my program included accounting courses that made me familiar with all the terms mentioned in this article. Enjoyable read though.

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