Common financial terms that are critical for the enlightened marketer

All financial managers have a goal to act ethically, and in compliance with International, Federal, State and Local laws.  This is particularly true with larger companies under greater regulatory and analyst scrutiny. 

While each company may stress certain financial measures more than other, here is a quick list of the most commonly used terms/metrics and their meanings.

•       Earnings Per Share (EPS).  The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.  Calculated as:

Net Income – Dividends on Preferred Stock

Average Outstanding Shares

•       Net Income Before Taxes (NIBT).  Often pronounced “nib-bit,” this is the revenue less the expenses PRIOR to subtracting out the taxes due to various government bodies.  An important figure, it allows the observer to understand the pre-tax income/loss of a company.  Often this is important when considering operating performance between comparative companies or when valuing an acquisition candidate as the taxes may or may not apply to a parent company net income situation.

•       Earning Before Income Taxes Depreciation and Amortization (EBITDA).  Pronounced “E-bit-dah,” this figure is similar to NBIT but takes the income figure even further back up the net income calculation to negate any impact of depreciation and amortization.  This is important to many managers as depreciation and amortization are accounting principals that are non-cash in nature.  They represent a non-cash amount of expense a company is allowed to deduct from income in order to lower taxes.  Please look up these terms for a further explanation of their application in accrual accounting.  Since they are really non-cash deductions, many financial managers prefer to add them back into the net income to gain a more clear understanding of the true cash flow of a company.

•       Cash Flow.  Cash flow is the total amount of money being transferred into and out of a business.

•       Balance Sheet.  The balance sheet is a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.

•       Income Statement, Operating Statement or Profit and Loss (P&L) Statement.  The statement of operations summarizes a company's revenues and expenses over the entire reporting period.

•       Cost of Sales (COS) or Cost of Goods Sold (COGS).  The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the goods along with the direct labor costs used to produce the goods. It excludes indirect expenses such as administrative costs and sales force costs.

•       Gross Margin.   A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company.

•       Budget Variance.  A budget variance is the difference between the budgeted or baseline amount of expense or revenue, and the actual amount. The budget variance is favorable when the actual revenue is higher than the budget or when the actual expense is less than the budget.

See how the common thread of all these metrics and their related goals are numbers related to the financial health of a company?  This is what the C-Suite lives and breathes on a daily basis.  This is the topic that consumes their internal discussions on how to control and optimize the company operations.