My wife, Gaynor and I have been blessed with two children — our daughter, Brodie and our son, Henry. Since becoming teenagers, we’ve sometimes questioned that “blessing” but none the less, one of their wonderful teenage phrases that stuck in my mind was: “Too many words” which they’d often say to Gaynor and I when we were trying to explain something to them, usually something they didn’t like or want to hear.
I have often thought of the phrase, “Too many words” when I consider the amount of times finance folks, will use different words for the same thing. As a fully qualified accountant myself, I mean no disrespect when I say this, but I often wonder if the finance function sometimes tries to over-complicate matters to justify high salaries, rather like a good lawyer does! Well, now I’ve offended my finance friends, (who’ve stopped reading), lets have a look at some of the commonly heard phrases that mean the same thing.
“Gross Profit”, “Gross Income” and “Gross Margin” ALL mean the same thing because they each have the word, “Gross” at the front! Gross (lets say, “profit”) simply means the Sales (also known as Revenue, Income or Fees Earned) minus the Cost of Goods Sold).
And there’s another funny phrase… “Cost of Goods Sold” which can sometimes be referred to as “Cost of Merchandise Sold” or “Cost of Goods Consumed”.
“Operating Profit”, “Operating Income” and “Operating Margin” ALL mean the same thing because they each have the word, “Operating” at the front! Operating (lets say, “profit”) simply means the Gross Profit (see above) minus the Operating Expenses.
Hey you’ll never guess what? “Net Profit”, “Net Income” and “Net Margin” ALL mean the same thing because they each have the word, “Net” at the front! Net (lets say, “profit”) simply means the Operating Profit (see above) minus the Overhead Expenses and such items as Depreciation, Amortization, Dividends and Taxes.
“Net Profit / Net Margin / Net Income” is also referred to as “Earnings” for the Earnings per Share or “Earnings Before Interest, Tax, Depreciation and Amortization” calculation. To potentially confuse people even further, “Net Profit / Net Margin / Net Income” is also referred to as “Return” for the “Return on Asset” (ROA) or “Return on Equity” (ROE) or “Return on Investment” (ROI) calculations.
So “Net” = “Return” = “Earnings”.
With the holidays just around the corner, these can be great conversation starters at the dinner table especially with estranged family members whom you may not normally choose to spend time with yet, feel obliged to over the festive season.
As Brodie and Henry would say, “You’re welcome”.
I hope I have demystified the language of finance just a little, a smidgen, a tiny bit, a small element, a small amount …… I can hear the kids saying, “Too many words!”