09 April, 2012 12:24
...I Say ToMAHto....
A little knowledge can be a dangerous thing. Even a LOT of knowledge can be a dangerous thing-- if it's the WRONG information or if it's taken out of context.
Having a good handle on basic financial vocabulary is a good place to start when you're looking at "stepping up" to the C-Level sales challenge, but like almost everything in life, it's not quite that simple.
It doesn't take long to realize that different organizations use financial analysis tools/concepts and even language differently-- sometimes for specific reasons, and sometimes not.
Here are a few specific examples:
- COST vs. EXPENSE-- There is a subtle but sometimes crucial difference between the words “cost” and “expense.” In general, “cost” refers to the costs of actually producing a product or service (COST of Goods Sold, COST of Sales, etc.), while “expense” refers to money spent to promote, market and sell a product or support the general overhead and administration of a company. Apple’s “cost” to produce the iPad is apparently around $316. Apple’s “expenses” related to the iPad include advertising, sales expenses (salaries, etc.) and allocated “overhead” charges to cover rent, utilities, etc. and other general and administration functions.
But what about the “expenses” related to the cost of research and development? Money spent on localizing and translating product into different languages? Add the potential complication that some companies actually include what would traditionally be considered “cost of goods” as an operating expense. You can see that it can get confusing if you don’t understand exactly how “cost” and “expense” are being defined and differentiated in a particular case.
- OPERATING INCOME vs. EBIT vs. EBITDA-- Generally, “operating income” is what’s left after you take top line sales, subtract the cost of goods or services, and THEN subtract operating costs. This is basically generic “profit” before taxes. Sometimes, companies (particularly those that require a lot of debt financing for their operations) report another metric-- EBIT (Earnings Before Interest and Taxes). Still other companies use EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) as an indicator of profitability. EBITDA is especially useful for companies whose line of business requires large amounts of capital investment in factories, materials, equipment, property, etc. to generate relatively small profit margins. Telecommunications companies, utilities, heavy industrial and manufacturing sectors are examples of industries that benefit from tracking EBITDA.
While EBIT and EBITDA are not “official” measurements according to International Accounting Standards (IAS), they are increasingly used as a way to “level the playing field” when comparing and reporting profitability relative to disparate companies and even sectors.
- DEVELOPMENT EXPENDITURES (Amortization vs. Expense)-- Some companies classify product research and development costs as “expenses,” while others consider them an investment in “assets”-- understandable considering the results of such efforts indeed produce intellectual property (often classified as an asset) that continues to generate revenue over a long period of time. This approach is most common in sectors such as software development and pharmaceuticals, where R&D spending is a major part of a company's budget and the resulting intellectual property, patents and technologies are the primary source of income.
Tomato, ToMAHto, Potato, PoTAHto... These issues may seem like a small thing to you, but ignore them, and risk having your prospects “call the whole thing off.”
HTML Comment Box is loading comments...