Important Financial Acronyms

Описание: I think this idea of acronyms is an important thing to understand because most of the time communicators and hearers are not communicating and understanding at the same level. Because finance is the language of business, it's actually unfortunate that it's not very clear.
Finance is needlessly complicated, we confuse people for no reason. So acronyms — the financial accounting standards board, FASB you will hear that referred to in the market, is the governing body for financial reporting in the U.S. And it creates the GAAP metrics, the generally accepted accounting principles that organizations use for their financial reporting. IFRS or the international financial reporting standard is FASB's peer in the international community. Outside of the U.S. organizations use the IFRS or the international financial reporting standards for governing their financial reporting. There are nuance differences between FASB and GAAP and IFRS accounting but that's the base, those are basic definitions for what they are. There are unique differences between the standards. When an organization looks at its profitability, the first thing we look at is their revenue or sales. And are there costs associated with generating revenue and sales inside of organizations? Of course there are. The first bucket of costs that we look at are the cost of goods sold or COGS is the common acronym for this. The best way to think about these costs these are the direct costs associated with getting product or services ready for market. They are the direct costs for the products or services that an organization sells. When you subtract those direct costs the first profit metric you get on the P&L is often referred to as gross profit. The direct costs are not the only costs associated with running a large organization. The next bucket of costs that we look at is often referred to as SG&A. It's an acronym for the selling general and administrative expenses. You might hear these sometimes referred to as overhead, I don't like that expression because it has a negative connotation, but literally it is the overhead associated with running a large company. In there is all of the sales, marketing, advertising, the commercial effort of getting their products and solutions to market. The general administrative are all the support functions, HR, finance, legal, IT, audit, the corporate executives, all of that goes into the selling general and administrative bucket uh often referred to as overhead in the organization's business expenses. Capital expenditures is how we account for the buying of property, plant, and equipment inside of an organization. Capital expenditures are the buying of property, plant, and equipment. Capital investments that a company makes in order to develop products in order to develop products, expand their business, and so forth. One more metric i'll share with you: the cost of goods sold, the selling general and administrative expenses, are operating expenses. When you subtract them the next profit metric you might look on the P&L is operating income. Some companies call this operating profit, some companies call it operating earnings. It is often referred to as EBIT, the earnings before interest and taxes or the company's operating profit. Another financial metric that comes up from time to time is EBITDA, that is the earnings before interest, taxes, depreciation, and amortization. The way we calculate it, we simply take the operating income or the EBIT and we add back the DA. That's really dumb but that's how you do it. That's how you calculate what it is, organizations that have lots of capital expenditures use EBITDA for two fundamental reasons. One, is the closest profit metric to the concept of cash flow. Two it holds people accountable to the things they can control. The revenue or sales, the cost of goods sold, or solutions provided, the SG&A, and pulls out things that are difficult to control. The interest, the taxes, the depreciation, the amortization. Most people in the organization don't feel like they have much control over their interest expense. They don't feel like they have much control over their taxes or income taxes. They don't have much control over the depreciation or amortization expenses. So it holds them accountable to the things they can control, while pulling out the things that are more difficult to control. Organizations that have lots of capital expenditures use EBITDA as their profit metric.

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