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Speaking the Language of Upper Management

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Category: Business Strategy
Published Date Written by Keith Harasyn

Editor's Note: This article originally appeared in the January 2012 Newsletter. It is reprinted as part of our archive article series.

Have you ever had trouble conveying a process improvement to a key decision maker? Have you had a great idea  rejected because of the bottom line cost? Does your management team fail to see the benefits of proposed quality improvements? If you answered yes to any of these questions, you may not be using the proper language when you convey your quality message to upper management.

 

 

 

It's not necessary to be an accountant to have a basic understanding of accounting concepts. By placing yourself in the metaphorical “decision maker's shoes” and focusing on what they understand, you will be able to greatly improve your influence and relevance on key recommendations. Lets start at the beginning with some key accounting terminologies:

 

  • Revenue – the dollar amount of sales for a specified period (typically one business year). Revenue is expressed as an absolute amount from which costs are subtracted to determine net income. Revenue growth is the year to year change in revenue expressed as a percentage, which is an indicator of a company's financial health.
  • Expenses – the amount of money spent by an organization for ongoing operations. Expenses are the costs incurred by a firm that are deductible from revenue to reduce taxable income.
  • Net Income (Profit)– or the “bottom line”. It is an organization's total earnings (revenue minus expenses). Expenses can include cost of business expense, interest, depreciation, taxes and all other expenses. Negative net income is referred to as a net loss.
  • Earnings – an important number that is scrutinized by investors; it is the net income of an organization over a specific period in time.
  • Earnings before income taxes (EBIT) – an organization's revenue minus all expenses excluding taxes and interest for a given period. EBIT is an indicator of a company's financial performance.
  • Profit Margin – a ratio of the net earnings after taxes over revenue and reported as a percentage.

  • Return on Investment (ROI) – the profit or loss resulting from an investment transaction. This is usually expressed as an annual percentage.
  • Payback Period – the length of time required to recover the cost of an investment. It is measured by dividing the cost of the project by the projected annual cash inflows. Caution should be used when reporting the payback period because 1) it ignores profitability (i.e. the benefits that occur after the payback period); and 2) it ignores the time value of money. (A better metric to use is net present value).

  • Net Present Value (NPV) – an indicator of how much value an investment or project adds to an organization. It is defined as the sum of the present values (PV) of all incoming and outgoing cash flows for the life of the investment. NPV is useful because it reports the cash flows discounted to the present value. Normally, only investments with a NPV > 1 are accepted. That means the investment must return more to the company then it costs or it is not worthwhile to pursue.
  • Return on assets (ROA) or return on net assets (RONA) – an assessment of profitability relative to a firm's total assets. ROA is calculated by dividing net income by total assets. Assets are anything the company owns that has an economic value, such as cash, inventory, accounts receivable, equipment and securities.

By having a basic understanding of these financial terms, one can be better prepared to answer the bottom line questions. What will our ROI be? How will this change affect our revenue and expenses? Arguments to reduce waste can be quickly prioritized by understanding the factors that drive a company's profitability and increase the bottom line; words that a manager in charge of a department budget will want to hear.

Note more information can be found on-line at http://www.asq.org/qualityprogress/search (free for asq members)

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