Different roles and situations in life require us to speak a different language. The most obvious that comes to mind is when we travel or communicate with someone whose first language is different to ours. The less obvious is when the language doesn’t change but you enter into a different area that has its own terminology that provides meaningful insights and understanding within the subject area. A good example of this is sports. If you’ve ever had a conversation with someone who deeply understands a sport that you don’t, you will have noticed a range of words and expressions used that leave you confused.
Many subjects have their own terminology and the same can be said for health, science and finance.
The challenge that many of us face at times is that we may not have an understanding of a particular subject’s terminology but find ourselves in a situation that demands at least a basic understanding of the terminology – and the concepts – used.
Many people will progress into leadership positions without having significant finance experience, beyond managing their departmental budget. Whatever your route to a senior role, you will need to understand the language of finance.
Here are four reasons why understanding financial terminology is important.
It may sound obvious but when you have a basic understanding of financial terminology you in turn, increase your understanding of financial matters and underlying concepts. Think back to a topic in which you weren’t overly knowledgeable in and then increased your knowledge. The sports fan learns more about the sport and in turn understands and starts using specific terminology.
Once you understand financial terminology then you can use your understanding of that terminology to better understand your organisation’s financials. For example if you understand the term “accrual basis” then you will better understand why your profit and loss may be looking healthy but your cash flow is not.
Show others that you understand
If you are someone that needs to present or explain your organisation’s financials or program’s financials to upper management, sub committees, board and/or external parties it can be difficult at times to portray a level of understanding with a limited use of financial terminology. A certain level of financial terminology will allow you to more accurately convey results whilst also instilling greater confidence that you do in fact understand the organisation and/or program that you are talking to. Your understanding of the concepts and ability to effectively communicate them is strengthened when the right terminology is used, in the right context, be it a report and/or presentation.
An understanding of financial terminology can lead to less overwhelm and greater confidence when reviewing financial statements and talking to ‘finance people’. Financial statements can appear at times to be a wall of numbers, however with even just a basic knowledge of financial terminology and concepts you can quickly get an idea of what’s going on. For example, understanding the net profit margin and current ratio of an organisation can provide insight into the financial health of the organisation. Furthermore with the skills to correctly use financial terminology, you are more likely to feel greater confidence when talking to your ‘numbers’.
Make better decisions
Understanding financial terminology helps you to understand the numbers, and the implications of the financial report for your organisation. It better positions you to discuss financial issues with your team and colleagues and this in turn will inform your decision making. This can be thought of as the tangible results that can be had. Feeling better about your numbers may not lead to better results in itself, but improved decision making will in the long run contribute to better results.
Obtaining and building financial vocabulary will not by itself result in an understanding of your organisation and/or programs financials. It is however a key step required in building your financial literacy and well worth the effort.