This is an excerpt from my new book, Be the Master. In the Part of the book this excerpt is taken from, I cover some of the often-unseen fundamentals of the business world. The idea is that being successful in life and your career is much harder if you don’t really understand the rules that drive so much commerce and culture.
Businesses have their own language, and if you’re going to be in business, it’s good to know some of the terms.
- EBITDA is Earnings Before Income Tax, Depreciation, and Amortization. Basically, it’s the business’ revenue, less their immediate expenses like COGS, salaries, and so on.
- COGS is Cost of Goods Sold, and applies mainly to companies that sell physical goods. Simply put, it’s what you pay for the stuff that you mark up and sell. Notably, in the US, you can’t deduct this expense until you sell the product – which is why companies hate maintaining large warehouses of inventory.
- ROI is Return on Investment. This is the amount of money (usually) you expect to make in return for some expenditure. “If we spend $10,000 on this new manufacturing equipment, we’ll be able to turn out twice as much product, which will double our revenues.”
- TCA is Total Cost of Acquisition, meaning (usually) how much it costs to acquire new business, such as a new customer. Different companies use different terms for this. A related term is TLV or Total Lifetime Value of a customer. If it costs you – through advertising or whatever – $100 to acquire a new customer, but their total lifetime value – e.g., the amount of revenue they give you – is only $90, then you’re losing money. Understanding how much you pay to acquire customers can help you make better decisions about how to get a better ROI.
- Bottom Line is the company’s final, “net” profit. You add up all the revenue, deduct all the expenses – including taxes and whatnot – and this is what you have left. This is, essentially, the reward for whatever risk you took on the business.
- P&L is a Profit & Loss statement. It’s a concise financial report that summarizes all your income and all your expenses, and shows you the bottom line.
- GAAP refers to Generally Accepted Accounting Practices. These aren’t hard-and-fast rules per se, but they’re the accouting procedures least likely to land someone in jail.
The language of business can help you better understand its perspective. I once worked for a retail company whose CEO absolutely hated discounts. When Marketing proposed a “loyalty program” designed to increase customer spend by offering them discounts, he lost his mind. He pulled up a P&L, pointed to the bottom line, and said, “this is where discounts come from. If we have to make this number smaller in order to make the top numbers bigger, then we’ve achieved nothing at great expense.” That was his perspective; right or wrong, it was the business’ perspective. Understanding how he viewed discounts – not as a lure, but as a negative number on his P&L – was the key to understanding his attitude. Understanding the language of business is what made all that possible.
Learning this language will help you have more meaningful discussions with the leaders of your business, which will help you better understand your business’ motivations, goals, and challenges.