Test your business and finance knowledge
Here’s a quiz to check if you know important business terms along with steps you can take to work on your prowess with the numbers.
Learning the terms associated with business and finance is a lot like learning a foreign language. You read the words, look up the definitions, and start to use them in conversation. As you read the business literature and watch business news, you’ll see and hear other words to add to your list. As Matt Ragas and Ron Culp note in their new book, “Business Acumen for Strategic Communicators”: “To become fluent in the language of business means learning its vocabulary.”
Here’s a quick starting point: How many of these terms can you define? (Answers below).
1. P/E ratio
9. Market cap
If you’re ready to turn up the heat even more in building your business and finance education, you don’t need to pursue an MBA or devote hours of daily toil. Set a realistic goal and consider some of these options.
- Get comfortable with managing your own money. I build personal finance content into my courses, because there’s a direct connection between personal and business finance. Developing a budget, tracking expenses, setting a savings goal, managing debt and investments—becoming comfortable with all of these will heighten your overall business/finance acuity. Jean Chatzky’s “Her Money” is one source I like, and there are also a number of widely used apps and podcasts you can check out.
- Set up a Google alert on a company you’re interested in and whose stock is publicly traded. Start reading its quarterly financial news releases, listening to its investor conference calls, and reading the CEO letter and highlights in the annual report.
- Subscribe to The New York Times’ “DealBook” with Andrew Ross Sorkin. It’s free! You’ll see him on CNBC’s “Squawkbox” as well. Another free business news source that’s building quite a following is “Morning Brew.”
- Choose (at least) one business news source and read it regularly. It could be a daily like the Wall Street Journal or a periodical like Bloomberg Business Week, Forbes or Fortune. Forbes and Harvard Business Review are great sources for trends and leadership topics. Supplement these with others that will round out your knowledge and tie into your interests or work focus. If you’re thinking about starting a business at some point, or Entrepreneur are good options. If you want to learn more about economics, consider The Economist.
- Ask leaders and mentors who they read and listen to, and then write these down. What are their favorite leadership and business books and sources? Decide what you’d like to read, listen to or watch regularly. A few that I’d added to my list, based on leaders’ recommendations: NPR’s “Planet Money” and “The Ezra Klein Show,” a New York Times’
- Develop (and keeping adding to) your list of “superheroes.” These are executives who are doing great things at their organizations, who take a stand on important issues, and whose actions and comments you admire. Don’t limit yourself to businesses or U.S. organizations. There are plenty of examples across non-profit and government (Janet Yellen) and outside our country’s borders (Christine Lagarde).
- Take a class in business, economics, finance or accounting. It will “stretch” you and widen your perspectives. You can then decide if it generates a strong return on your investment.While working full time in my first corporate job, I took classes at night for an MBA. Later, when an investor relations position was created, I was asked to consider taking the position. I had no IR experience, but I’d get on-the-job training and mentoring from my new boss. I don’t think it was the degree that mattered as much as the fact that I had shown some interest in business and finance.
P/E ratio: The price of a share of company’s stock divided by its earnings per share is called a P/E (or Price/Earnings) ratio. It assesses the relationship between a stock price and earnings, giving investors a way to compare various stocks and determine whether a stock may be undervalued, fairly valued or overvalued.
Margin: Also known as profit margin. It is calculated by dividing the profit (or income) by sales (or revenues). If your profit was $100 and your sales were $500, your margin would be 0.20, or 20%. It’s a way to tell whether an organization is being efficient and productive in generating sales, managing costs and producing profits. There are different types of margins—for example, an operating margin is operating income divided by sales; net margin is net income divided by sales.
Valuation: An organization’s total market value. The valuation for companies whose stock trades on the public stock exchanges would be the number of shares outstanding multiplied by the price of the stock. A company with 1 million shares and a stock price of $10 would have a market value of $10 million. A company whose stock is not traded publicly can also have a valuation, based on an estimate that would consider the company’s growth, whether it’s in an industry likely to grow, and comparable public company valuations.
Variance: Typically used to compare a budgeted amount and an actual amount. Organizations use variance analysis to determine the differences between budgeted and actual line items in order to identify potential problems and make changes. You can use a variance analysis in your personal budgeting, too.
EPS: Earnings per share. This is calculated by using a (public) company’s net income (its profits after all costs have been deducted) divided by the number of outstanding shares.
P&L: Profit and loss. The income statement (which shows revenues, costs and profit) and the term P&L are often used interchangeably.
Liquidity: It describes an organization’s ability to pay its bills. Does it have enough cash on hand (or assets easily converted to cash) to pay its current expenses (and cover future obligations)? Liquidity is associated with a cash flow statement and cash analysis.
KPI: Key Performance Indicator. In short, KPIs are performance measures. Organizations identify their most important KPIs and then compare these to benchmarks or industry standards. The P/E ratio is a KPI for public companies in assessing their market value. Net profit margin is a KPI relating to profitability. There are many KPIs; they can be broad (like P/E and net profit margin) and more specific to a given industry sector. Net revenue per professional is the metric that Rick Gould of Gould+Partners cites most often with his agency clients. Nonprofits, too, use KPIs, like donor or member retention rate.
Market cap: Also known as market capitalization. See valuation, above. It’s the total number of shares multiplied by the share price.
ROI: Return on investment. Money that’s returned (or earned) on a given investment. Let’s say you buy a share of share for $20; in six months, the stock is trading at $25. At that point, you’ve earned $5 on your investment of $20. That equates to five divided by 20 or 0.25, which is a return of 25%. This principle can be applied to situations like deciding whether it makes sense to buy a certain piece of equipment for a business, to buy a home, to spend money on a communication/PR campaign.
Karen Vahouny, a former presenter for Ragan Communication’s Business Fluency Boot Camp, is an independent communications consultant who has worked in both the corporate and agency world. She is an adjunct professor at George Washington University.