Do You Know Your Business Terminology?

Overview

Recently, at a fundraising luncheon for the Minerva Foundation, I was seated next to a woman who sold regalia. “Do you know what that is?” she asked. “Yes, of course,” the words jumping from my mouth before I had the chance to think. It sounded familiar. “What is it then?” she asked. “It has something to do with the flags ships fly that represent letters.” I smiled confidently until she clipped me with a terse, “No.”

As my confusion turned to embarrassment I looked down at my plate. I thought I knew, I said I knew, but when tested, I really only had a vague understanding of the term. She went on to define regalia, slamming the lid shut on my credibility and confidence with, “You should ask questions when you don’t know something.”

How often does this happen to you? To some degree, you are familiar with a concept, have heard the word before, but if you actually had to explain it, you’d find your understanding vaguer than is within your comfort zone. What about the people on your management team? Can your operations manager explain the difference between mark-up and margin? If asked, could the sales manager define effectiveness vs. efficiency? If they’re like the majority of managers today they likely can’t.

You Don’t Know What You Don’t Know

Soon after my “regalia incident” I was curled up with a back issue of Harvard Business Review and found an article that drop kicked me back to that luncheon. The author described a study of American senior executives that failed a quiz testing their understanding of basic business terminology, which fascinated me given the likelihood that they must use these concepts and words every day. Polling my own company, I determined the top three terminology mix-ups we encounter among executives. We encouraged some of our clients to take the quiz and found that the results Canadian executives in mid-sized companies experienced were on par with what the study found. Click here to take the test yourself.

In addition to the information found in the quiz, we decided to add three more word pairings that are often confused.

Responsibility vs. Duty

When referring to accountability in a company, a responsibility is defined as something you get done through other people, while a duty is something you do yourself. It is the accounts receivable clerk’s duty to make collections calls on overdue accounts. It is the CFO’s responsibility to see that it gets done, but not to do it herself.

While many people use these words interchangeably, the distinction is critical in setting up accountability systems in a company. Profitable growth is limited when supervisors are unable to delegate their duties and remain trapped in the “if I want it done right I have to do it myself” vortex. In small companies, this is a trap that presidents can find themselves in where they believe everything that happens is both their duty and responsibility. Often, this can manifest into activities like personally ordering the materials to ensure the rush order gets out on time or making the collections calls herself when accounts are overdue.

As companies grow, the presidents must learn how to delegate their duties, by changing them into responsibilities, or the company will stagnate. One person can only do so much.

Efficiency vs. Effectiveness

Efficiency has to do with speed. Effectiveness has to do with quality, though it can affect speed as well. One simple way to think about these terms is in the context of a production line. If the line is supposed to produce 1 car per minute and the actual rate of production is 2 cars, it is considered to be producing efficiently. If every third car’s breaking system is faulty, the line is ineffective.

In the context of marketing, an efficient campaign may send an automated phone message to 10,000 prospects. If that message enrages all of them and none respond, it is an ineffective campaign. Efficient sales people may cold call 20 companies in an afternoon and get one expression of interest. Effective sales people may cold call five and get two, from a decision maker.

It is important to note that efficiency and effectiveness are both measures on a spectrum – it’s not an either / or equation. You can have an efficient and effective sales person. Unfortunately, there are inefficient and ineffective sales people too.

Profit vs. Cash flow

Cash flow represents the money in your pocket. Profit is an excess of income over expenditure. The words are not interchangeable, because profit can have timing issues that effect when it shows up as cash in your pocket. Some timing issues fall on the expense side of the income statement. For example, let’s look at depreciation. If you have a bakery and purchase a new oven for $30,000, that $30,000 comes out of your pocket as soon as you pay the vendor. It comes out of your profit, however, in stages. The stages loosely represent the wear and tear on that oven, which require you to eventually replace it with another oven.

On the revenue side of the equation, timing of invoicing and timing of payment can often be quite different. There are rules, depending on what kind of business you operate as to when you can recognize the revenue on your income statement, regardless of when it shows up in your pocket. In the bakery, you may recognize the revenue when you invoice for the cupcakes. If you offer 30 day payment terms, there is a lag between when the revenue shows up on the income statement (at invoicing), and when the revenue shows up in your pocket (at payment).

And Regalia?

The Oxford Dictionary defines it as “the distinctive clothing worn and ornaments carried at formal occasions as an indication of status”. The woman I met at the Minerva luncheon defined it as the medals and ribbons pinned to soldiers’ chests.

It’s counter-intuitive, but I’ve found that if you don’t understand something and fess-up, asking questions will build people’s confidence in you. At minimum it’s an ego boost to them that they know something and can help you know it too. The riskiest strategy is pretending you know something and getting caught.

Are there other terms that stump you but you’ve never asked? What impact do you think this has on your credibility with clients? With your employees? Managers? Did you find the definitions above too simplistic? Email your questions or feedback here.