Money Talk: A Glossary of Financial Terms for Non-Financial Managers
Mon, January 01, 2001
CIO — When an IT manager finally takes on the CIO mantle, often the lucky soul is faced with a host of duties and arcane terminology having nothing to do with technology and everything to do with finance. After all, the key to making good investments in technology is understanding how they’ll boost the company’s fortunes and eventually add to the bottom line. n "Technical people who want to rise to middle and upper management need to, and usually do, pick up financial knowledge and skills," says Robert Obee, vice president and CIO of Akron, Ohio-based Roadway Express. He came to Roadway 18 years ago prepared with multiple advanced business degrees and a strong financial grounding. "IT managers need to be equipped to deal with accounting and budgeting tools, and a strong understanding of the overall finances of the company in order to be effective." n Plainly put, CIOs and their IT teams must understand financial ideas and terms. Think you’ve got it covered? We invite you to run through the following list of basic financial concepts. If you know the intricacies of all these terms, you’re either a former CPA or a natural stand-in for your CFO. If you’re familiar with only half or fewer, you may want to put a few new financial tricks in your bag.
P&L The profit and loss statement is the cornerstone of executive responsibility. Businesses generally maintain P&Ls for distinct business lines, as well as significant products. Responsibility for a P&L unit can make otherwise pleasant people very difficult and demanding.
Contribution Margins If you want to expand your profits by, say, 20 percent, how many people will you need to hire? To figure it out, calculate the contribution margin, which is the incremental revenue or profit each new employee (or product sale or customer) generates. Much of the art of predicting cash flows and operating income from a business initiative, or a P&L unit, lies in determining these margins. The CIO helps create the management information systems that best measure them. At Blue Bell, Pa.-based Unisys Corp., for example, "customer profitability is the Holy Grail," says CIO John Carrow. "Because information systems need to build this measure from lots of different data, it’s important for the IT group here to have a solid understanding of the components from the bottom up."
Expense Allocations This can go by various internal names, but the concept is the same: Each operating unit must pay part of the company’s general and administrative expenses, which include debt, real estate, secretaries and, yes, information systems. Deciding how much to allocate to a unit is one place where the rubber can hit the road in internal politics, as these charges can seriously affect a manager’s ability to meet his P&L goals. As a result, CIOs can face resistance to new technology initiatives because of the resulting increased allocations, unless the benefits are clear to all affected—or at least the right people: the board of directors.
