Talk the Talk: Understanding the Language of Finance

The Challenge: Many executives believe the true “language” of business is finance and accounting. Although this language might not seem important in early stages of your career, eventually you will have to provide financial justification for what you’re doing and make decisions based on data from others. A lack of understanding about finance basics can make interpretation of financial data from your CFO or others within your organization seem daunting. Improving your financial literacy is a way to build the confidence required to talk the talk.

Key Takeaways

Basic financial literacy includes understanding the following:

• Income statements are one of the three major financial statements that report on a company’s financial performance over a specific period of time. Revenue earned is reported on the income statement.

• Financial ratios measure the relationship between two or more components on financial statements. For example, a debt service coverage ratio measures an organization’s ability to repay its debts.

• EBITDA is an acronym for earnings before interest, tax, depreciation, and amortization. It is calculated by subtracting operating expenses from revenue and adding back depreciation and amortization to operating profit (EBIT). EBITDA is a line item above net income on an income statement that excludes other non-operating expenses, as well as interest expenses and taxes.

The Bottom Line: Knowing what key finance terms mean, why they are used, and how they affect aspects of your business are just a few ways you can improve your business acumen. As you progress in your role as a healthcare leader, you’ll realize that basic financial literacy is critical to making important business decisions.

Adapted from Financial Skills for Executive Decision Making, part of the American Association for Physician Leadership’s facilitated online curriculum. More information about our educational offerings can be found at physicianleaders.org/education.