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Written by The Mezzanine Group
on July 21, 2011

The other day, I was on a conference call with a client group, and I made the classic error of using an acronym that someone had to ask me to spell out. The acronym was ROI (Return on Investment), which isn’t all that exotic as financial terms go, but in the moment I forgot that every profession has its code language and that we always need to make sure translation is readily available. (I was speaking with a group of specialist physicians, and I’m sure both that a) they all know what ROI was, just had temporarily forgotten the acronym, and b) they work every day with acronyms that are pure alphabet soup to me…)

Since finance is central to so many situations and to every organization, it’s worth knowing where to go to get definitions and – probably more critically – advice on how to use financial terms. One great resource is Investopedia, which gives formulas as well as, commentary on how they are used. (You just have to scroll down below the formula…) The phrase “garbage in, garbage out” is starkly true when it comes to financial calculations, and Investopedia can help a novice figure out, at least a little bit, what to put into the formula – and why.

One formula which is incredibly useful yet underused is CAGR – Compound Annual Growth Rate. Investopedia has a description here but it essentially gives you a sense of what the smooth annual growth rate would be if your up-and-down line were actually following the same trend every single year. It can be very handy to compare two growth lines, which are really hard to evaluate just using charts if they are at all volatile. CAGR takes away any optical illusions caused by the visuals to show the underlying pattern shown by a percentage growth (or shrinkage) rate.

Any time you are confronted with a financial term which is unfamiliar, or you just want to get a better sense of, check out Investopedia as a good starting point for understanding.

 

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