Quick guide to treasury terms, and how to use them

Clarity and mutual understanding are essential in treasury communications. Doug Williamson shares some tips for avoiding jargon headaches

Excellent communication is a core skill for almost all treasury positions.

As corporate treasurers, we build relationships with a wide range of people, including lenders, credit-rating agencies, regulators, financial and non-financial colleagues, and many other stakeholders.

Not all of them appreciate the meaning or importance of the technical terms, which are part of a treasurer’s everyday understanding. Agreeing what the important words mean up front is an essential investment in our relationships.

Our first steps in treasury and finance can feel like learning a whole new language. Our new treasury language includes both unfamiliar new terms and new specialised meanings for familiar words in common usage, sometimes known as ‘terms of art’.

New technical terms

Fundamental treasury concepts include ‘EAR’ and ‘EBITDA’. The first time we see or hear them, it’s clear that they are new technical terms.

When studying or revising, I repeatedly ask myself ‘Describe the meaning and importance of…’ both to refresh knowledge and deepen it. For example, let’s describe the meaning and importance of EAR in about 40 words.

Importance of EAR

  1. EAR is short for ‘effective annual rate’.
  2. It measures investment returns and borrowing costs on a fully comparable basis.
  3. EAR takes account of compounding, fees and other relevant costs.
  4. It is important because so many opportunities are not directly comparable.

Good question

This simple question-and-answer structure, ‘Describe the meaning and importance of…’ lets us evolve better and applied answers over time. The ‘importance’ part of the question is open-ended, and expands to address the range of practical cases it’s applied to.

EBITDA

Concepts like ‘EBITDA’ are clearly technical terms, too. If we don’t know what they mean, it’s evident we need to find out quickly, before we get lost in subsequent discussions.

  1. EBITDA is short for ‘earnings before interest, tax, depreciation and amortisation’.
  2. It measures operating profitability.
  3. EBITDA measures operating profits before certain excluded items, such as depreciation charges. The excluded items can potentially distort the underlying operating performance.
  4. This is why EBITDA can be a better comparator than other measures of operating profit.

We’re not always right

Sometimes treasurers disagree with each other about definitions. The Treasurer’s Wiki can help resolve some of these potential arguments within the treasury community.

Non-treasury colleagues, naturally, have different professional experience and perspectives than ours. We are all looking at the same problems from different, and entirely legitimate, points of view. We can’t assume we’re right and they’re wrong.

Assess the level

At the start of any communication, we need to:

  1. Assess the level of our audience.
  2. Introduce and define any important terms we intend to use, with which the audience may not be familiar.

With some groups, consider combining these two steps. The group’s initial understanding of key treasury terms, such as ‘capital’, may be surprisingly diverse.

Terms of art

Many important financial words have multiple meanings in different contexts. This won’t always be obvious, especially if our own professional background has made us very confident about exactly what a particular familiar word means.

Legal and regulatory ‘terms of art’ always need particular care. Indeed, many legal cases have turned on the precise interpretation of the wording of a legal document. Take specialist advice before you sign.

‘Capital’ is an important example of a term of art. Capital has at least five different meanings in finance, ranging through financial accounting, corporate finance, company law and regulation to economics.

Capital also has non-financial meanings. This makes it a particularly tricky term to recognise as a potential problem, and to address.

Case study: defining capital

“As an advisory director with Deloitte, I was working with a highly capable, but diverse team of specialists from a wide range of banking, insurance and corporate treasury backgrounds. We were struggling to deliver a coherent capital management plan for an investment management client.

“We were under severe time pressure and operating out of separate geographic locations. At a certain point I realised that the main barriers to achieving coherence were our significantly divergent understandings of what capital actually was. No wonder we’d been struggling.

“It’s no good having fantastic skills in the team if everyone is pulling in different directions. The output of the discussion was to make sure that the first paragraph of our paper said, ‘For the purposes of this document, “capital” is defined as XYZ.’

“Once we had agreement on the definition, it made everything else a lot easier. But it took a great deal of strength, patience and skill to get everyone on to the same page part way through the project.

“It was tricky as I wasn’t leading the project, but my role was to write a treasury policy, and I couldn’t until agreement on the definition had been reached. Following this experience, I always invest in clarifying key definitions at the start of any project.”
James Leather FCT, project finance manager, Sydney Motorway Corporation

The value of listening

“I try not to have a fixed mindset. I want to learn and understand different points of view. This can be a challenge. In many areas I am quite opinionated, so sometimes it can be difficult to detach my opinion and hear someone else’s point of view, but it is definitely something that I always strive to do.”
Rahul Daswani, senior manager, structured finance, Worldwide Payment Solutions, Microsoft, Dubai

About the author

Doug Williamson is level verifier for the ACT’s Diploma in Treasury Management (AMCT)

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