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Different definitions can change what you think you’re reporting

January 17, 2020

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Language is nothing without common definitions of words so that everyone can participate in conversation. (Image Credit: Pixabay user D-Vu / 25)

Definitions of terms may seem like a dull topic, but few other things have the capacity to so radically and invisibly change what you think you know about a business.

Setting definitions is so fundamental to how we think, process information, and discuss, it becomes taken for granted by most people, like the process of breathing. Language is nothing without common definitions of words so that everyone involved in a conversation.

As true as it is for the world in general, it is particularly applicable in business. Like any field, there is a well-developed vocabulary for the industry. Unlike many other areas of science and engineering, however, the words tossed about frequently have multiple potential meanings. Unless you nail down exactly what people are saying, you may misunderstand what they mean.

A simple example—well, it should be simple—is the term inventory. You might think it means everything out in the warehouse that might be a finished good a company could sell or the materials and components needed to assemble or manufacture products. And everything in the warehouse would count as such.

But what about products being brought over on a ship from Asia? It could take a couple of months for those goods to arrive. In one sense, they are inventory that happens to be on its way, just as trucks bringing products from one part of the country to another also could be part of an extended inventory. Legally and financially, though, they might or might not be, depending on where ownership of the stock transfers. There is also a practice where vendors manage inventory in a warehouse belonging to a large customer. The products are in the warehouse but belong to the vendor, not the company, until they cross out of a secure area and into general stock. So how do you count those items?

Then there are other complications, like integrating stock management across an entire enterprise. Ever try to order a product through a chain retailer’s online site and then know you’ll be able to pick it up at a local store? Last time I tried it, which was some years ago, the result was frustrating. That level of inventory knowledge may not be necessary for high-level financials, but it affects the ability to smoothly run operations and logistics.

Finally, for now, there’s the question of inventory value. This gets tricky even inside of a company’s four walls. One department might think that inventory is based on the actual cost at which each item was purchased. Another might say it’s an average cost, or that first in is considered first out with overall inventory value adjusted that way. Or first in is last out.

All of this is the confusion that appears with one single concept. There are so many others—how a company credits marketing with sales, patent strategy, what constitutes customer service and support and who provides it, to name a few—that can be equally complex. Be sure that you know what business vocabulary means to the companies you cover.

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