3 Business Terms You Must Know – Lesson 1: Constant Currency | Organic Growth | Bookings
The Inquisitive Learner has started a new series of articles wherein it attempts to define/ explain, in the most lucid manner, 3 business terms that you must know. This series of articles would equip the readers with insights into the business jargons – 3 at a time – so that eventually, their business understanding increases over time. So, let’s get started with our very first post in this series i.e. 3 Business Terms You Must Know – Lesson 1: Constant Currency | Organic Growth | Bookings.
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1. Constant Currency:
“What Is Revenue At Constant Currency?”
Constant currency is a metric that allows a fixed exchange rate which eliminates fluctuations when calculating the financial performance of an organization. Companies with foreign operations translate the revenues of foreign currencies (i.e. local to the respective countries overseas) to a single reporting currency for them to be able to judge their true performance irrespective of exchange rate vagaries.
Let’s understand this with an example. Let’s say a Multinational Company has operations in 3 countries in the world. Let’s say that the company headquarters are in the USA and it has significant revenue streams from clients based in India and Germany. Now also suppose the MNC performed exceptionally well in the Indian market while the company saw a drop in revenue coming from Germany. Let’s also assume that the Indian National Rupee (INR) fell against the United States Dollar whereas the Euro beat USD at the current conversion rates. Then actually, in USD, the MNC earned more in the German market when compared to the Indian market. Now, for the quarterly results, to report the revenue in a single currency (USD here) and in order to avoid the fluctuations in the currency conversion rates over the year, the MNC fixes up a certain exchange rate at which the revenues would be evaluated. This exchange rate is typically the weighted average of the exchange rates of each country. The exchange rate is a fixed value from either the beginning or the end of a year. This fixed exchange rate is called constant currency and thus the revenues calculated with this exchange rate gives a more realistic performance of the MNC.
2. Organic Growth:
The other name for organic growth is internal growth. Organic growth means that the growth achieved by the company has come from its core resources, products, and/or services or systems. External factors or resources (for example mergers and acquisitions) play no role when we talk about organic growth.
For example: If we talk about the organic growth of Capgemini, it would not include the growth that Capgemini achieved because of its acquisition of Altran.
“What is ‘Bookings’ in press releases of companies?”
As the name suggests, ‘Bookings’ is pretty straightforward to understand. Bookings represent the commitment of a customer to spend money over a period of time and in return, the vendor provides services to the customer. Bookings generally have contracts or a subscription model.
Let us consider the example below:
Let’s assume, Capgemini signs a deal with General Electric for its Insights and Data Services over a period of twelve months on a monthly subscription basis starting January. Thus, Capgemini has got ‘booking’ for its services that General Electric would use on a monthly basis. If we start from January, for the coming months, neither General Electric has used Capgemini’s services nor Capgemini has given it. In this case, even when Capgemini hasn’t earned any revenue for the coming months, it is still sure to make revenues until the contract ends. The revenue which would be generated here, over the period of time, is counted as ‘Bookings’ to be released in the quarterly and annual press releases of Capgemini.
That concludes our today’s article – 3 Business Terms You Must Know – Lesson 1: Constant Currency | Organic Growth | Bookings. If you are someone who is prepping for the GMAT or the CAT, you might also like Special Case of Vedic Math Derived Base Multiplication.
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