Approximate reading time: 2m 60s
What are the basic financial knowledge that managers must acquire in order to successfully perform their management duties.
Every day, managers make decisions that affect the financial performance of their company, whether it is planning operations, hiring and firing staff, preparing a budget, approving a capital investment or sending an invoice for payment. Often these managers lack the basic financial skills to understand the financial implications of their decisions. As a result, resources are lost, bad decisions are made and the organization's financial results suffer. Based on experience in working with non-financial managers over the years, we have identified five basic financial skills that everyone with managerial and supervisory responsibilities should possess.
It's good to remember what Peter Drucker said
If you can't measure an activity, then you can't manage it.
1. What is accrual?
There are two methods of accounting used to record business transactions: cash accounting and accrual accounting. Most midsize and large companies use the accrual method, so it's important to understand what this means for you as a manager. When is the cost charged to your budget? When do you get a sale loan? Does the purchase order generate an accounting transaction?
Understanding the difference between these two methods of accounting is important for managing your cash flow, expenses, liabilities to your suppliers and receivables from your customers.
2. What are the main financial statements
Managers should be familiar with the main financial statements prepared for external users, and what information is presented in each report. Understanding the figures in the financial statements will provide you with the basic information you need to communicate with accounting and financial staff.
• What information is presented in the financial statements?
• How are my actions reflected in these figures and what positions have I reached?
• Does my company use other internal financial statements?
• Do I understand how to use these figures from the reports to improve the financial and operational results for my functions as a manager and my responsibilities?
Managers need to know how to budget the department or project, quantify the resources they need to achieve the goals and action plans for the next financial year. Budget planning is not a formality just to meet the requirements of senior management, creditors or investors.
The budgeting process is a time to question how resources are used and whether they can be used more efficiently. The expenses of the departments must be directly related to the goals, strategies and action plans for the budget year and must be in accordance with the strategic plan of the company.
Managers need to identify and document operational needs that determine their cost levels. Each line must have a reasonable basis for evaluation, such as sales or production volume, number of employees, percentage of salaries and employee costs, and other costs.
4. What is variance analysis and how is it done
It is good for managers to know what variance analysis is and it is that they need to analyze variances to the budget or forecast. All significant deviations, favorable or unfavorable, must be considered.
Managers must be able to relate deviations to what happened in their department or work area during the reporting period, such as the past month. Is this a one-off deviation or will the difference be repeated for the rest of the year? Should you include this deviation, favorable or unfavorable, in the financial forecast for the quarter or fiscal year? If you can't explain the differences in the budget based on your knowledge of the business, it's a good idea to seek help from the finance department.
5. Financial Analysis of Capital Investments and Strategic Initiatives
Managers often present and defend capital investments and strategic initiatives designed to improve operational and financial performance. The financial evaluation of these projects is a key element of the approval process.
Managers need to know the assumptions that underlie the financial analysis of each project, under their guidance, and ask difficult questions. I've seen companies waste millions of dollars on projects and initiatives based on wrong financial analysis.
Managers also need to understand the concept of return on investment (ROI) and how to interpret the results of common financial techniques used to measure ROI : return, net present value (NPV) and internal rate of return (IRR). They must identify how a project will affect certain items in the balance sheet and income statement and the impact on the financial performance of the site or company if the financial objectives of the project are not achieved.
Financial skills are an integral part of the basic tools that every manager must have. Managers need to understand the financial implications of their decisions and how to use financial information to improve their company's performance. Training and development organizations need to ensure that their leadership development programs provide the basic financial skills their leaders need to run their business more effectively.