Basic Financial Skills Every Manager Should Know
Long-term experience with corporate management shows that managers make decisions that affect their company’s financial performance.
Basic Financial Skills Every Manager Should Know.
from planning for various operations, hiring and firing staff to preparing budgets, approving a fixed investment, and submitting invoices for payment.
Most of the time, these managers do not understand the financial consequences of their decisions due to a lack of some basic financial skills or lack of proper financial advice, tax advice, or accounting.
As a result, they waste resources; They make poor and incorrect decisions, and damage the financial performance of the organization. We have described these skills in the continuation of this article so that you can manage your organization or startup financial issues with open eyes from now on.
1. Cash accounting versus accrual accounting.
To record business transactions, we use two accounting methods: cash accounting and accrual accounting. Most media to large companies use accrual accounting; So it is important to understand what this type of accounting or financial accounting means to the manager’s profile.
When is an expense credited to your budget? When do you get credit for sales? Does the purchase order generate an accounting transaction?
Understanding the difference between these two accounting methods is important for managing liquidity, cost levels, commitments to your salespeople, and what your customers want to receive.
2. Basic financial statements.
Managers should be familiar with those basic financial statements that are prepared for external users. They need to know what information is provided in each financial statement. Once you understand the financial statements, you will become familiar with the basic terms you need to communicate with the accounting and finance staff.
What information is provided in the financial statements? How are my actions reflected in these cases and what topics do the main items affect? Does my company use a specific form of internal financial reporting? Do I know how to use this report to improve financial and operational performance for my areas of responsibility?
3. Budget preparation.
Managers need to know how to budget a department. Budget means determining the number of resources you need to achieve the goals and operational plans of the next fiscal year. So keep in mind that budgeting is not just a formality to meet the demands of top executives, lenders, or investors.
Managers must identify and document the operational assumptions that drive their cost levels. Each heading of the main items should be based on a reasonable estimate; Such as sales volume or production, the number of employees, the number of employees’ salaries, the per capita cost of employees, etc.
4. Analysis of variance.
Managers must anticipate and analyze existing budget differences. They need to properly examine all the significant differences, both positive and negative.
Managers need to be able to relate differences to what has happened in their department or area of work over that period. Is this a one-time difference or will it be repeated for the rest of the year?
Do you need to consider this positive or negative difference in the financial forecast for the next quarter or fiscal year? If you are unable to explain budget differences based on your knowledge of the operation, you should contact the finance department immediately.
5. Financial analysis of fixed investments and strategic initiatives.
Managers often advocate for and defend fixed investments and strategic initiatives designed to improve operational and financial performance. Financial evaluation and risk assessment of these projects are key components in the approval process.
Managers need to be aware of the assumptions that make up the financial analysis of any project. They should minimize the possibility of errors in financial analysis by asking complex questions. We see companies wasting millions of dollars on projects and initiatives that were based on inaccurate financial analysis.
Managers should also be familiar with the concept of return on investment and know-how to interpret the results of common financial techniques for measuring return on investment: repayment, current net worth, and internal rate of return. They should identify how a project affects headings of specific key items in the balance sheet and profit and loss statement, and how the project’s financial performance will affect the site or company if it does not meet its financial objectives.
Financial skills complement the basic toolbox that every manager should have. Managers need to know the financial implications of their decisions. And how they can use their financial data to improve their company’s performance.
Management training and development organizations should include in their leadership. Development programs the training of these financial skills in an effective and practical way. Practical mastery of these skills will make any manager more effective in leading his business.
If you are an entrepreneur or a collection manager. You need to learn the skills to control and review your company’s accounting. Do not forget that depending on the type and scale of your business. and the plans you have for developing your business. You may need the help of a financial advisor or tax advisor.
