Long-term experience with corporate management shows that managers make decisions that affect their company’s financial performance: from scheduling 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 have some basic financial skills Financial advice, Proper tax advice or accounting, can not understand the financial consequences of their decisions. As a result, they waste resources; They make poor and incorrect decisions and damage the financial performance of the organization.
Based on her long experience with entrepreneurs and business owners, Lianabel Oliver, CEO of a financial education company, has identified five key financial skills that everyone with managerial and supervisory responsibilities should master. 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 medium to large companies use accrual accounting; So it is important to understand this type of accounting or Financial Accounting What does it mean for a manager? When is an expense credited to your budget? When do you get credit for sales? Does the purchase order produce 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 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 amount of resources you need to achieve the goals and 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.
The budget preparation process raises the question of how resources are used and whether they can be used more efficiently. Departmental costs should be directly related to the goals, strategies and operational plans for the annual budget and should be managed in line with the company’s strategic plan.
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, number of employees, amount of employees’ salaries, 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 happened in their department or area at the time. 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 identify and advocate for fixed investments and strategic initiatives designed to improve operational and financial performance. Financial evaluation and Risk Assessment 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 likelihood of errors in financial analysis by asking complex questions. We see companies that have wasted 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, net present value, and internal rate of return. They should specify how a project affects headings of specific key items in the balance sheet and profit and loss statement, and how it affects the site or firm’s financial performance if the project’s financial goals are not met.
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 incorporate the training of these financial skills in their leadership development programs 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 the development of your business, you may need a financial advisor or Tax Advisor Get help.