With increasing expectations of customers and changing dynamics of the market, the business world is evolving in this modern era. You would see companies integrating tech-savvy tools, while some brands are automating all business operations. Therefore, as a manager, you have to be agile, resilient, and well versed with efficient business practices. Every day you will make decisions that directly affect the company’s financial performance.
Whether it is hiring and firing employees, scheduling a budget, sending invoices, or seeking a loan – managers should have the necessary financial skills. It helps them understand the implications of their decisions, ensuring the organization doesn’t have to suffer. Instead of thinking this is not your cup of tea, learn the ropes.
Here we are unfolding financial skills every manager should have.
1. BUDGET PREPARATION
Preparing budgets is no easy feat, but managers should know how to create departmental budgets. It comprises of those resources that you require to accomplish the goals of the coming fiscal year. First, identify the cost structure of the company to estimate costs and the spending levels. You have to tie all the departmental spending to objectives, action plans, and strategies to align it with the company’s strategic plan. All items should have a reasonable estimation. For instance, if your sales growth is 10%-20% every year, your forecast should reflect the same.
2. LEARN FINANCIAL TERMS
Even though you are a non-finance manager, you can still play a part in the company’s financial decisions. You can get an online bachelors finance to become a master of this arena. Otherwise, please make yourself familiar with primary finance terminologies and figure out what it means. Have a look below.
- Assets: All the equipment and machinery owned by the organization is an asset since it yields future benefits. Assets that last longer than 1-year fall under the category of fixed assets. Whereas, ones with the durability of less than a year – stationary, inventory, are current assets.
- Liabilities: It is the money your company owes to others. If the payment is due in 12 months – it is a current liability. Otherwise, if you have taken a loan – it would be a long-term liability.
iii. Income: The amount of money an organization earns is called income, but very different from profits. For instance, if you receive a discount from suppliers or commission, it is also counted as an income.
- Expenses: These are day-to-day operational and administrative expenses of the company – rent, electricity, etc.
- Equity: It is the net worth of your company. In short, it is the sum of assets and liabilities.
Understanding these key terms would help you assess the financial health of the business.
3. INTERPRETING OF FINANCIAL STATEMENTS
Usually, supervisors and frontline managers don’t have to analyze financial statements. As you climb the organizational ladder, a primary understanding of financial statements becomes crucial. Are you wondering what financial statements are? It comprises of three things.
- Income Statement: It gives an overview of the sales, expenses, income, and profit of the company. You should be able to comprehend the changes in profits over the past years.
- Statement of Financial position – Balance Sheet: It reflects the financial status of the company – showing assets, liabilities, and equity.
iii. Cash flows: It helps you see how much cash is coming in and going out of the business to ensure there are no liquidity problems.
Some primary knowledge of financial statements will help you communicate efficiently with accounting and finance personnel.
4. JUSTIFY INVESTMENTS
As a manager, you might be asking for significant investment in new systems, large-scale training programs, or some equipment. Usually, you have to present a business case that justifies why it should invest in a particular project. Thus, managers have to learn how to interpret the “return on investment” measures. You would have to calculate the “internal rate of return” to see how much return the investment would generate.
Likewise, compute the “payback period” to see how many years would take the investment to reach its value. If returns are high, the payback period might be as short as 2-years. These numbers would dictate the financial viability of the project, promising approvals if returns are excellent.
5. CASH VS ACCRUAL ACCOUNTING
In the finance world, there are two methods to record business transactions. You either make sales on cash or credit. Some customers pay money right after purchasing a product or service, resulting in an immediate inflow of cash. Whereas, big clients who order in bulk settle dealings on the credit of 2-3 months. Are you wondering how credit sales work? These don’t bring cash into the business; instead, the transaction goes into balance sheet under the heading of accounts receivable.
However, it doesn’t mean you would be buying raw material from your pockets. You will have to settle the same credit terms with suppliers. As soon as the clients pay, you can use that money to pay for raw materials. Likewise, for general expenses, you can use the money from cash sales to foot the bills.
Believe it or not, but financial skills are as essential as any other skills for a manager. They have to understand financial implications, use numbers, and data to improve the company’s performance. Similarly, organizations have to ensure their training programs provide primary financial skills. Otherwise, they should look for managers with finance backgrounds of some kind, helping them manage the business smoothly.