It is a fact that in any organisation, whatever choices we make, they are bound to impact the financial performance of the organisation. These choices can be related to operations planning, hiring and firing staff, budget preparation, approving capital investments, or sending invoices for payment. However, many non-finance managers frequently lack the fundamental finance skills necessary to comprehend the impact of their choices both positively or negatively.
Let’s not forget that the prevalent language in business is finance. You can advocate for yourself and your team when taking part in company-wide financial decisions by learning the fundamentals of finance. By doing so, you’ll be able to understand how your actions affect the financial health of your organisation.
In this article we will cover:
The 4 finance skills every manager should have
1. Foremost Familiarise Yourself with Common Financial Terms
The ability to contribute to financial discussions and comprehend your organisation’s financial statements is crucial, even for non-finance managers. However, to achieve this, you must first become familiar with a few basic financial phrases. To help you get started, consider these:
Assets: Assets are resources that belong to your company and will be helpful in the future. Current assets are ones that you may anticipate will be valuable within the year, while fixed assets are those that are physical and will produce income over a longer period of time.
Liabilities: Liabilities are financial obligations your company has to other people. Long-term liabilities are not required to be settled within the year, but current liabilities are.
Income: The money a company makes from selling products or services is known as income. While expenses are the sum that a company spends to create and provide goods and services.
Owners’ Equity: The amount of assets that a company can legally claim as its own is known as owners’ equity, according to the Corporate Finance Institute. When comparing “owners’ equity” to “net worth,” this figure expressly includes the owners’ individual assets in the business.
You will have a comprehensive understanding of how the objectives of your team affect the particular numbers on each financial statement and affect the overall financial health of your firm by knowing your organisation’s assets, liabilities, income, and expenses.
2. Reading & Interpreting Financial Statements
The history of a company’s financial activity is displayed in a financial statement. To keep track of budgets and guide financial strategy, managers read and evaluate financial statements. To ensure compliance with tax regulations, government organisations and auditors also review financial statements.
Managers must learn to comprehend and connect the dots by understanding the fundamental facts in each statement.
Three main categories of financial statements exist:
- Balance sheets: It’s a finance document that essentially summarises a company’s liabilities, assets, and equity at a moment in time and shows how much a company or organisation is worth—so-called “book value.” The key to understanding a balance sheet is in the name itself; it must always balance. This document offers stakeholders like investors, shareholders, and lenders a quick look into your financial health, what the company owns and owes and helps in making smart financial decisions.
- The income statement: sometimes called a profit-and-loss statement, or P&L—is a document that outlines your business’ income and expenses over a set period of time. The amount your company has spent to deliver goods and services, and the amount it has earned by selling those goods and services, are recorded in this document, which can be used to see if your organisation was profitable during a specific period of time. A better understanding and interpretation of P&L will equip you to make better decisions and impact the financial health of your organisation positively.
- Cash flow statements: basically summarise the movement of cash and cash equivalent that comes in and goes out of the company. It’s a vital financial statement that tells how well a company generates cash to pay its debt and fund its operating expenses. This complements a balance sheet and income statement and is a valuable statement to measure the strength, profitability, and long-term future of the company.
3. Variance Analysis
Budgets and realities don’t always match up. When expenses such as rent, food, entertainment, and other costs seem to exceed the monthly budget you set for yourself, you may notice this in your personal life. When spending and revenue statistics don’t match forecasts in the budget, it is called a variance. And in an organisation, particularly when there is more money to manage, it is even more typical.
At times, your balance sheet won’t balance, and the income statement may reflect results that are inconsistent with the company’s trend in profitability. We can describe inconsistencies such as these as a variance. The Variance analysis is used to determine a contrasting financial behaviour like what happened, why it happened and even a course of action.
It allows you to work out problems within your team and organisation that would have far-reaching, often expensive consequences if left unnoticed.
4. Cost/Benefit Analysis
Cost-benefit analysis is another approach to arrive at data-driven decision-making most often used in business, both at established companies and startups. It is comparing the projected costs and benefits associated with a project decision to decide whether it makes sense from a business perspective. If the projected benefits outweigh the costs, perhaps the decision is good to make and vice versa. This approach is beneficial for arriving at a more logical and simplified business decision-making. It also aids in uncovering hidden costs and benefits.
Now that you know that one cannot escape from learning basic finance skills, it’s time to take the leap to build out those skills.
GlobalGyan, the trusted learning, and development partner for over 50 large corporations and over 20,000 professionals offers Fundamentals of Finance – a program that covers everything from financial statement interpretation to analysis, but also equips you with essential finance skills. along with many other useful topics that can help you move forward as a well-rounded manager and lead with confidence.