Managers are often required and expected to have a very broad range of skills and while their team will ultimately be the subject matter experts, they should be able to understand concepts at a proficient level. One of the areas where managers will find themselves spending quite a lot of time, however, are several different financial principles.
Both understanding them and applying them are important in the day-to-day operations of management. Here are a few finance fundamentals that managers should have a working knowledge of and will likely be expected to perform from time to time.
How to Read Financial Statements?
Your company financial statements are a summary of everything happening in the company’s bottom line earnings and expenses. As a manager, you’re going to be making spending decisions, so being able to read and understand these financials will help you understand the impact your spending decisions have on the overall company health.
Being able to consider and understand this impact on the company financials when you’re making decisions is a great skill. Almost always, your financial manager, CFO, or accounts department will be happy to meet with you and go over these financials and show you how to read and analyze them.
The Cost of Human Resources
There is a lot of different spokes in the wheel of human resources that managers should have a good understanding of. In most businesses, the cost of their staff is going to be the highest expense, and because you’re running a team of employees, you’ll want to understand what they’re costing and all the aspects that make up this cost. More importantly, you should have a strong understanding of how employee compensation works at your company – like how pay grades are determined and how packages are calculated and offered.
You’ll also want to be able to create and monitor employee’s timekeeping and attendance records, as this is a function of the cost of human resources too. Actively managing how employees make use of leave benefits (particularly sick leave) is very important.
The Basics of Procurement Principles
One of the financial principle that is most important to understand as a manager is a procurement. Knowing how to correctly and accurately evaluate quotations and proposals from your company vendors is crucial. To this end, you would want to understand procurement principles like RFP and RFQ processes as well as your company’s specific policies on financial authority limits.
If your company is large enough, you’ll likely have a procurement or purchasing department, but in big projects and spending decisions you will probably be very involved, so being able to understand and contribute to the fundamentals is important. It also doesn’t hurt to be able to write your own Request for Proposal documents.
How to Apply Analytics to Finance
Finance is ultimately a strict set of controls. You only have so much money to spend as it’s based on income. Not only is the recording and processing of all transactions important, but the control of this also spend and allocating of budget to each department or project is a large part of the financial role within a company, determined by executive management.
Having both MSc Finance and Management skills like those offered from Aston University can make a huge difference to how you apply your financial responsibilities within the company. Ultimately, management is about controlling the flow of work, information, and finances, so having skills in all these areas will make you valuable to your company.
The Difference Between Cash and Accrual Accounting
Small businesses might use cash accounting, which is a rudimentary accounting method that effectively works on income and expenses. There are no accounts receivable, or accounts payable provisions, and transactions are only actually recorded when there is cash entering or leaving the company bank account.
Accrual accounting is more common and expands on cash accounting by recording expenses and revenue when they are earned or committed, regardless of whether there has been an actual payment or money has been received. Accrual accounting offers a better view of your overall financial position but has the downside of not providing much insight into actual cash flow because the company might look very profitable because they have invoiced for work, but they might not actually have much cash.
Being able to understand how to read and interpret both accounting methods is important as a manager.
How to Create and Manage a Budget
A non-negotiable financial skill for managers is the budget. Your department will have specific income and expenses parameters to work with, and that means you’ll need to manage them throughout the financial year. The only way to accurately do this is with a budget. Not only should you be able to create a budget, but you should also understand the different budgeting methods too. Familiarise yourself with terms like zero-based budgeting and incremental budgeting and ensure you can work with a budget should your company use either.
Your budget is a living document and will undoubtedly change as unexpected income and expenses are generated throughout the operating period, so managing this budget as an ongoing responsibility and ensuring your allocated budget is enough to meet your departmental deliverables is critical as a manager.
How to Analyse Variances
As part of managing a budget, you’ll need to be able to determine and analyze your budget variances. This means you’ll need to be able to understand the difference between the planned expenses and income versus the actual income and expenses. You’ll need to be able to critically examine and determine the reason behind these variances and how to compensate for them. You should also be able to determine if this was a one-off occurrence or if you’ll need to adopt the budget for the recurrence of the variance. It helps to break down the reporting period into smaller periods to do this.
There is a demonstrably strong link between management and finance, and the importance of being proficient in financial principles as a manager cannot be understated. Spend time learning and upskilling yourself in these areas and you’ll find your effectiveness increasing as a manager.