What managers need to know about finance

In an organisation, financial acumen is a skill that will support any manager in their career. The skill is not about knowing the intricacies of transaction recording based on debits & credits or the details of financial reporting; it is about having the ability to do six things:

• Engage with the business strategy – know the organisation’s mission, objectives, strategy and tactics at a macro level to make sure that all actions that are taken align with these overarching principles.
• Understand performance indicators – know the portfolio of measures that are used to monitor business performance in a company, department and project level. This also includes knowing how the indicators are calculated to make sure that actions taken can be translated into how the indicators will be affected.
• Read and interpret financial reports – be able to read the financial reports that are generated within the business. This includes company, department, budget area, customers, products and projects. The skill is being able to assess strengths and weaknesses and identify appropriate actions that will improve performance.
• Contribute to the budgetary process – participate in the budgetary process, the setting of budgets and the monitoring of performance through the financial year. At a detailed level this includes using variance analysis to interpret the causes of deviation from budget predictions and producing year-end forecasts that predict the likely outturn for the year.
• Know the financial consequences of the decisions – identify the financial implication of decisions through the creation and evaluation of a business case that takes into account the likely financial effects of the changes to the business that will take place as a result of any decision. This involves venturing beyond finance into judgment, but the judgment is made on the basis of experience and sound evidence.
• Seek ways to add value not cost – continually improve the performance of the products and services by adding customer value while eliminating cost and waste in their provision.

Although strength in these six abilities is by no means a fast-track ticket up through an organisation, the opposite is almost certainly true. Weakness in them will hold back even the most ambitious individual.

Other abilities are important, depending on the role of the manager in the organisation; for example, sales people may find it helpful to be able to read published financial statements to complete credit checks, and those in manufacturing should know cost allocation techniques to be able to build up a product cost. These other abilities build on the foundation of the six abilities outlined above.

Adapted  –  Guide to Financial Management

John Tennent