Managers are tasked with getting things done while ensuring employees are satisfied and productive, company values are followed, and hopefully, profits are coming in.
Managers can’t assure company success without being financially literate, at least in the context of a business’s expenses and income. That’s why all managers should acquire these five basic finance skills through an online course to ensure financial alignment with company goals.
Budget Management
Anyone managing a team or project should have a basic understanding of budget management, regardless of the industry. This includes tracking income and expenses, or more simply, money in and out of an organisation.
Budgets comprise four facets:
- Revenue: All income, including from sales or investments.
- Capital Expenses: Business investments, like a property or piece of equipment.
- Operating Expenses: Monthly and daily expenses needed to keep the business afloat, like rent or utilities.
- Employee Expenses: Labor, benefits, etc.
Managers should track and prepare budgets for each of the above expense categories and adjust them when revenue is down. An essential part of budget management is preparing for unexpected expenses.
For example, many businesses experienced revenue loss when the COVID-19 pandemic hit. While that may have been too big a hit to prepare for, strong budget management would have allocated funds to mitigate the loss.
EDHEC’s online Master of Science in International Business Management covers budget management in Bloc 3, through managerial accounting and finance sections.
Financial Statement Interpretation
A financial statement shows a history of a company’s financial activities. Managers read and interpret financial statements to help track budgets and inform financial strategy. Government agencies and auditors also examine financial statements to ensure tax regulation compliance.
Managers might need to prepare and present financial statements to investors or accountants. So they should understand the basic information within each statement.
There are three main kinds of financial statements:
- Balance sheets, which summarise a company’s liabilities, assets, and equity;
- Income statements, which summarise revenue, expenses, income, and earnings over a set period; and
- Cash flow statements, which assesses a company’s ability to generate cash for operating expenses, investments, and debts.
EDHEC’s online Master of Science in Data Management and Business Analytics degree covers everything you need to know about financial statement interpretation and analysis, along with many other useful topics.
Variance Analysis
Budgets don’t always align with reality. You might notice that in your personal life, when rent, food, entertainment, and other expenses seem to outweigh the monthly budget you set for yourself. This is called a variance — when expense and revenue numbers don’t align with budget predictions. And it’s even more common in a business, especially when there’s more money to manage.
Step one for every manager is to notice variances in a financial statement. You should review each statement carefully for any discrepancies. But after spotting variance, the next step is to find out its source.
Variance analysis translates directly to comparing predicted versus actual behaviour in finances. The analysis entails assessing the variance and determining its cause, whether it’s a computer error, underestimated expense budget, or a change in the market.
Managers should look out for three types of variance:
- Material variance, where there’s a discrepancy between the predicted and actual cost of materials;
- Labour variance, where there’s a discrepancy between the predicted and actual wage paid to employees; and
- Overhead variance, where there’s a discrepancy between predicted and actual overhead costs.
A manager that understands company variances can better prepare for them in the next budget.
Cost/Benefit Analysis
Cost/benefit analysis helps managers make financial decisions by using strategy to determine which decisions will bring more benefit and which will bring more financial loss.
To conduct a cost/benefit analysis for a business opportunity, managers should follow these easy steps:
- Write down all the costs that the company would incur now and over time.
- Determine all the benefits that could result from the opportunity, including increased revenue from new customers, for example.
- Determine any cost savings.
- Create a timeline with frames for each expected benefit and loss.
- Determine any benefits that can’t be quantified.
With this information, managers can determine if the benefits outweigh the costs of an opportunity by calculating any of the following:
- Return on investment, which you can calculate by subtracting the total investment cost from the benefits to find the net return;
- Breakeven analysis, which tells you the point in which you’ll break even on your investment; and
- Payback period, which tells you the amount of time it will take for the investment to pay for itself.
Critical Thinking
Critical thinking may seem like a more broad skill than a basic finance skill, but every company’s budget and financial strategy could benefit from a critical-thinking manager. Critical thinking entails observing and analysing everything objectively, and that goes especially for company financials.
For example, financial statements don’t tell you everything you need to know to prepare a budget. A statement documenting company assets, for instance, might assess value when a piece of real estate was purchased. However, it might not account for depreciation, as many companies like to make financial statements look more positive if they can to impress investors. Managers should also use critical thinking to look for any red flags in financial statements, like number manipulation or fraud.
Basic finance skills will help you make sound financial decisions but they won’t tell you everything you need to know about your company’s health. Managers should use basic finance skills in tandem with critical thinking, customer feedback, and competitor analysis to remain one step ahead of the game.
