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Three Finance Concepts Every Manager Should Know

Here’s the thing. You’re doing great in your career and by looking at your performance your boss has promoted you to be the manager for your unit. You’ve got a great salary hike but it has also resulted in a whole lot of added responsibility. Now, you’re not just an employee who had to prove his skills and ability. You are now responsible for managing teams, and projects. Your new deliverables include increased profitability within project budgets.

The challenge this opportunity brings is great. The hitch however is that your finance fundamentals are quite shaky. This gets you wondering on how and where to start.

This article will help you get started on these questions. It will discuss the three most essential financial concepts that a business manager must know to get the job done well in today’s business environment.

Budgeting

Budgeting is the outcome of planning and understanding the costs of the project you are going to undertake. Sure, you can ask your finance department to make the budget. The problem with that approach is that if the finance department makes the budget, then it will be their budget not yours.

A budget is your understanding of the resources required, and therefore the cost, be it regarding materials, people or time. It is important therefore that you as a manager must know how to prepare a budget. No matter how good your finance people are, they will not be fully cognizant of project requirements and goals. Budgets have a nasty habit of overshooting themselves, so it is important to keep space for contingencies and delays. Budgets are also an important tool in post project assessment. A budget therefore is a very useful tool for planning and project assessment for every effective manager.

Reading Financial Statements

Every company publishes its financial position in the form of key financial statements. These are: balance sheet, income statement, and statement of cash flows. Having the ability to read these statements and gather the key financial information from them is an essential skill for every manager. The benefits of this skill are unlimited. It helps you understand the financial health of your own company; it also helps you gauge your competitors or prospective customers while bidding for new projects. If you want your company to make a capital investment, the financial statements can provide you a good picture of whether your company can afford it. This is one skill that can contribute more to your success than anything else.

Return on Investment: This again is an important concept for every business manager. Before taking up a new project it is important to evaluate the viability of the project. Since the company is going to invest money in the project, you need to be able to evaluate how much return you will be able to get from that investment. There are various tools such as NPV and IRR that can be used to check whether it is worth investing in the project. A related concept is that of opportunity cost. Opportunity cost is the cost of choosing one option over the other.

While there are many other finance concepts that you should know as a manager, these three are key and you should get them right as early as possible.

Finance Must Knows is an online training program on “Finance for Non-finance Managers”. It is designed to help you become proficient with the key financial concepts that you must know as a non-finance professional.

[Image by Alex Barth]


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