Every business manager, department head and members of the management team should have a basic understanding of accounts. This basic accounting information ensures that managers get fully involved in all business decisions and are capable of understanding accounting matters as well. If managers don’t have accounting knowledge, there are several courses and books to help them know what is accounting for managers.
Why Must Managers Know Accounting?
We have often seen companies provide training in leadership and strategy. However, in the past decade or so, it has been seen that understanding the intricacies of the financial statements can have a bigger impact on business health.
Non-finance managers must have adequate knowledge of accounting to interpret the financial statements and take key decisions. Moreover, knowing accounts has become a necessity for non-financial managers owing to the rising importance of corporate governance following the debacles such as the Enron, Equitable Life, Worldcom, and Marconi. It has become extremely important for managers to ensure there are no issues or errors with the accounts.
Sound financial control is the pre-requisite of business success. Manager with poor accounting knowledge may not be able to contribute when their company faces a financial issue. Additionally, financial knowledge helps a manager to answer common business questions – What are the company’s financial priorities? Is the project viable? How to improve cash flow? What’s happening to profit margins?
Must-Know Accounting Concepts
Accounting is a pretty vast subject and managers should try knowing as much as they can. In case, they don’t have finance or accounting background, there are a few very important concepts that every manager must know.
Bottom line number in the earnings statement tells whether or not the company is functioning in-line with the expectations. If it is a positive number or we can say the company is profitable, then the company is fundamentally sound as it is earning more than it spends. In case the number is negative, then it will mean that it is time to take corrective action.
Identifying One-time Item
Often there may be cases when the bottom line shows a profit due to a one-time transaction. Managers must be able to identify them to understand the true position of the company. For instance, a company that normally makes a profit reports a loss in one quarter due to one-time marketing expenses. If a manager identifies this, he or she will know that there is nothing to worry about as the benefit of the marketing campaign will be available in the future.
Understanding Business Worth
A manager can get this information by studying the balance sheet. To understand the business’s worth, a manager must know how the profit or loss is translating into the assets and liabilities. Moreover, the manager must know the condition of the assets, i.e., whether they are liquid, or tied to productive investment. Such information will play a crucial role in making key business decisions. For example, if a manager wants to expand, studying the balance sheet will help him know how much funds they have and how much debt they can afford.
Cash – Sources and Spending
To know where the cash is coming from and where it is going, a manager must study the cash flow statement. Studying cash flow helps in figuring out how to pay daily expenses and how to plan for the long-term budget items, such as loan EMI. Moreover, it will also help in determining any expected shortfall, and how this shortfall can be met.
How to Learn Accounting for Managers?
As we said earlier, there are several courses and books to help anyone know what is accounting for managers. These courses and books detail how to compile accounting transactions. Also, it helps the managers to know how to extract information from the financial statements. Moreover, these also help the manager understand how accounting information impacts decision making in areas such as human resources, acquisitions, sales, and marketing.
Apart from the courses and books, several educational institutions also offer crash courses to help managers with accounts. There are also MBA courses, where students are taught basic accounting skills. Often the company in which the manager is working sponsor the fees for such courses.1,2