Keeping the bottom line in mind: why you need to understand finance

Tuesday, November 17, 2015 - 12:11

By Hamish Williams

Every decision made and every action taken within an organisation has a financial impact. Some obviously have more impact than others as the decision to buy a slightly higher quality brand of instant coffee in the staff lunch room is unlikely to bring a business crashing to the ground. However, managers with no accounting or financial reporting responsibilities make decisions every day that have significant financial impacts on their organisation.

A manager deciding to employ another sales person will increase revenue by bringing in new business and also increase expenses, as there is another salary to pay. Not investing in the proper training of staff may see customer service issues occur that lead to lost customers and reduced revenue. So while managers may not seemingly have responsibility for financial reporting, the simple responsibility of making decisions in a business means they are responsible for the business finances.

For managers who have accountability for decision-making, financial literacy is a critical skill. Financial literacy is defined as the combination of financial knowledge, skills, attitudes and behaviours necessary to make sound financial decisions, based on circumstances, to improve financial wellbeing.

Knowledge can be interpreted as both access and understanding of financial reporting when and where it is provided. While senior managers may have access to financial reports, they must also be able to understand what the report is telling them. Is revenue decreasing or are expenses increasing?

Skills refer to the learnt abilities that managers have to make a decision with a predetermined result. They need to be able to take their knowledge of an organisation’s financial information and manage resources in a way that provides a desired improvement in financial performance.

Attitudes refer to the settled way that a manager views particular components of the business and how they should be managed. For instance, a manager of a kiosk may have the attitude that greater numbers of staff will mean that customers are served faster, customer satisfaction will be higher and the business will profit from repeat business. Greater financial literacy will give the same manager the attitude that while customer satisfaction is important, staff numbers should be carefully monitored to ensure the wage expense doesn’t erode any potential profits.

As a non-financial manager, you are not expected to have an in depth understanding of the accounting procedures behind journals, ledgers, trial balances, debits and credits. That’s what your finance and accounting teams are for. As a non-financial manager you are expected to know how to interpret and use the information these teams put together, and have enough knowledge to question the numbers further when something seems off. As a non-financial manager, having an understanding of your organisation’s finances can improve your decision-making enabling you to better contribute to the organisation’s bottom line.

AIM’s Finance for Non-Finance Managers short course provides a practical guide to analysing financial data and understanding the implications of financial performance. It introduces all aspects of financial management from planning through to budget review and reporting on financial outcomes.