By the numbers: the accounting knowledge you need for leadership success
Money makes the world go round and the same is true for your business or organisation. The importance of the role of accounting in business in ensuring the quality of financial reporting can’t be overstated.
As a manager, you’re responsible for the financial information produced by your team, business unit or department. Managers with these accounting responsibilities are therefore tasked with ensuring and defending the quality of financial reporting, right at the source where the numbers and figures are being produced, so it’s essential you understand what these numbers and figures actually mean.
Accrual or Cash Accounting
These are the main two methods of accounting that business use to record transactions. Larger organisations tend to use accrual accounting, so it’s crucial for managers to understand how this system in particular works. You need to understand concepts such as when an expense will get charged against your budget and when you’ll receive credit for a sale. Knowing and understanding the difference between these two methods of accounting is essential for managing many different facets of business decision-making.
Every senior manager should know their way around a basic financial statement that’s been prepared for external users and which information is presented in each statement. It’s essential that you’re across the basic terminology so you can discuss the relevant numbers with your accounting and finance colleagues. For instance, you need to know how your team’s actions are reflected in these statements and how to interpret them to improve the financial and operational performance for your business area.
A business unit for departmental budget is something that every manager should be able to prepare. It’s an official record of the resources you believe your team will need to achieve their objectives over the next financial year. The process of budget preparation is your opportunity to analyse how resources are being used and question if they could be used more effectively and efficiently. Your business unit’s spending should tie in strategically to the objectives and action plans for the financial year and align with your organisation’s broader strategic plans.
Every manager needs to be able to analyse their variances in income and expenditure against their budgets and forecast. Where there are significant variances, these should always be examined, regardless of whether they’re viewed positively or negatively. You need to develop the ability to relate these variances to what actually happened in your business unit for the accounting period you’re reviewing. If you can’t explain the budget variances based on your own knowledge of your team’s operations, you should contact your colleagues in the finance team immediately.
At AIM, we know it’s crucial for managers and leaders to develop their financial knowledge in order to make the best possible decisions for their organisation. All of us at some stage in our career will be required to read, interpret and report on financial data of some kind, particularly as we progress through our leadership career. That’s why AIM offers a suite of finance programs such as our new Diploma of Accounting which is designed to provide the fundamental knowledge that every manager needs to make decisions based on the best available financial data.