Understanding Finance For Non-Financial Managers

Managers are often involved in six sigma , lean manufacturing, and other initiatives which require financial analysis. Managers do not need to know every aspect of finance nor do they need accounting expertise. However, managers do need basic finance training to understand the implications on the organization of major money decisions.

Managers need to be able to read and understand a profit and loss statement. They need to be able to determine the impact of capital expenses, major expenses, labor increases or decreases, maintenance expenses, and every other expense.

A manager should know how to read and understand a balance sheet and cash flow statement. They do not need to be experts, but knowing how an expenditure affects each of the Profit and Loss statement, cash flow statement, and balance sheet must be understood to be most effective in a managerial capacity.

As an example, suppose a manager of an auto parts supplier wants to purchase a new piece of equipment that will make parts three times quicker than the current one. On the surface, it sounds like a good buy. If the manager hasn’t had even the basic finance training, he isn’t equipped to make a correct decision. So in many cases, the manager just sends it up the ladder until the analysis can be done and decisions made. Often, managers are then upset with the decision and wonder how anyone could decline to purchase a machine that produced parts three times quicker.

However, there are many financial decisions to be made and analyzed. For example, how will the company get the money to make the purchase? Will it be financed? What is the return on investment and payback period for the purchase? Will the purchase put too much debt on the books? What will it do to the debt to equity ratio? Can the cash flow and balance sheet support the expense? Are there other projects that have a greater ROI and payback? What will the depreciation do to the P & L? What does this purchase do to the tax situation?

The list of questions could go on for quite some time. Although most managers do not want to be financial experts, those with the basic finance training
and expertise are equipped to make sound requests and complete basic financial analysis themselves.

The simple income statement (often called P & L for Profit and Loss) is the first financial document managers often encounter. Studying each line item of an income statement each month often helps a manager’s understanding. Asking questions of the local accountant brings further knowledge. Reading a few simple books (not college textbooks) will help the manager continue to increase financial knowledge.

One of the best ways to become familiar with financial statements is through Yahoo Finance. Most public company’s income statement and balance sheet can be found by simply entering the stock symbol.

Reading the Wall Street Journal or other publication such as Baron’s weekly also provides exposure to finance.

Once a manager has a basic understanding of finance, it is worthwhile to listen to a few conference calls of analysts and top managers of a public company. These calls are often held quarterly (every three months). Most companies allow any potential investor (anyone) to listen to the call. It is enlightening, as you are listening to some very knowledgeable people (at least regarding finance). The analysis will ask some tough financial questions of the top managers, and it is interesting and a learning experience to hear the discussion.

Any manager with enough perseverance and desire can learn all they need to know about finance by simply reading and learning on their own. However, it is often simpler to condense this learning time frame by taking a finance training course geared toward non-financial managers.