Congrats! You just got promoted to your new position as a supervisor or manager. Lots of hard work went into it and you should be proud. Now … what are you going to do to stay on the fast track? For most non-financial managers, one of their biggest weaknesses is their knowledge of basic business financial terms. Fortunately, you can learn even if you have difficulties balancing your own bank account!
The #1 reason you need to have a working knowledge of business financial terms is so you can better comprehend your corporation’s financial standing. Without a thorough knowledge of your business’s fiscal health, important decisions cannot and should not be made. Furthermore, if you’re not part of that decision-making process now, without this awareness, you probably won’t ever be part of it in the future.
There are four primary types of statements managers need to know:
A balance sheet provides numbers reflecting a company’s assets, liabilities and net value, or equity. This statement shows the company’s financial situation at one moment in time, like a photograph. It’s important to note that a corporation’s assets (what it owns) minus its liabilities (what it owes) equates its net worth. This statement changes every time a company spends or receives money.
2. Income statement
This is also known as an operating statement. Many people compare an income statement to a report card for a business. It shows financial activity over a period of time. Income statements reflect gross profits (or loss) based on sales and expenses. Typically, these reports generate each month, quarter and year.
3. Cash flow statement
A cash flow statement reflects amounts of money that has come into and gone out of a business, and the balance left over for daily expenses. It’s possible to be making a profit without having a positive cash flow. This statement helps managers determine whether or not they can cover loan and debt payments.
The ratios provided on statements are there to assist with identifying weaknesses and strengths in business operations. They can be used to figure out where a corporation stands in its industry and how it compares to other businesses like it. Numbers are used from both the balance sheet and the income statement to determine standing, but not the cash flow statement.
There are many types of ratios, but the four main ones you should know are:
- Asset management ratios: Measure a firm’s success in managing its assets to generate sales
- Liquidity ratios: Measure a company’s ability to pay debt obligations and its margin of safety
- Debt management ratios: The company’s use of debt to finance its assets
- Profitability ratios: A class of financial metrics that assess a business’s ability to generate earnings compared to its expenses
These four terms shown above connect together to show exactly what’s happening in your company. You should never rely on just one of these to determine how your company is doing. You should, however, familiarize yourself with all aspects of the accounting and financial departments so you can manage your department better.
Don’t let the embarrassment of not being a “numbers person” hold you back from furthering your skills. It will be worse if you ignore this critical part of your managerial tool kit. There are many places to find training that can get you up to speed without talking over your head. Hey, you got where you are now because of talent … now just add another weapon to your arsenal. Business financial terms and how they relate to your organization is not something to fear.