Effective managers can’t be oblivious to the numbers, ignorance is not bliss!

Gone are the days when you can sit in a meeting and switch off when the finances are being reported.  Effective managers today need to have a much greater grasp and appreciation of the relationship between the functions they manage, and their impact on the financial performance of the business and the allocation of resources.  Certainly there is increasing need for greater financial sophistication for those managers or departmental heads that are required to prepare budgets and forecasts.

Why is it important?  There are a host of reasons, to go into them all would turn this article into a book, but in essence it is vital that managers are able to understand the relationship between the expenditure they make and the revenue and profitability it contributes to the organisation.  Equally, an appreciation of the finances helps budgeting and the allocation of scarce or competing demands on resources generally but more specifically, money.

Where might you start?  The good news is that you don’t, unless it floats your boat, need to sign up for a course in finance or accountancy.  For most the starting point is likely to involve asking those in your organisation charged with looking after the finances and accounts to go through what records and reports etc are produced.  There are several differing types of financial reports which are produced at different times and for differing requirements. The initial focus it is suggested would be to look at what are called the annual accounts, these include the profit and loss account and balance sheet and which are produced to comply with the business year-end, Company’s House, and other reporting requirements.  Typically such accounts report the financial performance of a business or organisation for a 12 month period - your financial year or accounting period.  The nature of these records report past performance and provide you with the balance sheet - a snap shot of the finances at one particular date.  For those that are less numerate, a good way of grasping the information may be through the use of graphs, focusing on the more relevant or key areas applicable to the functional responsibility of the manager. 

You may hear colleagues referring to management accounts, these are real time financial reports produced in the current year of trading, and typically they will include a profit and loss account, and

balance sheet.  Such accounts, depending on the nature and financial sensitivity of your business may be
produced monthly or quarterly.  Management accounts act as barometer for the business as it steers its way through its year; such reports serve to highlight key issues, budget variance, cost control, cash flow managements and overall profitability.  Again, whilst this information is typically presented in a traditional report, many organisations take the raw data and present it in a form more accessible to those who’s bent is perhaps not numbers.

So far we have probably looked more at the accounts and finance from the top down, but what drives the year-end results and the management accounts outcomes are the budgets or forecasts produced.  Perhaps this is the more comfortable area of finance associated with the responsibility of the manager charged with such tasks.  Though for many the annual task of preparing a departmental budget is one full of dread. As a result the default setting for those creating their budgets is often based on the activity or spend they typically carried out in the last 12 months with little or no variation.  Whilst other budgetary approaches are determined or based on allocation of spend set based on say a percentage of business turnover, industry spend, competitors spend, or what the business can afford,  increasingly the more effective  basis for budgeting is zero based budgeting or the objective and task method approach.
In simple terms, you start with a clean piece of paper.  Using either a combination of a previous year’s budget or actual outcomes, you work through the lines of expenditure challenging the activity and spend to virtual destruction only including spend where it can be justified.  Such an approach invariably involves you challenging the activity undertaken and as well as looking at how, or if, that activity is appropriate or can be financially justified.   Link this approach in line with some predetermined objectives for the proposed budgetary period then the outcome should give you a budget that is much more responsive and relevant to the needs of the organisation.  Whilst the ability to finance all activities still may be a challenge, the budget approach should at least help in ultimately prioritising activities and optimising spends and determining desired revenue streams.

In summary, whilst the performance of managers or departmental heads, invariably focuses on their ability to fulfil and surpass the task and challenges they are charged with, there is a growing trend and need for such managers to have and demonstrate not only an appreciation of the finances but also to be able utilise them to drive business, demonstrate accountability, financial returns and ultimately financial rewards for themselves.

For further information about this topic and for any other queries please contact us or call us on 0845 8800 320