Once you’ve been working in your new position as a manager for a few months, the company’s financial statements will be distributed to you at the end of each month. While many people just read over these documents and do not know what to do with them, financial statements can be precious tools if you understand how to use them properly. Here are the six ways that a manager uses financial statements to run his or her department more effectively.
Forecasting is an integral part of management accounting. Managers use forecasts to estimate business performance, gauge cash flow and decide on what kind of inventory and staffing needs they’ll have in the coming months. Forecasts also help managers with their marketing and sales activities by informing them when they can expect spikes in demand for their products or services. Further, they help predict when new hires may be needed to handle increased workloads. As such, forecasting is used to inform many managerial decisions at all levels of an organization.
A manager planning for next year’s budget will want to review all of their relevant financial statements. An income statement shows precisely how much money came in, what was spent, and whether any profit was made. The balance sheet will show their assets, liabilities, and net worth at that time. A cash flow statement is an even more detailed look at how cash is flowing into and out of your business. This allows them to decide what assets they should acquire or divest to maximize future profitability.
One of your main tasks as a manager is to make sure you control your finances. There are several ways to check up on what’s going on with finances, and one of them is reviewing financial statements. While there are numerous types of statements, here we will focus on reviewing balance sheets and income statements. These two documents will give you an idea of where your company stands financially—so you can plan accordingly for both short-term and long-term financial goals.
4) Profit Planning
Profit planning, also known as income statement forecasting, is essentially figuring out how much revenue your company will bring in. This helps you decide how much money to allocate to different aspects of your business—the number of salespeople you need or whether you need an expensive new product development team. It also allows you to estimate potential profit margins based on competitor analysis and historical data.
Managers use financial statements to help them better understand their company’s performance. To do so, they use financial ratios to compare numbers from one year to another, across departments, with industry averages and so on. While some ratios can be precise, such as a benchmark for profit margin in a specific industry, others are more general. The six most common categories of financial ratios are profitability, liquidity, activity, leverage, investment and efficiency.
6) Cash Budgeting
Cash budgeting is one of six ways that managers use financial statements. It’s simply creating budgets by estimating income and expenses for future periods. This allows your company to keep track of its cash flow (and plan ahead to collect receivables, for example). If you’re running a small business, there are also online applications that will help you with cash budgeting; take advantage of these if they’re available to you.
Every manager needs to know how to use financial statements. They’re not just for finance people; they’re essential tools that all managers need to utilize. If you haven’t been given any specific guidance about which financial statements you should be tracking, make sure you familiarize yourself with your organization’s balance sheet, income statement and cash flow statement. You can train yourself in the course of accounting for managers, which can help you can critical knowledge. Learn more about this course on our website.