A Middle Managers Guide to Finance

What is Financial Management?

Today’s post for A Middle Managers Guide to Finance provides middle managers a quick outline of financial management.  And, hopefully, in a manner that is relatively painless.  Feel free to comment at the end of the post!

I’m going to guess that as a middle manager, you probably await finance reports that signal to you and your manager how your part of the business is performing.  These reports may come from the accounting department and report current performance data compared to some sort of budget/plan and last year.  I’m also going to guess you probably dread the annual planning/budget exercise.  And when your CFO talks about the company’s performance, “What did the CFO just say?” is the question of the day. 

Just what is Financial Management and how much do I need to know about financial management to do my job?  Isn’t all that finance stuff the CFO’s problem?

Financial Management starts with Financial Managers and their high level Goals/Responsibilities.  In a general abbreviated format, financial managers have the following responsibilities:

  • Financial Planning and Analysis – These responsibilities refer to activities related to forecasting future business results, ensuring company goals can be achieved and putting pencil to paper to measure whether or not forecasted goals were actually achieved.  Financial management professionals also kick the tires on new endeavors; again ensuring the returns fit company expectations.  A great deal of accounting data supports these activities.
  • Asset Management – Here, Asset Productivity could be the description as well.  Financial management looks at the returns being generated on the investment in assets, e.g. cash, inventory, people, technology, equipment and buildings.
  • Overall Financial Structure – The financial structure refers to managing the amount of cash and debt the company uses to operate.  This activity also determines how new assets, e.g. buildings, will essentially be paid for or financed. And whether or not new equity (shareholders money) should be raised in lieu of borrowing additional cash. 

Your company’s financial reports are rooted in accounting data and reports subjected to Generally Accepted Accounting Principles (GAAP). These principles are generally accepted set of accounting principles. Standards and procedures issued by the Financial Accounting Standards Board (FASB). GAAP and FASB exist to bring reporting standards of financial data in such a way that enables comparisons to be made between company’s reports and to provide clarity and consistency. 

To be a successful middle manager, you must have a grasp of fundamental financial management concepts in order to “walk the talk” about financial performance levers under your control. Understanding the fundamentals of finance help you ask the right questions if performance is either too good, on target or slipping. Understanding the fundamentals also helps you make business adjustments where needed. 

Key pieces of this financial foundation include performance analysis and asset management.  Yes, mathematics is involved! Financial concepts involving the time value of money, ratio analysis, cost of capital, return on investment, profitability, valuation, price elasticity, etc. will be covered in future posts. 

So, what does this mean to middle managers? Breathe easy. You won’t be asked to develop spreadsheets to augment your decision-making tool kit or to develop the metrics for valuing the purchase of new equipment or additional inventory.  Financial professionals will perform these activities.  

But you need to possess a high-level understanding of financial management concepts, especially when preparing budgets or requesting additional resources.  Financial managers want to know resources are being applied efficiently in your business and are producing expected returns, all based on how they measure productivity and performance. And guess what, you want to know, too! My goal will be to provide you this understanding foundation as we move through other financial management posts.

If you can’t demonstrate an understanding of basic financial management concepts, you will be left in the dust. Another middle manager who can engage the finance department will make off with your resources while someone else reorganizes your operations. Enough said.

Reflect back on the post related to cash for a minute.  If you were able to follow through with the Career Momentum suggestion at the end, you better understand the connection between the people and activities under your supervision and their connection to cash sources and uses.  Plus, you now are on a first name basis with your new best friend, the financial manager attached to your business-operating unit. (Seriously, having the finance manager on your side is invaluable!)

A final word about reporting. Typically, there are internal financial reports, external financial reports and management performance reports.  Each serves a different audience and therefore contains different types of financial data. Most meaningful to you will be understanding the genesis and underlying financial concepts related to management performance reports used to evaluate your business’s performance.  

Career Momentum Builder 

Ask your supervisor to share with you their point of view regarding the keys to their management performance reports, usually produced by the accounting department monthly or quarterly.  What’s most important? How does your operating unit fit into these reports? Are there performance targets to be attained this period? How can you be more helpful in attaining these targets? Is there a role you can play during the next planning cycle?  

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