4 Financial Analysis Skills Every Manager Must Have
Let's crack a myth - Financial analysis is only for financial analysts. The reality is that managers of every department of an organization must have some basic understanding of financial analysis to assess the organization's past, current, and future performance.
Business leaders rely on the financial statement to make business decisions and effectively communicate with stakeholders and investors. This blog will spotlight the basic financial skills that every manager must know to meet organizational goals. These skills can be learned through financial analyst certification.
What is Financial Analysis?
Financial analysis is the process of finding sense from the financial data gleaned from balance sheets, cash flow statements, ratios, income statements, and statements of stakeholders. The reports are then used to make major financial decisions and determine the business's performance.
Types of Financial Analysis
There are many methods of doing financial analysis, but the most common ways utilized by data analysts are mentioned below:-
The horizontal analysis, also known as trend analysis, compares the financial documents of a business with the previous period and calculates changes over time. This shows the increase and decrease of the numbers and the reason for the change if any.
The vertical analysis is an examination of a company's financial statements that involves analyzing a single column to determine how different numbers interact during a specific reporting period.
Ratio analysis evaluates the relationship between the financial information in the financial report. Financial analysts use this method to understand the health and performance of the company.
Every manager should familiarize themselves with each type of analysis to check out the organization's performance. By doing so, managers can determine what strategies are working to improve the company's financial position and make future decisions accordingly.
Basic Financial Analysis Skills For Managers
Let's take a look at the essential skills every manager should learn to gauge their company's financial position.
1. Reading Financial Statements
Leaders need to know how to read and understand the fundamentals of financial statements. The three most essential sheets of financial statements are the balance sheet, income statement, and cash flow statement. Financial analysts use the numbers involved in these financial statements to make various resorts. Perhaps managers can also check how their contribution is affecting these statements.
Balance sheets show a company's assets, liabilities, and equity during a reporting period. It also communicates the worth of an organization. Managers can use this data to determine the financial position of the company.
Income statements refer to profit and loss statements that summarize the income and expenses earned by a company during a financial period. Income statements can be used to check an individual's managerial performance, providing the company's profits.
Cash Flow Statements
Cash flow statements record the cash circulation in the company's name over an accounting period. Managers can use them to understand how well they can operate in the short-term and long-term based on cash flow.
The financial statements together give an overview of a company's performance. Before making recommendations to organizations, managers should know how to reference the information in these documents.
2. Understanding Key Ratios
By comparing ratios to previous periods, a company can determine if it is underperforming or overperforming. Based on the financial reports, ratios enable the business to measure its efficiency and profitability and determine the relationship between one accounting variable and another on its financial statements.
Understanding the significance of financial ratios is critical to knowing the financial status. Managers should be familiar with calculating profitability, liquidity, leverage, and productivity ratios to know the different aspects affecting the company's performance.
3. Finding Meaning in Numbers
Managers need an in-depth understanding of how numbers should be applied to their businesses to grow their financial position. A high ratio for one company can be problematic for another because financial data isn't universal. Every company has different priorities based on the objectives and goals that they want to achieve.
The most crucial ratio is typically returning on equity. However, this isn't always the case. The value determines the majority of company performance that organizations deliver to their owners and shareholders, and managers should be aware of and understand every potential profit criterion.
How to Develop Financial Analysis Skills
Now that you know the skills related to financial analysis that you must know as a manager let's talk about the different ways you can develop these skills and stand out from the crowd.
Researching - Conducting individual research about financial analysis by reading blogs, videos, etc., can provide a surface understanding of finances.
Learn From Seniors - Ask queries to the accountants or financial specialists at your organization. Making financial decisions might benefit from having industry-specific information.
Join a Certificate Course - Certificate courses are designed for individuals who want to gain comprehensive skills and knowledge about a particular field. Joining a financial analysis course from a recognized institute would be beneficial for a manager to learn about financial analysis.
Here we have mentioned the essential skills a manager must possess to do their work potentially. If you are also working as a manager and looking for an online institute to learn financial analysis skills, you can check the website of Hero Vired. It is a recognized institute started by a Hero group offering business-oriented courses to individuals, and this institute provides the best curriculum in its financial analyst certification course.