As a manager, every decision you make has financial implications for your organization.

Finance is a common language of business. By developing basic finance skills, you can understand how your actions impact your organization’s finances, but also advocate for yourself and your team when weighing in on company-wide financial decisions.

Here are six essential finance skills managers need to advance their careers and become more effective in their role.

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Finance for Managers: 6 Basic Skills

1. Adopt the Finance Mindset

Before diving into specifics, it’s important to have an understanding of what sets finance apart from accounting.

“[Accounting offers] snapshots in time of today,” says Harvard Business School Professor Mihir Desai in the online course Leading with Finance. “In fact, finance believes all value comes from the future. Finance takes all future cash flows to try to figure out what today’s values are. Finance is inherently forward-thinking and doesn’t like to look back.”

Adopting this mindset can help you, as a manager, conceptualize your team’s skill set and your company’s product offering as assets with potential. While both finance and accounting are important to running a business, the forward-thinking finance mindset can serve you well as you lead your team.

2. Familiarize Yourself with Common Financial Terms

Even as a non-finance manager, being able to contribute to financial discussions and read your organization’s financial statements are important skills. But, to do this, you first need to familiarize yourself with some common financial terms. Here are a few to get you started:

  • Assets: Assets are items owned by your organization that will yield future benefits. Those you can expect will become beneficial within the year are called current assets, and those that are tangible and will generate longer-term income are called fixed assets.
  • Liabilities: Liabilities are expenses your organization owes other parties. Current liabilities are required to be paid off within the year, while long-term liabilities are not.
  • Income: Income is the amount of money an organization earns by selling goods or services.
  • Expenses: Expenses are the amounts spent by an organization to produce and deliver goods and services.
  • Owners’ Equity: According to the Corporate Finance Institute, owners’ equity refers to the portion of assets an organization can claim as its own. When specifically using the term “owners’ equity” over “net worth,” this number also takes in to account the individuals’ personal investments in the company.
  • US GAAP: The United States Generally Accepted Accounting Principles is the set of financial principles followed by most companies in the United States.
  • IFRS: The International Financial Reporting Standards is the set of financial guidelines followed by most countries outside the United States. Make sure to check which set of guidelines your organization uses. The differences will appear in certain aspects of financial statements, including the balance sheet’s format.

Related: GAAP vs. IRFS: What are the Key Differences & Which Should You Use?

Understanding your company’s assets, liabilities, income, and expenses can give you a clear view of how your team’s goals impact the specific numbers on each financial statement and affect your company’s overall financial health.

Additionally, there are two types of financial statements to familiarize yourself with to gain a basic understanding of your company’s finances: the balance sheet and the income statement.

3. Read a Balance Sheet

The balance sheet is a document that shows your organization’s assets, liabilities, and owners’ equity.

In its simplest form, it's based on the accounting equation: Assets = Liabilities + Owners' Equity

accounting equation

The key to understanding a balance sheet is in the name itself; it must always balance. If you notice that a balance sheet is not balanced—meaning the organization’s assets do not equal the sum of its liabilities and owners’ equity—there is likely an error in the data.

Related: How to Prepare A Balance Sheet: 5 Steps for Beginners

4. Read an Income Statement

The income statement—sometimes called a profit and loss statement, or P&L—is a document that outlines your business’ income and expenses over a set period of time.

The amount your company has spent to deliver goods and services, and the amount it has earned by selling those goods and services, are recorded in this document, which can be used to see if your organization was profitable during a specific period of time.

Being able to recognize how profitable your organization is over time can allow you to contribute to cross-departmental conversations and aid in your decision-making for your team.

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5. Manage a Budget

“Budgeting is a team sport,” says John Wong, HBS Online’s Senior Associate Director of Financial Planning and Analysis in a previous blog post. “Just like the players on a football team, each team member at an organization plays a specific role.”

The most important budgeting skill for you to have as a manager is understanding how your company’s budget translates to goals, and effectively communicating your team’s role in reaching those goals to your direct reports.

A good place to start is looking at your organization’s budget and noticing how the numbers track to the company’s goals. For instance, if your company’s most recent initiative is pushing out your product to a new vertical, the budget will reflect that allocated spend. If there's a new focus on social media as a driver of qualified leads, the budget sheet will reflect the additional spend to be used for paid social posts.

Once the rationale for the budget allocations is clear and you understand how they track to the company’s goals, you can then break down your department or team’s portion of the budget in the same way. When this has been communicated effectively, your team may find fresh motivation knowing which of their daily responsibilities should take priority given the team’s goals.

6. Analyze Variance

Once you’re familiar with how to read your organization’s financial statements and budget, you may notice that the actual numbers don’t always align with the budgeted ones. Sometimes your balance sheet won’t balance, and the income statement may reflect results that are inconsistent with the company’s trend in profitability. Inconsistencies such as these can all be described as variance.

It’s one thing to be able to recognize variance in a financial statement, but the key skill here is learning how to analyze the cause of that variance. The reason could be simple. For instance, your balance sheet isn’t balancing because of a computational error. Or, it could be much more complex; maybe your budgeted spend isn’t aligned with your actual spend due to a series of miscommunications about how much a specific effort would cost to complete.

Getting to the root of variance issues can allow you to work out problems within your team and organization that would have far-reaching, often expensive consequences if left unnoticed.

Taking Steps to Expand Your Skills

Now that you’ve done some research on basic finance skills for managers, it’s time to take the leap to build out those skills. Reading articles, talking to an experienced colleague, or taking an online course are all options that can help you shape yourself into a well-rounded manager who understands the bigger picture, advocates for yourself and your team, and leads with the forward-thinking mindset of finance.

Are you looking to develop or hone your finance skills? Explore our online finance and accounting courses to develop your toolkit for making and understanding financial decisions.

Catherine Cote

About the Author

Catherine Cote is a marketing coordinator at Harvard Business School Online. Prior to joining HBS Online, she worked at an early-stage SaaS startup where she found her passion for writing content, and at a digital consulting agency, where she specialized in SEO. Catherine holds a B.A. from Holy Cross, where she studied psychology, education, and Mandarin Chinese. When not at work, you can find her hiking, performing or watching theatre, or hunting for the best burger in Boston.