Becoming an effective manager requires continuously honing and improving your management skills. This could mean exchanging resources with others in your network, reading books or publications, or taking online courses.
Not to be overlooked are the management tools you have at your immediate disposal: your business’s financial statements. Financial statements can be used by managers to track performance, budgets, and other metrics, and as tools to make decisions, motivate teams, and maintain a big-picture mindset.
3 Financial Statements Used by Managers
There are three key financial statements managers should know how to read and analyze: the balance sheet, income statement, and cash flow statement.
The balance sheet provides a snapshot of a company’s financial health for a given period. It lists the assets, liabilities, and equity line by line for the period so that stakeholders can understand the breakdown.
The income statement, also known as the profit and loss statement, or P&L, gives an overview of the income and expenses during a set period. Typically presented annually or quarterly, the income statement allows businesses to compare trends in income and expenses over time.
Finally, the cash flow statement details the inflows and outflows of cash for a specific period. Broken into operating activities, investing activities, and financing activities, the cash flow statement demonstrates the business’s ability to operate in both the short and long term.
When analyzed together, these statements provide a holistic view of the financial health of your organization. They can be used to learn from previous pitfalls and successes as you strategize for the future. Here are six ways you can leverage your company’s financial statements to excel as a manager.
Related: How to Prepare a Balance Sheet: 5 Steps for Beginners
6 Ways Managers Can Use Financial Statements
1. Measure Impact
As a manager, it’s important to have a method for tracking the impact your efforts have on your company’s bottom line. Take a look at your company’s income statement, and note the direct expenses related to the revenue for that period.
Perhaps you purchased a piece of software, requested more ad spend, or hired a specialist for a big project. Did those expenses result in the net income you were targeting? Moving forward, you can learn from your mistakes and double down on investments that paid off.
2. Determine Budgets
Financial statements are also useful when managing and planning budgets. Because the financial landscape is ever-changing, John Wong, HBS Online’s Senior Associate Director of Financial Planning and Analysis, cautions against using previous financial statements as a starting place for future budgets.
“Historical data is essential to building a budget, but should be used as a reference point and not necessarily a starting point,” he writes in a previous blog post.
An understanding of your company’s financial health and history is necessary when budgeting, and should be paired with a forward-thinking mindset.
3. Cut Unnecessary Costs
Being able to see your company’s expenses line by line on both the income and cash flow statements can highlight areas where it’s possible to cut costs. Maybe you’ve been paying a monthly subscription for a service you no longer need, or your team outings could be scaled back in favor of more inexpensive activities. Seeing a list of every expense and how it impacts your company’s net income can be an eye-opening chance to save money and reallocate spend where it’s needed most.
4. Think Big-Picture
Keeping the broader health of your organization in mind is vital when managing your team. Analyzing the balance sheet, income statement, and cash flow statement can allow you to understand the ins and outs of your company’s finances and give you bigger-picture clarity to guide your goal-setting and decision-making processes.
Related: 5 Ways Managers Can Use Finance to Make Better Decisions
5. Align Across Departments
Your company’s financial statements can be used to ensure multiple departments are on the same page. When managers from each department have analyzed the statements, discussions about goals and budgeting can center on a shared understanding of the organization’s current financial health, and offer perspective into other managers’ goals and motivations.
6. Drive Team Motivation
Consider using your company’s financial statements as tools to motivate and engage your team. The income statement can show how your employees’ projects positively impacted the company’s revenue, which could boost their performance and drive.
When setting team goals, leverage financial statements to provide context for why specific benchmarks were targeted and the thought process behind your plans for reaching them. Instill in employees your same big-picture mindset and the knowledge that their efforts make a tangible difference to the company.
Become a Finance-Driven Manager
Your organization’s financial statements are valuable assets you can use to make strategic decisions and manage your team. If you’re unsure of where to begin, brushing up on your financial literacy, networking with finance professionals, or taking a finance course are great places to start. Bolstering your financial knowledge can enable you to make the best use of the resources available to you and become a finance-driven manager.
Are you interested in using finance to become a better manager? Explore our six-week online course Leading with Finance, and discover how you can gain the skills and confidence to use the fundamentals of finance in your career.
