5 Ways to Identify Financially Illiterate Managers

If your non-finance managers struggle with one or more of the items listed below, there are most likely gaps in their financial literacy:

1. Struggle to Read a P&L

Most managers are accountable for their monthly P&L (profit and loss report) yet many struggle to understand, read and interpret this extremely important report.

There are two main reasons managers find the P&L confusing:

1. Line items are often confusing –managers do not understand the meaning of specific line items appearing on the P&L – I.E. cost of goods sold, write-off’s, shortages, breakages, under-recovery etc..
2. Allocations are confusing – managers do not understand why amounts that they/their department did not spend appear on their P&L’s. ?In most companies, shared services (I.E. marketing, admin etc..) are allocated to different departments. If managers do not understand why these amounts appear on their P&L’s, they may be missing the basic principles of accrual accounting.

2. Shy away from financial jargon

Many managers shy away from conversations that involve financial jargon.

If you notice your managers remain quiet in meetings or avoid conversations around EBITDA (Earnings before interest, tax, depreciation and amortisation) debits and credits, the interpretation of key financial ratios, margins etc.. – that’s a sign that non-finance managers are confused by these words and struggle to understand why the business is measured on the strength of these calculations.

3. Problems with simple calculations

?Managers are expected to calculate mark-ups and margins for their divisions or units. If managers experience problems with these calculations or cannot understand how a change in the variables involved in these calculations can affect margins, this may alert you to the reality that these managers do not actually have an understanding of how these key ratios affect pricing and costing and they may lack the skills to protect margins.

4. Have difficulty preparing budgets

Many managers experience difficulty in preparing budgets and may not fully grasp the financial issues at hand. One common mistake is to take last year’s budget and simply adjust for inflation. A manager, who does not have the financial acumen to plan for changes in the business, a change in the economic climate, changes in demand or supply or changes in strategy will prepare a budget, which does not fairly reflect the needs of the business. This will result in incorrect planning, an incorrect allocation of funds and business goals will not be met.

5. Mismanage cash

?Managers who consistently request more money from finance may be ‘mismanaging’ the funds available in their departments. This can be caused by a number of factors:

1. Debtors terms are not being implemented and no one is following up with outstanding debtors.
2. Creditors terms are not being negotiated and creditors are being too quickly.
3. Over-purchasing of stock – managers may be over-stocking which will have an adverse effect on cash flow and leads to issues of potential stock obsolescence or write-offs.
4. Managers are spending on unnecessary items for their departments and are not being cost-savvy – IE fancy office chairs, fancy food, promotional gifts etc..

Unfortunately, financially illiterate non-finance managers can land up costing companies dearly and adversely affect profits. A relatively small in investment in training non-finance managers and filling in their financial literacy gaps can yield dividends for many years to come.

Have a great weekend.

Best,

Mark

www.accountingmadeeasy.co