Financial literacy, or the ability to interpret financial information, is important at every level within an organization. Companies must routinely assess their financial health in order to operate sustainably.
As you might expect, accounting and finance departments are integral in overseeing budgeting and forecasting, as well as ensuring compliance with applicable tax laws. And accounting managers certainly have their work cut out for them, in terms of risk management planning and cost-benefit analyses.
Still, it’s imperative for managers across all departments to have basic accounting knowledge. Moreover, all managers should teach their team members accounting concepts to ensure they understand the many factors that collectively affect a company’s profitability.
What does an accounting manager do?
An accounting manager applies leadership skills to oversee their organization’s accounting department, which, in turn, reviews the business’s day-to-day operations. Accounting managers also analyze complex financial data and help ensure their companies are profitable.
Basic accounting concepts every manager needs to know
Organizations rely on their managers’ business acumen for everything from financial forecasting to monitoring industry trends. For example, managers work with senior leaders to develop budgets and ensure teams operate accordingly.
Asset
Assets are what the company owns such as cash, property and equipment. This could also be known as their collateral. Creditors evaluate assets to determine if a company has the resources available for liquidation in case the company encounters challenges with paying back debt.
When a lender sees that a company has sufficient assets that could be liquidated to pay back a loan, they usually feel more comfortable approving the funds.
Liability
Liabilities include debts the company owes, such as loans and accrued expenses. Unearned revenue is another example of a liability, although it refers to goods or services – rather than funds – that a company is liable for. Financial reports include information about liabilities to help creditors see how much debt companies owe to other lenders.
If a company applies for a loan and the creditor considers their liabilities to be too high, then that creditor might deny the application, since the company already needs to repay other lenders. Creditors generally have concerns about being “last in line,” or, worse yet, not being paid back at all.
Equity
A company’s equity is also referred to as its “net worth.” Equity takes into account the total liabilities and total assets, and owner’s equity includes retained earnings and common stock.
A manager needs to understand how their team contributes to the organization’s overall net worth. For example, when teams achieve their sales goals, companies can then meet their debt obligations and, as a result, reduce their liabilities.
What are the most important basic accounting skills for managers to learn?
Understanding accounting concepts helps managers with strategic planning. They can apply their financial acumen to make informed decisions about resource allocation, budgeting and forecasting.
The following are among the most relevant accounting skills for management professionals.
- Cost management
- Financial planning
- Analyzing financial statements
Additionally, managers should be familiar with the Generally Accepted Accounting Principles (GAAP).
These principles were created by the Financial Accounting Standards Board®1 (FASB®), and most financial reporting in the United States adheres to them. In-depth knowledge of GAAP is therefore essential for strategic management.
What types of financial statements should managers learn to read?
Managers should know how to gather financial insights about their companies. It’s one thing to have sales goals, but making sure managers understand the context for these goals can completely transform the company’s ability to meet them.
There are three types of financial statements most companies use to create their quarterly goals and inform their decision-making processes year-round:
- Income statement
- Balance sheet
- Statement of cash flow
Income statements
An income statement illustrates a company’s financial performance by tracking revenue, expenses and profits. Understanding this statement is important for managers, because they must be able to find ways to increase revenue while minimizing expenses. Ultimately, income statements can help managers pinpoint accounting transactions to review as they work to help their companies achieve greater profitability.
Balance sheets
A balance sheet provides an overview of a company’s assets, liabilities and equity. Creditors often review balance sheets to determine whether to approve or deny applications for business loans.
A manager can also utilize a balance sheet to help manage the company’s debt and leverage.1 Taking on debt, as an individual or a company, will always bring about a heightened level of risk, due to the fact that income must be used to pay back the debt even if earnings decrease.
Cash flow statements
A statement of cash flow, also known as a “cash flow statement,” documents how a company spends its cash. Specifically, it details operating expenses, investments and financing activities.
Understanding how to read a cash flow statement is an essential skill for managers for two key reasons:2 First, the SEC requires publicly traded companies to prepare cash flow statements – as well as balance sheets, income statements and statements of shareholders’ equity – to share with their shareholders. And second, cash flow statements help managers ensure whether their companies are operating sustainably.
Why are accounting skills helpful for budgeting and forecasting?
A company can be very profitable according to their income statement, but if they don’t have a sufficient cash budget, then they won’t be sustainable in the long run. Managers who understand accounting principles are therefore instrumental in creating budgets for their companies.
Creating a budget requires financial expertise and critical thinking. Managers must analyze budgets from previous years to help determine the upcoming year’s budget. They also help put controls in place to ensure business decisions and spending align with budgets.
First, management must communicate budgeting strategies to their supervisors and front-line workers so they understand how to help the company reach their overall goal.
Fixed and variable costs
When creating the budget, it’s important for managers to understand fixed and variable costs. Fixed costs remain the same, and variable costs can fluctuate based on the production of the business.
Examples of fixed costs would include rent for a building, business insurance and taxes. Variable costs, on the other hand, can include direct labor, materials and utilities.
Fixed and variable costs directly tie into the breakeven analysis for the company. If the company does not have any profits or losses then it will break even. As the company moves further away from its breakeven point, the effect of leverage and risk lessens.
Managers are therefore responsible for watching their variable costs closely. They must be adept decision-makers with strong communication skills to support operational efficiency and help ensure teams operate within their budgets.
How can managers use financial statements to inform their decision-making processes?
Let’s say John is an operations manager for a cookie manufacturer. His role involves making sure his department meets their profit goal. Using his financial skills, John determines that he must increase the department’s sales/revenues and decrease their expenses.
This requires John to analyze the company’s income statement and create a strategy. First, he would take a look at their current sales numbers and determine how many more cookies they would need to produce to meet their sales goals.
Producing more cookies, however, will increase costs, because John will have to pay for additional staffing hours, ingredients and overhead.
Therefore, John must also review and analyze the total expenses for the department.
Like the average consumer, companies can waste a lot of money on unnecessary purchases. By taking a close look at the previous months’ expenses, John can find various ways to cut costs, which helps increase the overall profitability of his department.
What ratios do managers need to know to conduct a financial analysis?
Managers use ratios to measure different aspects of their firms’ operations. Ratios can also help compare actual performance to budgeted plans. They provide a quick snapshot into the financial stability of a company at a single point in time.
There are a few of types of financial ratios managers should be familiar with:
- Liquidity ratios
- Activity ratios
- Profitability ratios
Liquidity ratios
The liquidity ratio can help determine how much cash a company has available to pay back short-term debt. This can be useful for creditors and vendors to assess whether the firm can generate cash to pay what it owes in a short amount of time.
There are two specific liquidity ratios managers should know: the current ratio and the quick ratio.
The current ratio equals current assets divided by current liabilities. The quick ratio is current assets minus inventories divided by current liabilities.3
Decision-makers utilize these ratios to help them effectively manage a company’s short-term debts and ensure the company does not take on more than they are able to repay.
Activity ratios
Activity ratios indicate how quickly the firm is turning over its accounts receivable, inventory and fixed assets. The activity ratios include inventory turnover, accounts receivable, total asset turnover and fixed asset turnover.4
The inventory turnover ratio measures how many times per year a firm sells its inventory. Managers can utilize this information to optimize their sales goals and, in turn, help improve inventory turnover.
Profitability ratios
Profitability ratios measure a firm’s profits relative to its sales, assets and equity. The profitability ratios include gross profit margin, operating profit margin, net profit margin and return on assets.
Investors and managers pay attention to the gross profit margin to help gauge their pricing strategy and increase the company’s profits. Some companies raise their prices over time to help them remain competitive and avoid causing “sticker shock.”
How do managers use financial reports to help address fraud/theft?
Companies must implement checks and balances to hold their employees accountable for their performance—and indiscretions. These internal controls help to minimize fraudulent activities and theft. It’s important to identify theft before it gets out of hand.
Managers should therefore conduct regular audits of financial reports to identify questionable transactions and keep organizational leaders abreast of their suspicions.
Financial management is a team effort
Overall, managers from every department need accounting and financial knowledge. Internal managers’ main responsibility is to ensure the company is profitable.
And considering that most businesses fail due to lack of capital, it’s especially crucial for managers to understand key concepts like cash budgeting, cost accounting and how to use accounting software.
Managers must also continue to seek out the latest information about accounting concepts and standards as the generally accepted accounting principles and international financial reporting standards evolve.
Managers need to stay informed so they can ensure their companies adhere to any changes and maintain regulatory compliance. Keeping up with new accounting technology is important as well.
Ready to sharpen your business acumen?
From identifying financial risks to guiding major investment decisions, managers have myriad duties that require a deep understanding of accounting concepts.
Whether you currently lead a team or you’re interested in deepening your knowledge of the accounting field, Rasmussen’s online Accounting programs may be well-suited to your career path. You’ll learn how to use accounting software as you discuss the fundamentals of financial statement analysis.
An online accounting certificate could be just the thing you need!
Rasmussen University’s Accounting Certificate, Accounting Associate’s degree, and Accounting Bachelor’s degree programs do not prepare graduates for any state-issued professional license or certification. These accounting programs do not meet all educational prerequisites for licensure as a Certified Public Accountant (CPA) in any state.
This article is for general informational purposes only and does not constitute financial advice.
FASB® is a registered trademark of Financial Accounting Foundation
Financial Accounting Standards Board® is a registered trademark of Financial Accounting Foundation
1Adam Hayes, What is Financial Leverage, and Why Is it Important? (Apr. 25, 2025)
2Adam Hayes, Cash Flow Statement: How to Read and Understand It, Cash Flow Statement: How to Read and Understand It, (May.10, 2025)
3Shobit Seth, Quick Ratio Formula With Examples, Pros and Cons, Quick Ratio Formula With Examples, Pros and Cons, (May.10, 2025)
4Will Kenton, Activity Ratios: Definition, Formula, Uses, and Types, Activity Ratios: Definition, Formula, Uses, and Types, (Oct.18, 2020)
