All managers, whether in profit or not-for-profit businesses, should have a very good understanding of accounting. Understanding the financial language of business and the various financial measurement tools provided by the accounting discipline enable a business manager to understand the financial strengths and weaknesses of their particular organization.
Understanding the financial health of an organization by way of the different accounting statements (Balance Sheet, Cash Flow Statement, Income Statement, Statement of Owner's Equity) facilitates informed decision making. Understanding the meaning behind the numbers on these statements helps senior managers decide on may issues. This includes employee and management compensation, marketing programs, inventory and/or raw material purchases, as well as day-to-day operating, and investing and financing issues.
Accountants compile the details of transactions a business enterprise conducts. They create informative financial statements and analysis reports concerning the business. However, managers, especially senior decision-makers must understand the basic language and concepts of what accountants report to them. This gives them a better understanding of the statements presented to them. This leads to intelligent discussions with their accountants on the state of the business and what steps must be initiated to ensure the future financial health of the organization.
Understanding accounting makes it possible for managers to recognize problems in their business before they even get the numbers and other information to an accountant at a period's end or at year end. Because they understand where their organization is at financially, they can take immediate corrective action. With an understanding of accounting measurements, such as ratios, they can perform their own financial analysis at any time, using their data. This keeps them on top of things. They can then discuss concerns with their accountants even before their books (financial statements) are prepared at the end of a period or year. In addition, understanding accounting concepts helps business owners and managers in their discussions with those who have a stake in, or do business with their organization, such as bank's and investors.