Can your managers read the instruments?

I mean the instruments of business. The instruments of business include cost reports and monthly management accounts.

People are often promoted into management positions because they have leadership skills and technical competence in the area they will be managing. They may come from may come from production, sales or marketing.

If these managers are not able to read and interpret the instruments of business they are at a disadvantage at management meetings. As a result accountants tend to hold the floor and the non-financial managers are not able to make the contribution they should.

What this means is that all managers making operational decisions – from those in production to those in sales – need to be able to carry out a cost/benefit calculations to ensure that what they intend doing will ultimately be profitable. For example, the indiscriminate granting of credit to meet sales targets may not result in additional profits because of slow payers and bad debts.

Managers responsible for purchasing are often tempted to make bulk purchases to achieve lower prices – but purchasing more does not mean that more will be sold. The resultant cost of carrying the stock and the associated risks such as theft, damage and obsolescence may out way the benefit of the lower prices of purchases.

Clearly an understanding of costs, how the accounting system functions and how to interpret the financial statements of the business is needed.