Having worked with executives who have little or no accounting experience, I have sensed their frustration with accounting and finance reports. They didn’t understand the flow of financial information, but they wanted to make informed decisions and run their businesses more efficiently. Lest we forget, the basic purpose of accounting is to disseminate useful financial information that allows decision-makers to make informed decisions. So, how can accountants and finance professionals help their non-financial colleagues understand the financial statements that land on their desks?

Although there are textbooks about accounting for the non-accountant, most actually seem suited for accounting students: They address a number of peripheral issues without concentrating on the key lessons for non-accountants. Accounting is a vast field of information; attempting to cover a wide swath of principles and concepts may demotivate even ambitious non-accountants.

To avoid information overload, focus on only the most relevant areas. An understanding of basic financial statements, the income statement and the balance sheet are of paramount importance. Non-accountants can focus specifically, then, on interpreting those financial statements and what they say about the company.

Non-accountants usually refer to financial statements in order to understand the company’s financial results or to evaluate a possible investment or expansion of the existing organization.

With those needs in mind, how can business leaders quickly sift through the volume of available information and focus on what is most relevant? This is where the ability to understand financial statements from a “helicopter” point of view is extremely helpful. Generally, executives and board leaders will not examine or have a clear understanding of all the details included in the notes; nor do they need to. Even accountants and CFOs can have some difficulty explaining the minutia of reporting requirements. Rather, it seems more applicable and effective for accountants and nonfinancial executives to work together to develop and explain key ratios to focus on, such as efficiency and liquidity ratios. In reality, these individuals may achieve the greatest (and most cost- and time-effective) benefit from having a basic understanding of how efficient their organization is and if there is sufficient liquidity in place to service debt.

 

A Matter of Ratios

To start, efficiency ratios are excellent for analyzing how well the organization is using its assets and liabilities. They can serve to calculate how quickly receivables are being collected, how effective the purchase or use of inventory and fixed assets have been. An important factor to consider is that an improvement in either of these ratios has a direct correlation to increased profitability for the organization.

Another key factor non-accountants should familiarize themselves with is liquidity ratios, which have an internal and external importance. It pays for all managers to comprehend them, as ratios such as the Current Ratio and Quick Ratio are often used as key indicators of an organization’s ability to meet its short-term obligations and are closely observed by internal and external parties. An additional concern for internal managers should be an excessive amount of liquidity, which may lead to idled funds.

While these ratios are important, even a basic understanding will allow non-accountants to ask relevant questions and make informed decisions.