- What is management accounting?
- Why management accounting is important for decision making
- Relevant costs analysis
- Audience targeting
- Make or buy evaluations
- Define budgets
- Controlling
- Planning
- Meaningful report generation
Financial accounting is a statutory requirement for a business to maintain financial records and compile financial statements. These statements are useful for submission to authorities, financial institutions, management and shareholders. But, financial information is also essential to monitor the business and drive business decisions on a day to day basis. Management accounting is the process of managing the financial information that is related to the operational aspects of a business. It is vital for a business to have an accurate and relevant management accounting system and reports so that the organization can respond and make decisions that are based on the actual financial metrics. It helps the managers study the actual financial results and implications and results of their decisions. Financial accounting is aimed at creating financial reports and statements that are useful to present externally and internally. Management accounting is most useful for the organization internally.
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What is management accounting?
Accounting is the process by which a business keeps track of their daily transactions. It also includes analysis and summarization of the transactions into accounting reports. Financial accounting looks at the overview of the financial transactions and produces the reports and analysis that is often used for submission to statutory bodies and shareholders.
Management accounting which may also be called cost accounting is a more internal process. Management accounting is the process of managing and extracting reports and analysis of the financial data of the organization for decision making. Management accounting helps managers strategize, course correct and make informed decisions based on the analysis and interpretation of the financial data related to the internal operations of the company. Management accounting is a virtual tool to help the managers of an organization steer it towards their goals. Management accounting analyzes financial information, interprets it and presents insights to the management. It helps non-accounting personnel understand and make sense of the financial data within the company. It translates the facts and figures of business transactions into useful reports and insights to drive fact based decision making.
Why management accounting is important for decision making
Decision making in business should be driven by facts and figures. Most of the daily transactional information of an organization is too minute and detailed to assess at a glance. Management accounting extracts reports and insights from the actual data to answer important questions. So, management accounting helps in making decisions based on the actual accounting data. It also helps study trends and the effects of past decisions.
Management can base their strategic decisions based on the actual data and trends. The more detailed operational decisions such as purchase and inventory will also benefit from the insights provided by management accounting. It is important to make accurate cash flow forecasts when making business decisions. Trend charts for cash flows can be based on the historical accounting data of the organization. The performance of the business over a period of time is important to drive future decision making. A business considering an expansion or fresh investment can analyze management accounting reports to estimate what their cash flows may be and how long it would take to break even.
Relevant costs analysis
How a company spends its money directly impacts the bottom line. To improve profit margins, a company will have to perform a cost analysis to analyze expenses and better plan future expenses. Since expenses are likely to be spread out, expense analysis involves comparing different suppliers, products, services and other factors to determine the one that would be most advantageous and profitable.
When current and historical accounting data is compared, it is easy to determine which service provider or supplier is more advantageous for the company. The advantages may be more than cost driven. Rather than merely pick the vendor who quotes the least amount, the organization can determine the other benefits such as reliability, timely delivery, quality, accuracy and other factors. Expenditure decisions that are based on reports are more likely to be fact driven. There is greater transparency and more confidence in vendor selection and expenditure decisions. Expenditure and cost analysis can be used to plan and spend the company budget more efficiently.
Audience Targeting
Product or service design is successful when it fulfills the needs of the end user or customer. A company that knows its target audience well will be able to align both its products as well as its advertising campaigns to better suit them. Many organizations do not take advantage of the valuable information that they have about their existing customers. A company that analyzes their customer data will be able to understand their demographics.
Management accounting can be used to sift through customer data and generate a buyer profile based on factors such as; age, gender, location, educational level, income level, lifestyle etc. The customer profile factors are unique to different industries and organizations. Not all customers are the same. Certain customers or buyers are more lucrative than others. Management can use their customer profile data to determine which customers generate the most volume and the ones that have better profit margins. This can help shape policies that pay more attention to enhance the number of lucrative customers. When you invest more time and effort into the target audience you get more returns for it. It is a good business strategy to use resources in a way that will gain you the maximum benefit.
Make or buy evaluations
Manufacturing industries have a large amount of data that they can analyze to optimize every stage of production. Product production is the core focus of the company. While some companies perform every stage of production consecutively, other industries may use components sourced from outside. Sometimes it may be more time or cost effective to manufacture the required components internally rather than to source them from a vendor. If there are plenty of vendors who are able to supply the required input components of the required quality, on time and at competitive prices, buying from suppliers may be the better option.
Since the pros and cons of making or buying can differ wildly across industries, geographies and products, make or buy decisions must be made after analyzing all these factors. A make or buy decision can greatly impact the bottomline of the business. This decision can be made with greater confidence when management accounting is used properly. A company’s management accountant can prepare a comparison report on the relative costs of manufacturing in house vs sourcing externally. If a company determines that they have a greater advantage by manufacturing in house they can make the required investments and changes for the same. Management accountants will also be able to estimate how quickly the company will be able to recover the additional investment made for in-house manufacturing capabilities. The rate-of-return is essential to make or buy decisions.
Define budgets
Budgets that are decided at random are often wasted, misallocated or insufficient. They may even be excessive and lock in money that could be better used elsewhere in the company. The most intelligent way of defining the budget for a period is to study the historical expense data. Insufficient budget allocation may potentially stall a project or marketing campaign mid way. This may cause the entire expenditure to be wasted or stall the optimal operations of the company. Budget planning and allocation is vital to the success of every action of the company. It would be foolhardy to embark on any project, product development, manufacture or marketing unless there are enough funds allocated to complete the process.
Management accounting helps determine the budget forecast for the coming time period. This budget planning can be done at different levels of the company. Budgets can be planned for each project, department, product, location, marketing campaign or any other planned action by the company. This ensures that there is an optimal allocation of resources for each function of the company. There will be no sudden unexpected difficulty in operations caused by insufficient resources.
A company may have many projects, products or planned projects that call for attention. It is essential that the company chooses the right one to spend resources on for the best returns. If there are limited funds or resources, this choice becomes even more important. Management accounting helps management compare the cost analysis and determine which expenditure would be the wisest. Budget planning using management accounting takes the guesswork out of budget allocation.
Controlling
Management can have better control over all the different functions and departments of a company when they have the right data. Rather than word of mouth, it is essential to also assess the details of each department through the facts and figures. Management accounting is essential to transform the data from departments into easy to understand reports that keep management informed. So, if a department is underperforming, management will be able to assess which aspects of that department are lagging behind. Detailed analysis helps target the problem and address it.
If there is a department or project that is doing exceptionally well, the relevant data can be analyzed to understand what has contributed to its success. So, good management accounting helps the different levels of management better control the operations of the company. By cutting costs that drain the company’s resources and allocating more resources to the projects that work well, a company can increase its profits.
Planning
Management of a company is about managing the current operations of a company and also making future plans and steering the company towards its goals. Planning that is based on data has a better chance of success. By studying the historical and current patterns in the industry and company, management accounting helps forecast future trends. Today’s highly competitive markets require that a business should use every opportunity to get one step ahead of the rest. Management accounting helps companies extract and use the information that is readily available in their records to make better decisions. Management accounting generates reports that give you the larger picture and also drill down to finer details. It can be used to spot trends and keep tweaking and adjusting plans in response.
Meaningful report generation
Management accounting analyses large amounts of data to extract vital information. Creating these reports can be a time consuming effort without the proper tools. An intelligent enterprise management software such as Tally helps a management accountant create reports quickly and accurately. This also ensures that every report that is generated uses the real time data. Computerized management accounting with accounting software also helps the accountant easily access and compare historical data and trends. Accurate and insightful reports drive the success of the company. Use of the complete accounting software solution, Tally, empowers management to make confident data-driven informed decisions.
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