Why is Management Accounting Important for Your Business?
Management accounting, also called managerial accounting, is the process of preparing reports and accounts that provide the company’s management with accurate and relevant information to help make day-to-day decisions. It combines management, accounting and finance with the business skills and techniques managers need to add value to their organization.
Unlike financial accounting (Also see Distinguishing Financial Accounting and Management Accounting), management accounting generates reports on a weekly or monthly basis for the consumption of the company’s CEO and department managers. These reports show the number of orders on hand, amount of cash available, sales revenue generated, states of accounts payable and account receivable, outstanding debts, raw materials and inventory. They may also include charts and statistical analysis.
Management accounting is important for businesses for the following reasons:
It paints a complete picture of the business on any given day. Management accounting combines financial information with available non-financial information to provide a comprehensive overview of the businesses operations and financial health.
It facilitates day-to-day management and business decisions by collating information that helps the management make day-to-day business decisions. These may include reports on the business’s cash flow, revenue, outstanding debts as well as statistics and trend reports.
It helps in performing a marginal analysis. Management accounting facilitates marginal analysis, which is a cost-benefit study of a business activity to examine if additional benefits obtained from an action is worth more than the associated costs. Managers use marginal analysis to find a way to maximize profits.
It helps identify constraints and bottlenecks. Management accounting helps identify the constraints and bottlenecks in the sales process or production line. It shows where the principle bottlenecks are and helps calculate the impact of these bottlenecks and other constraints on cash flow, revenue and profit.
It facilitates the process of capital budgeting. Management accountants provide the managers with the information needed to make informed decisions about capital-intensive projects and purchases. They look at standard budget metrics like net present value (NPV), examine proposals, work out if a project or purchase will be worth the risk, and advise the managers on ways to finance the project or purchase.
It helps in trend analysis and forecasting. Management accountants review trend line for certain costs and investigate variances and deviations to make forecasts for the future. They look into information such as historical pricing, sales volume, customer tendencies and geographical locations to calculate and project future financial goals.
It helps determine the cost of products and services. One of the duties of a management accountant is to calculate and allocate overhead expenses to assess the actual costs of products or services. Determining the actual cost of products is very important for maximizing profit. The allocation of overhead costs may be based factors like quality of good produced and areas of the facility.
Engaging the services of an accounting firm for accounting and bookkeeping services are very crucial for the success of a business. Outsourcing these services will allow you to save valuable time and be assured that your finances are in good hands.