Management Accounting is difficult, but it provides invaluable support to businesses and should not be overlooked.
While traditional financial accounting focuses on the preparation of accurate financial reports for external parties, management accounting uses both financial and non-financial information to assist decision makers in making informed decisions to reach business objectives.
Management Accounting is often placed in the “too hard basket” but it can be critical to business survival and achieving success.
Why is Management Accounting complex?
Internal information needs to be up to date and accurate
Internal systems and processes need to be efficient so critical information can be extracted in a timely manner.
For instance, when looking at current outstanding sales orders and work in progress, the information must be accurate and must be obtainable in a fast turnaround in order to be valuable.
Analysis and interpretation of data
Gathering information is the easy part, it’s the analysis and interpretation that can be difficult. You need to have an understanding of what you are looking for and what that information can mean. You need to investigate both internal and external factors to determine why outcomes and results have occurred.
Identifying that sales have spiked from last month is great information to have, but can you identify if this was caused by a certain activity such as marketing? How can you ensure that the same level of sales are achieved in the following months?
Problem solving is needed
Management Accounting does not just identify potential problems, but it must also provide actionable solutions. Sometimes this may involve thinking outside of the box and taking risks.
For instance, identifying that a large job is at risk of becoming unprofitable, then there must also be action that can be taken to reduce the adverse effects or ensure that a profit can still be made.
Understanding of the business, industry and economic environment
It is important to have a greater awareness of external factors that may impact your business operations. If a local industry is shrinking, then how will this affect your business? What are the KPIs that will indicate that your business is being affected and how can you ensure survival above others?
An investment in time and understanding
Many organisations view accounting as purely compliance based and a non- value adding overhead. Management Accounting, requires time and resources to set up and maintain in order for it to be useful for decision makers and business operators. The function must be viewed as an investment in business support and guidance that can add value and profit to your business.
Communication is critical
Accountants are trained and skilled at looking at numbers and statistics and understanding everything about them. However, for many business operators and managers, finance and statistics may not be their strongest skill and so the information must be displayed in a way that is understandable.
Findings and recommendation are only valuable if they can be understood by the decision maker.
What value does it bring to business?
There is a lot of analysis and planning that goes into Management Accounting that aims to give critical information to decision makers so that informed decisions can be made to ensure business objectives are met… or in basic terms, you can identify a threat/opportunity and can take action needed to ensure you make a profit.
Other benefits of Management Accounting include:
- Establishes formal planning and performance benchmarks
- Provides options and support to decision makers
- Identifies, assesses and plans for business and financial risk
- Enables organisations to adapt to change as they are in the mindset of being proactive
- Communicates business goals, objectives and strategic plans
Your decision-making ability is what will enable you to reach your business goals.