In its most basic form, management accounting allows a business to control its operations and take informed decisions in line with its performance objectives. For small and growing businesses, management accounting is a way to ensure that the business stays within its means as it grows. Indeed, management accounting is crucial for entrepreneurs as it allows business owners to keep their fingers on the pulse of business operations and to steer clear of costly mistakes which can sink a small business.
Five steps for improved management accounting
As a part of its business support function, GroFin helps entrepreneurs prepare monthly management accounts to monitor their business and take corrective actions, as and when the need arises. Based on our experience of helping small and growing businesses undertake regular and robust management accounting, here are the five steps involved in a typical management accounting flow:
Preparing the budget
Budgeting is the starting point of sound management accounting. A robust budget is the cornerstone of planning, control and performance management. Budgets directly contribute to performance management by providing concrete targets against which actual results can be compared, and corrective measures can be developed accordingly.
Under management accounting, preparing a budget for each business segment is a good practice as it allows the business to position itself to track performance of different divisions and take business decisions accordingly. For example, a textile manufacturer may have segments like yarns, knits and weaves, while a healthcare provider may have segments like hospitals, pharmacies and medical consultancy.
Undertaking a costing analysis
Management accountants make use of cost allocation methods to allocate various business costs for each item produced by the company. To do so, businesses would need to calculate a cost per unit of output to begin with. Also, different units of operation need to be identified as cost centres or profit centres.
A cost unit will mean different things to different businesses but a good rule of thumb is to look at output and work out the cost unit according to the final product. For instance, a product-based operation such as textile manufacturing will determine the cost of each clothing item and probably different components (fabric/buttons/accessories) as well; for a services firm, say a hospital, it might wish to calculate the cost per patient treated, the cost of providing a bed for each day or the cost of an operation, or a school might wish to calculate the cost per student educated, the cost of providing a desk and educational materials for each day, or the cost of conducting an examination.
Taking the right decisions
It may not be wrong to state that decision-making is the focal point of management accounting. Whether a decision is good or acceptable depends on the goals and objectives of management. Consequently, setting the organisation’s goals and objectives is critical to decision-making. In management accounting, it is useful to classify decisions as strategic or tactical.
Strategic Decisions: Strategic decisions are broad-based, qualitative decisions which include or reflect goals and objectives. Examples of strategic decisions are: What should be the organisational structure? What should be the main product lines of the business? By virtue of their far-reaching impact, strategic decision cannot be delegated lower than a particular level.
Tactical Decisions: Tactical decisions are routine in nature. They are important but repetitive and need little thought with few alternatives. The decisions are taken up by middle and first line managers and do not involve any higher risk or uncertainty. Examples of such decisions are: What should be the process flow for assembly line workers? What should be the daily manufacturing target of workers to meet the prevailing demand? The tactical level of management requires information and instructions from the strategic management level.
Designing a suitable information system
Starting from tactical systems such as Management Information Systems, and going onto strategic systems such as Decision Support Systems and Executive Information Systems, an information system is generally built on a combination of planned procedures, a well-planned organisation structure, technology and managers who how analyse the data produced by the systems to assist them in making informed tactical or strategic decisions.
Performance management is a key aspect of management accounting. It focuses on measurable indicators that can help managers take decisions regarding performance of different divisions and the employees who contribute to it.
Performance management provides a systematic link between organisational strategy, resources, and processes. It is a comprehensive management accounting process framing the continuous improvement journey, by ensuring that everyone understands where the organisation is and where it needs to go to meet stakeholder needs.
Management accounting vs financial accounting
So, how is management accounting different from financial accounting? Management accounting focuses on reporting in a manner that facilitates decision making by internal stakeholders such as owners and managers. Financial accounting follows set formats required by external stakeholders such as public shareholders, investors, tax agencies and registration bodies, among others, to comply with local rules and regulations.
Management accounting – in practice
Your GroFin Investment Manager can assist you in evaluating your current management accounting systems and in putting a more efficient reporting system in place. Monthly management accounting and reporting forms a key part of our business support proposition at GroFin, and if you do not know how to do it, our Investment Managers will only be too happy to help you to get there.