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Financial accounting is centered on providing quarterly or yearly financial information to investors/ shareholders/ creditors outside the company whereas management accounting is used internally to make efficiency improvements within the company. It is focused more on reporting to external stakeholders.
Specifically, management accounting is aimed at informing the management about operational business metrics. The information offered by management accounting is essential and valuable to the company in making informed decisions. It is focused more on reporting to internal stakeholders.
The information reported through Management Accounting includes the cost of goods and services, helps to determine whether a product is profitable, whether investing in a new business venture is wise, and on how to plan the company’s budget for the next financial period.
Accountants who have completed the ACCA’s Management Accounting, knowledge-level course, are good at creating internal analyses to conclude the overall business strategy and get a good start in this line.
Management accountants are people who can simplify complex operational data and turn them into actionable insights. Even though the definition itself is pretty much self-explanatory, there is a lot more work done behind the scenes.
Let’s take a look at an overview on what makes management accounting so important in decision making and how management accountants can add value to companies today.
There are a number of common scenarios that prove management accounting is essential to aid managers in their decision making processes.
I) Planning, Forecasting and Budgeting – Companies use forecasting and planning to project the financial direction in the coming months and years.
Typically, this involves projections for revenue and budget. The budget might also outline the costs for new equipment purchases and acquisitions. This way, companies can use the resources effectively based on these metrics.
II) Project Management Decision – These projects might involve significant outlays of cash that may require new debt to finance them or utilise existing reserves. Careful analysis of the seemingly random factors around the project and identifying the Critical Success Factors is necessary to ensure that the project does not end up into a loss making one.
This is where the management accounting team steps in to provide ongoing reports and perform cost-benefit analysis for existing projects. This usually includes financial plans for each department, marketing plan, new product development, or any other activity-based costing.
III) Performance Management – Performance management is another important aspect of management accounting. The management accounting team must have effective processes and/ or systems to measure and track performance within a company.
That way, managers can avoid costly overruns and allow a company to remain competitive while also being profitable. The process typically involves cost reductions, value enhancement and performance reporting.
One of the major values added by management accountants is that they support key decision makers in the evaluation, control, and planning of business strategies.
They know when and where they should act, probe, explain; when and where they should compete with other companies and, if necessary, explain the limitations of management through forecasting techniques.
Often, these skills and techniques are highly valued by a company and could make a huge difference when it comes to analysing the probability of success in the business strategies. This may seem like an ‘under the radar’ job, but it is extremely crucial and has the power to make or break a business.
In summary, hiring a management accountant who can provide these services or can understand a company’s operational processes and subsequently develop an accounting system that addresses its needs can greatly increase the total profitability of the company. And to give yourself the foundational knowledge in a critical role such as this, taking the Management Accounting Paper by ACCA is important.