Page 3: Management Accounting
Management accountants look ahead - they focus on forecasting and decision-making. They use information to advise on how the business can move forward, for example, should a company buy another, should it invest in new equipment. Management accounting involves using the internal financial information available to managers, as well as that information which companies must publish by law. This contributes to forward planning, reviewing and analysing the performance of the business.
Management accounting is fundamental in strategic planning. When a business is looking to make a strategic decision, for example, whether to develop a new product line, acquire another business or expand into other countries, the CIMA trained management accountant can provide advice. They can use a number of tools to assist decision-making. These include ratio analysis, budgets and forecasts (such as cash flow and variances).
Management accounting tools
A ratio is one variable measured in terms of another, for example, how many girls are in a class compared to the number of boys. Ratio analysis is one tool in the strategic decision making process. Management accountants use ratios along with other internal business data and publicly available information to assess aspects of a company”s performance.
The main ratios used in management accounting are:
- efficiency or activity ratios, including liquidity - these show whether the business is able to pay its debts. They look at whether the assets of the company (its buildings, land equipment) could repay any debts.
- gearing- shows the long-term financial position of the business. It can show balance of funding in a business i.e. how much money is from loans (on which it needs to pay interest) and how much is from shareholder funds (on which it needs to pay a dividend to shareholders). More money from loans carries more cost and therefore more risk.
- profitability or performance ratios - show how well a business is doing. They relate to the business objectives, which might be to make profit or obtain a return on investment, or collects its debts quickly.
It is important that management accountants look at all the relevant ratios when making a decision. Management accountants need to be able to produce accurate analysis, correct forecasts and a detached and professional overview to a company”s performance. These contribute to the future success of a business.
Other tools available to a management accountant include:
- cashflow forecasts which look at likely future flows of costs and revenues. The business uses these to plan expenditure and to see where it might need to borrow.
- budgets, which are financial plans for the future. They help the business to see where it will incur costs and where revenues will come from. They are particularly important in helping to co-ordinate the different parts or activities of a business.
- variances which show the difference between what was forecast to happen (in a budget) and what actually happened. The reasons for these differences can then be analysed to show why the variance occurred. Management accountants can then see how the business can build on positive variances or avoid negative ones in future.
- investment appraisal helps to decide whether a particular investment is worthwhile or not. It looks at the costs of investing, for example, in a new factory or processes and at the likely financial returns.