Financial information in decision making

CIMA is the Chartered Institute of Management Accountants. It supports over 164,000 members and students in 161 countries.  CIMA works with some of the world”s leading businesses and provides a professional qualification in management accounting. 

Management accounting plays a vital role in a business. Management accountants look forward and use financial information to help a business make key decisions about its future. This demonstrates the value of the qualification in supporting business.

CIMA’s qualification is the leading management accounting qualification in the world. CIMA-qualified members work in both the public sector and private sector, in commercial and not-for-profit organisations. CIMA updates its qualifications regularly to take account of the changing needs of employers, students, managers and businesses.

CIMA stakeholders include its own students, qualified members and major employers. It supports students and members through all stages of their careers, with a focus on lifelong learning.

CIMA works to maintain the highest standards that businesses want. Its training provides CIMA members with the necessary skills to manage some of the world”s most successful businesses. CIMA members may lead the finance function in any organisation or work in roles outside finance. They have roles in top management leading companies like Norwich Union, Cadbury Schweppes and Nintendo.

Financial Accounting

Financial accounting refers to the figures, balances and accounts that a business must produce to demonstrate how the business is performing. In a small business, such as a sole trader or partnership, these accounts may be quite simple. However, they still need to be accurate. This is so that the business owner/s and the tax authorities have clear information about the costs and profits of the business. Once a business becomes a limited company, there is a legal requirement to publish certain figures. These include:

• balance sheets, showing a snapshot of what a business owns and owes at a specific point in time
• profit and loss account, showing the profit or loss the company has made in a specific period of time
• in public limited companies, the cash flow statement, showing where cash has come from and how it has been spent over the past year

Financial accounting tasks

Financial accounts relate to the past performance of the business. They give an important baseline of financial information for managers. However, this information is also publicly available to anyone else, including competitors, suppliers, government and investors. Managers need to be able to see how the business has performed in the past to enable them to look to the future.

The main tasks for financial accountants are:

• keeping accurate records such as ledgers, books and accounts
• ensuring invoices are raised and bills paid
• checking and monitoring spending and balances.

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.