Finance is often termed as the lifeblood or foundation stone of business and it’s rightly so. Managing the financial activities of the business thus takes an indispensable role in its success. The terminologies in finance like management accounting, financial accounting, financial management, etc are in essence different, but they supplement each other. Let’s look in detail at what management accounting is. In simple terms, management accounting, also known as managerial accounting or administrative accounting, helps the managers make informed decisions regarding the business’s financial affairs. It is newly evolved compared to other divisions of accounting and makes use of mathematical and statistical techniques in addition to the accounting techniques.
To explain how managerial accounting works for the managers or decision-makers of the organization, let us take an example. Managerial accounting can be compared to the pulse oximeter which indicates the saturation level of oxygen in the human body. It provides the readings to indicate whether our body is healthy or not and the treatment will depend upon the value it indicates. Similarly, managerial accounting provides data to the managers, based on which they make decisions for the profit maximization of the organization.
Nature of Management Accounting
It is futuristic
It concentrates on the future course of action of the business. It is not used to assimilate the performance of the company but to give a direction to the business based on predicting markets and future trends.
It uses the selective technique
It makes use of only that data which is useful in making decisions for the business at a particular time.
It studies the cause-effect relationship
Financial accounting analyses the causes responsible for the profits while management accounting studies the effects of different variables on these causes. This helps in choosing the best variable for increasing the profitability of the business.
It is not bound by the rules of accounting.
As mentioned earlier, it uses mathematical and statistical techniques in addition to the accounting techniques, while financial accounting is bound by the rules set by GAAP (Generally accepted accounting principles).
It helps in decision-making.
This is majorly used by managers to understand and choose the viable options for profit maximization and growth. It does not provide decisions but gives recommendations to arrive at the decisions.
Objectives of Management Accounting
Like in any other division of the business, the primary objective of management accounting is to increase the profit and growth of the business. Since it is the alliance of accounting to management, the objectives of management accounting have to complement the functions of management- planning, organizing, controlling, and directing.
Aid in the planning and forecasting
It provides financial reports that help in better planning the daily operations of the business. Planning helps the business to come up with alternate solutions to deal with contingencies. Short-term or long-term forecasts based on available information help in setting attainable goals and formulating policies.
Aid the decision-makers in interpreting the financial data
It is not easy to understand the accounting data. Management accounting helps to translate these technical data into an intelligent, non-technical form that is easily understood by the key decision-makers. Right decisions improve the efficiency of the business.
Help in making strategic decisions
When the business is at crossroads regarding expansion or diversification, management accounting provides the data along with the recommendations to choose the best possible alternative.
Facilitate the management control
It not only helps in framing budgets but also in reviewing the effects it causes. If needed, it can provide remedial actions to achieve the desired output. It helps the management in controlling the performance of the business.
Aids effective communication
It provides the financial data as understandable financial reports for use by the different levels of management. This effective communication helps in establishing control over the budgets or strategic decisions.
Helps in evaluation and efficiency of the policies
It lays high emphasis on management audit. Proper evaluation of the policy and implementation of the corrective measures improves the efficiency of the policies.
Improve the motivation of employees
The improved communication, coordination, and organizing give clarity to the business as well as the individual goals of the employees. This, in turn, enhances employee motivation.
Outsourcing Management accounting
Management accounting needs deep knowledge of accounting along with the ingenuity of the business person. In addition to this, planning, budgeting, and controlling the business has to be done with an eagle eye and hence it is not a simple feat. The obvious reason to outsource is for the easy accessibility to the expertise at a reduced rate. Start-ups and small businesses always struggle with the lack of money and expertise. The exposure of the financial service providers to various industries, adds to the wealth of experience. This will help in guiding the business on the path to success. Diligen has always taken a keen interest in studying the current and future trends of the various industries. It is our duty as a responsible financial service provider to recognize the weak spots of business and offer recommendations and assistance to increase the profitability of the business.