Management accounting is the method of putting together administration reports and accounts to promptly provide precise financial information to business managers so that they can make informed short-term and long-term decisions. It determines, examines, interprets, and reveals financial information to make it possible for a business to work toward its goals.
Management accounting varies from financial accounting. Financial accounting supplies financial information to individuals inside and outside of the business. Management accounting, on the other hand, is mainly done to help the managers of a business with decision making.
The functions of management accounting in a business
Here are the important roles of management accounting in a business.
1. Assists in forecasting
Forecasting helps businesses answer questions and make decisions such as: Should we purchase more equipment? Should we branch out into different markets? Can we purchase another business? Management accounting can assist in addressing these types of questions as well as forecasting potential business trends.
2. Assists in make-or-buy decisions
Will it be cheaper to acquire materials or products from a third party? Or would it be more profitable to manufacture them in-house? Product availability and cost are the determining factors in this scenario. By means of management accounting, insights can be put together that will make it easy for decision making at both strategic and operational levels.
3. Assists in predicting cash flows
Forecasting cash flows and its effect on a business are important financial information that a manager must know. Management accounting entails creating budgets and trend charts so that business managers can utilise these pieces of information to determine how to allocate budget and resources to bring in the forecasted revenue growth.
4. Assists in figuring out performance variances
Business performance inconsistencies are variances between what was anticipated and what is really achieved. Management accounting utilises analytical methods to assist management to improve positive variances and watch over the negative ones.
5. Assists in evaluating the rate of return
Prior to starting a business venture that needs large investments, a business would need to evaluate the expected rate of return (ROR). If presented with two or more investment opportunities, how should the business decide which one would be the most profitable? In how many years might the business recover cost on a venture? What is the capital most likely to be? Such are important concerns that can be addressed with management accounting.
Presently, the overflow of information has changed how businesses operate. They are not able to make important decisions without first looking at the forecasted effects and the outcomes. With management accounting, businesses are able to intelligently analyse information to invest wisely, and they would also be able to quickly prepare for events that may affect them negatively.
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