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What is Management Accounting and its Importance

By Arvind Rongala, Manager, Business Development and Marketing, Invensis Technologies- June 8,
2015045103

Read Comprehensive Information about Management Accounting

Management Accounting and its Role in Organization

Management accounting is the process of preparing management reports and accounts that provide
accurate and timely financial and statistical information to managers to make short-term and long-term
decisions. It identifies, measures, analyzes, interprets, and communicates information to enable an
organization to pursue its goals.

Management accounting differs from financial accounting. While financial accounting provides
information to people inside and, more importantly, people outside the organization, management
accounting is mostly aimed at aiding managers inside the organization with decision making.

The Role of Management Accounting in an Organization

Helping Forecast the Future:

Forecasting aids decision-making and answering questions, such as: Should the company invest in more
equipment? Should it diversify into different markets? Should it buy another company? Management
accounting helps in answering these critical questions and forecasting the future trends in business.

Helping in Make-or-buy Decisions:

Is it cheaper to procure materials or a product from a third party or manufacture them in-house? Cost
and production availability are the deciding factors in this choice. Through management accounting,
insights will be developed which will enable decision-making at both operational and strategic levels.

Forecasting Cash Flows:

Predicting cash flows and the impact of cash flow on the business is essential. How much cost will the
company incur in the future? Where will its revenues come from and will the revenues increase or
decrease in the future? Management accounting involves designing of budgets and trend charts, and
managers use this information to decide how to allocate money and resources to generate the projected
revenue growth.

Helping Understand Performance Variances:

Business performance discrepancies are variances between what was predicted and what is actually
achieved. Management accounting uses analytical techniques to help the management build on positive
variances and manage the negative ones.

Analyzing the Rate of Return:

Before embarking on a project that requires heavy investments, the company would need to analyze the
expected rate of return (ROR). If given two or more investment opportunities, how should the company
choose the most profitable one? In how many years would the company break even on a project? What
are the cash flows likely to be? These are all vital questions that can be answered through management
accounting.

Tools of Management Accounting

Management accounting employs various tools to forecast business trends:

Ratios

Skills and ability to read and analyze financial statements

Management information systems (MIS)

Key performance indicators (KPIs)

Simulations

Financial modeling

Game theory

Balance scorecards, and any other set of data that the company can produce can be used to complete
the analysis.
Management accounting uses activity-based costing to decide what to produce, how much to spend on a
product, how much it will cost to service a customer, and what customers and products are profitable.
They find the answers to these integral questions so that senior management can focus on maximizing
revenue.

Information deluge has transformed how companies operate. Companies can no longer take vital
decisions without considering the implications and outcomes. They can use intelligent analysis and
management accounting to invest smartly, and at the same time prepare quickly for events that might
impact them negatively.

Read Also Related Articles:

Sl.No Article

1 Importance of Accurate Financial Statements for a Business

2 Important Financial Ratios for a Business

3 10 Ways to Monitor Financial Performance for Your Business

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