Simplified Management Accounting

If you are not specifically an accountant but have responsibility for managing profit, what should you know about management accounting? Before we get into this, let’s first look at a definition.

Management Accounting

First let’s get a working definition of management accounting.  In a nutshell it is the providing to and use of accounting information by management. It is important to realize this information may be used by both those with an accounting background and those without that background. Therein lays the problem that should be turned into opportunity. Let me explain.

What Management Accounting Isn’t

It is not unusual for a CFO, Controller or other accounting person to overwhelm non-financial managers with volumes and volumes of information. As a result the manager is lost as to what is valuable and what is not. This is not simplified management accounting!

overwhelmed-manager

If we want our non-financial managers (or even financial managers) to be able to use the financial information furnished we should avoid the depiction above. For simplified financial management keep in mind that it does not meant accounting should provide unlimited financial information. With that and our working definition in mind, we can consider what is truly needed by managers. We need to examine the purposes of financial management.

So What are the Purpose?

While certainly not all inclusive, management accounting uses financial information (both historical and projected) to manage the operations of a company. Generally it takes a forward-looking perspective and by nature involves some degree of inaccuracy because estimates are used. Also keep in mind that this process is primarily for internal purposes.

An example would be what information a sales manager would find useful. Suppose it is budget time and this manager needs a way to estimate sales for the next year. By providing some historical information such as total sales over a year by customer, seasonality of sales, sales by sales person and/or territory, and sales and profit margin by product or service, he or she now has something to use when making a sales forecast.  It is just as important to note what isn’t provided. For the purpose of forecasting sales, this individual has no need to know all financial information as reflected in a balance sheet, income statement, or cash flow statement. In fact, all this extra information would serve to confuse rather than help.

What Other Things Help

In addition to limiting the amount of information, two things come to mind when considering what accounting should furnish to non-financial managers. First, make sure it is in as simple form as possible to make it easily understood and provide some additional explanation of the data if needed. Two, make sure that the manager actually does understand the information.

That is a brief run-down on simplified management accounting as to what it is, its purposes, and the things to consider when providing non-financial managers information.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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