The process of creating organisation goals by identifying, measuring, interpreting, and communicating information to managers, constitute the process of management accounting.
Management accountants perform various business functions to ensure accuracy in data interpretation, especially those that inform the future of businesses. Accountants work behind-the-scenes more often than not: they labour so that the people in the front, namely the business owner and/or executives, may do their work well and par excellence.
This, in no way, undermines the work and role of a management accountant. They continue to play a vital role to influence the functioning of the economy, at large.
Of course, such recording and reporting is the job of financial accountants – a type of accounting management that is far more visible, if only for the financial information they provide.
Also called management accountants, these number-crunchers have a specific function within any business or organisation. They use scientific metrics relating to cost of purchases and expenses made by the business, to arrive at important data analysis that drive critical business decisions. A key responsibility of a management accountant is to quantify budgets to analyse decisions related to operational planning. Using performance indicators and final reports, variances between actual outcomes and budgets are noted to make course corrections.
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Objectives of Management Accounting
Management accountants are, in many ways, the backbone of a business. They are instrumental in decision-making related to scale and costs. Here are the primary objectives of management accounting:
- Business Planning- This is the primary job of a management accountant. They help organisations prepare for the future, using past experiences in the form of reporting and data crunching.
- Policy Formulation: This follows from business planning, which contributes to forecasting. Policies are framed based on these plans, using the process of budgetary control.
- Support Financial Accounting: An organisation needs a lot of support choosing the right costing techniques that inform sound budgets and risk mitigation plans. Management accountants present the financial data in a non-technical manner, making it easier for executives to make decisions.
- Performance Control: Management accounting plays the crucial role of segregating a company into resource and responsibility centres. These, in turn, are managed by executives, who are responsible for the performance of each centre. This facilitates timely feedback, problem identification, and necessary course corrections.
- Organization: The use of budgeting, performance control, internal control related to finances and costs, helps a company run more smoothly in its day to day activities.
- Strategic Thinking: Management accountants are highly skilled at this. They put their brains into important factors like return on time investment, efficiency, cost effectivity, product pricing and the like, that help in scaling the business.
- Consistent Communication: Unlike financial accounting, which mostly takes place once or twice a year, management accounting is a regular process. This helps executives and top bosses to receive information on at frequent intervals.
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The Average Workday of a Managerial Accountant
Managerial or management accounting is a method of accounting that creates statements, reports, and documents that help management in making better decisions related to their business performance; managerial accounting is primarily used for internal purposes.
Basic accounting tasks fulfilled by management accountants include recording expenses and tracking income, and assessing tax liabilities. These data are then routinely compiled into reports, called income statements, balance sheets or cash flow statements. Hence, managerial accountants work in tandem with financial accountants.
These reports are what go into making sound performance plans for all employees across the organisation. Company executives, who are thus better informed, consequently make decisions that impact the company’s profitability. Company sales and consequential profit, the two pillars of business growth, are thus heavily dependent of management accounting.
They are also responsible for keeping various departments on or even under budget and, if current trends indicate potential budget overruns, it is incumbent upon them to approach operational management with their findings.
If this is how you want your day to look like, check out this course from the leading institute for management accounting, The Institute of Cost Accountants of India (ICMAI)
Skillsets of a Management Accountant
A sound understanding and an outright interest in the fields of Economics, Accounting, and Financial Topics, is a good place to start if you are looking to enrol in any of the accounting courses. Knowledge of hard accounting skills and an aptitude for numbers are skills that set a management accountant apart.
Management accountants need to be well-versed with the generally accepted accounting principles, or GAAP. Find out more about GAAP in India to build your knowledge on the subject.
Familiarise yourself with the basic tax principles, and how they apply to different cases within a company. Do a thorough research on case studies to understand the applications of the principles.
Beyond the basics, having knowledge of accounting practices and discounted cash flow would be very beneficial to your employer, and to your accountant skills set. Because accountants work within a business environment, good grasp on communication, and public speaking are additional skills that you could hone. For the same reason, working on your interpersonal skills also becomes a necessity. Remember, the role of a management accountant involves a lot of influencing without authority.
Of course, there are other important skills that must be present in you if you aspire to become a management accountant. This includes the skills to analyse, research, data interpretation and to present financial material in such a way that it underscores the value of your findings.
Generally speaking, executives are not necessarily detail-oriented people; they mostly crave the big picture. But, as you well know, how can one truly appreciate the big picture without being privy to the details?
Thus we conclude that persuasion goes hand in hand with presentation skills, and they are of equal importance to the management accountant.
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Scope of Management Accounting
The scope of management accounting is very wide. It primarily concerns itself with utilising financial information to solve business problems and make sounds decisions based on logic and scientific reasoning. Management accounting covers, but is not limited to the following areas:
- Financial Accounting: Any business transaction that is recorded comprises financial accounting. So basically, any company transaction related to income, expenses, inventories, assets, liabilities, cash flow etc., are all documented with financial accounting. The financial accounting process entails the preparation of annual statements and provision of making those reports public to important stakeholders, at the end of each financial year. These reports form the basis of management accounting decision-making processes, interlinking the two types of accounting.
- Cost Accounting: This helps to ascertain various nuances of business-related costs. These data are further used by management accountants for analysis over a period of time so as to arrive at business decisions.
- Statistical Forecasting: Management accountants use budgetary controls and forecasting techniques in order to assign responsibilities and and ensure coordination. This means that budgets are prepared on a functional basis to allow performance measurement, which in turn allows for strategic corrections, if any.
- Cost Control: Management accountants are responsible for inventory control, time control, standard costing, and cost control processes.
- Revaluation Accounting: Management accountants often use this type of accounting method to predict the most accurate profit margins. This is done to maintain working capital in real time.
- Statistical Methods: The use of statistical tools like graphs, diagrams, and charts, is quite common in management accounting.
- Reporting: Management accountants have the important, but tough job of preparing interim and external reports. The former is furnished to top bosses internally, while the latter is prepared on an ad hoc basis, with the purpose of sharing it with external entities like shareholders.
- Internal Audit: Every piece of data and report is maintained with the management accounting team to be made available for an internal company audit.
Limitations of Management Accounting
While management accounting is a highly sought after role in any business, it comes with its own set of challenges:
- Data Accuracy: Most management accounting analysis, interpretations, and findings, are based on previous reports. The accuracy of past records determines the legitimacy of managerial accounting reports. Most importantly, they affect the viability of business decisions.
- It is Not A Substitute of Administration: The techniques and tools put forward or used in management accounting are merely recommendations. They do no substitute administrative load.
- Lack of Objectivity: A lot of the management accountant's recommendations are based on intuition, and personal bias. Sometimes, these might prove to be counterproductive to business.
- Unquantifiable Variables: Management accounting cannot quantify variables like interpersonal conflict or environmental challenges. These are important drivers of business decisions.
- Cost-ineffective: Management accounting systems are costly to install that small businesses cannot afford to spend on.
Despite its shortcomings, management accounting still stands out as one of the most sought after roles in a growing business environment.