Accounting is referred to as the language of business, but this language of commerce and finance has its variations and limitations. Management accounting, compared to other categories of accounting, is optional, flexible, and unregulated. These features do not take away the importance of management accounting but they do give a different dimension to how a company views and reports its financial information.
Accounting systems, no matter how basic or sophisticated, are tools for management to make their enterprise profitable. Financial professionals and entrepreneurs embrace the importance of management accounting because it allows more emphasis on future achievements and challenges.
The importance of management accounting for long-term goals
Long-term strategies for running a business are necessary for ensuring profits in the future but it can be difficult for management to steer a company’s objectives in the direction of ongoing growth and potential opportunities. Management accounting provides information that is needed to keep up with consumer demands and competition in national and global markets.
We wrote a separate article which deals with the aspects of strategic management accounting.
The importance of management accounting is seen in the forecasts that operational managers make to stay ahead of the production of both goods and services. Income statements are all about a company’s revenues, but the detailed information concerning price setting is a major component of future profits. The importance of management accounting is reflected in the way a company’s leaders can project and sustain fair pricing and still be profitable.
Both marketing and production managers contribute to the price setting of goods and services. The goal of marketing managers is to meet consumer demands during current and future times. Production managers oversee material and labor costs to keep these expenses within profitable standards.
The importance of management accounting is achieved by providing these key individuals with internal reports that guide the decisions of both the marketing and production departments. These reports can reflect periods of time outside the standard requirements of the balance sheet and the income statement. Detailed information about future demands and projected material costs make management accounting reports valuable tools for decision makers.
The projected price of fuel, for example, is a key element to distribution costs but fuel prices are constantly changing. Management accounting reports can be tailored to give the most current fuel pricing without changing the actual costs that are shown on the income statement.
The responsive nature of management accounting helps a business stay competitive. Fixed costs and indirect expenses need to be recognized in a format that all departments of a company can contribute to. Management accounting uses the budget to accomplish this task.
Budgets also influence the importance of management accounting. The creation of a budget takes flexibility and the collaboration of department heads to state their individual needs and goals. Management accounting is the hub for gathering this information that is coming from many sources.
The criteria for creating budgets is typically shown in monthly and yearly amounts, but as time goes on, the proposed amounts can change according to important trends in the economy and marketplace. No matter what the guidelines are for preparing the budget, management accounting can take control of producing a budget that is fair and realistic. The creation of a budget by management accounting serves as a working document to ensure that there is communication with managers and department heads.
Unlike many reports required by regulative bodies, for publicly traded corporations, internal documents generated by management accounting are free from restrictions and regulations.
The importance of management accounting is also attributed to the freedom that management accounting staff has when compiling information for operations, marketing, and finance. Generally Accepted Accounting Principles do not need to be applied to data that is reported in management accounting summaries or records.
Information that comes from management accounting remains confidential and is used internally for the operations of the business. The requirements of the Financial Accounting Standards Board are also not part of how revenue and expenses are presented in internal documents. Without rules and regulations, managers can focus on information that will give them detailed data that has a wider spectrum than the areas that are represented on balance sheets and income statements.
Having a management accounting department within an organization is optional, but the importance of management accounting should never be dismissed if a business wants to stay competitive and reap the benefits of both short-term and long-term income.
The standard financial statements cannot give a company the information it needs in the timeframe that it takes to make quick and prudent decisions about all the aspects of an enterprise. There are no limitations to the formatting and the content of customized reports that a management accounting department can compile. This freedom to have as much information as needed when it is needed is a tool that surpasses the function of financial accounting.