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Accounting For Management

November 22, 2009

“Decision making” is the work of the manager. “Bean counting” is thought to be the work of the accountant. To many non-financial managers accounting remains an unsolved mystery,a burdensome boring necessity of business.

Accounting, however, has a second dimension in addition. Managerial accounting is as indispensable to the “decision maker”. as financial accounting is to the “bean counter”.

Financial accounting and managerial accounting are different. While they share many of the same concepts and follow similar procedures, they provide different information for different purposes. Financial accounting is primarily concerned with providing consistent data to those outside of business. Managerial accounting is concerned with presenting information for decision making to those inside the organization.

The time focus of financial and managerial accounting is different. Financial accounting looks backwards and reports past performance. While managers should be concerned with historical performance, they are more concerned with the future impact of today’s decisions. Managerial accounting has a forward orientation and provides pro forma financial reports that project the impact of current decisions.

Financial accounting is concerned with fairly reporting the results of the business in its entirety. Management is also obviously concerned with the overall results, but the everyday decisions that management makes usually deal with individual activities within the business. If overall performance is less than desired, management must isolate on those activities within the business that can be improved. It is managerial accounting rather than financial accounting that provides the tools for this analysis.

Financial accounting statements are prepared on a routine calendar schedule. Managerial accounting reports are prepared whenever needed. Effective use of managerial accounting requires that a determination be made how frequently and how closely a particular business activity needs to be reported.

Because financial accounting reports historical results, there are exact numbers available and estimates are infrequent. Managerial accounting, however, is often concerned with events that have yet to happen. The focus on the future requires that estimates be used. Because they provide insights into future activity, estimated numbers are not necessarily less useful than the actual numbers.

Financial accounting is performed according to a set of covenants called Generally Accepted Accounting Principles (GAAP). This standardization is necessary so that the performance of different businesses can be compared by outsiders. Since managerial accounting produces information for use by people within the organization, it is acceptable to use whatever concepts that the particular business finds useful. While internal reporting will often closely follow GAAP procedures, it can be tailored to fit specific needs.

Decision making is the work of the manager. The decision making process has four basic steps. It begins with the defining of a problem, includes identifying and evaluating alternatives, and concludes when a decision has been made to choose and implement one of the alternatives. The use of management accounting is indispensable at each step in the process.

Operating budgets are a basic managerial accounting tool. Budgets begin with a set of assumptions upon which certain projections are made. Deviations from budget provide managers with an opportunity to initiate changes to enhance future performance.

The development of a Key Area Results System (KARS) is an effective use of managerial accounting. The problem with typical financial accounting reports is that they say too much, too late. During the second week in December, you find out volumes about what happened in November. The problem is that November’s history and it’s December that now occupies your attention.

A KARS program is designed to give you approximate, but timely information about current activity. In a KARS program you identify those key operating results that largely determine the financial performance of your business and then find ways to gather information that will give an immediate indication of their direction.

Direction is the key word. You don’t need precise results, your financial statements will provide that after the month is over. What you do need is a timely sense of direction so that you have the opportunity to effect the results. Knowing in December what decisions you should have made in November is a small consolation.

Because it’s your business, you will be judged by the historical performance as presented by financial accounting. However, it is the information provided by managerial accounting programs that will enable you to make the timely decisions that can positively impact those results.

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