As there are many different types of accounting which are not mandatory, like management accounting, many companies decide not to use or implement them. This often occurs because the benefits they may bring are thought to be unimportant or of little value. However, it is important not to lose sight of the real benefits of management accounting and the improvements it may make to business practices.
In one of his most famous quotes of special relevance to the sphere of business management, Lord Kelvin stated: “What cannot be measured, cannot be improved. What cannot be improved, always deteriorates”. Hence the importance of management accounting. Also called managerial accounting, management accounting helps the company collect financial and non-financial information and then classify, order and present it in order to improve decision-making, control, planning and management in general within the company.
Even so, there are many companies that still do not have an established management accounting model, as they believe that the benefits it brings are outweighed by the cost of the resources involved. Below we use practical examples to explain some improvements that management accounting can bring to your company.
Improves cost management
By its very nature, managerial accounting helps us speed up significantly the classification of the company’s costs. That is to say, through exhaustive itemization of the costs incurred we can improve their control and management.
Let’s take for example a company with a high number of workers on the move. Financial accounting, the only mandatory form of accounting, tells us how much employees’ travel costs the company in general. At best, it can also specify how much is spent on accommodation, how much i spent on transport, etc. However, management accounting goes much further, permitting us to itemize in much greater detail the specific type of cost: how much is spent on taxis, how much is spent on public transport, how much is spent on mileage in private cars, etc.
If for example we discover that the item for taxis is very high, we can analyze new opportunities, such as reaching an agreement with the most commonly-used taxi company, promoting the use of public transport for business travel, purchasing company vehicles (which may be cars or may be motorcycles for short or intra-urban journeys), or even providing workers with bicycles. Any other improvement may also apply, since with detailed and up-to-date information we can adapt the company’s decisions, policies and actions to its real situation and the needs of its workers.
In the same way, improving cost management leads to better control of compliance with budgets. Implementation of budgets may be monitored in detail to detect problems, deviations, bad practice, unforeseen costs, etc., and to exercise full control of the use made of the company’s financial resources.
Following the above example, in the event of an increase in the cost of workers’ travel it will be much easier to detect the source: rising taxi fares, higher petrol prices, etc.
Facilitate the calculation of profitability
We have discussed better categorization of costs, but management accounting also permits better allocation of costs to departments per cost centre and even customer or project.
Using this information, we can analyze the cost effectiveness of the job performed and can ascertain how much has been earned per specific customer, order, etc. This also allows us to improve the company’s efficiency: prioritizing customers or types of projects that are more profitable than others, refocusing the business where necessary, increasing cost effectiveness through analysis of indirect costs, etc.
This is equally applicable to the company’s departments or cost centres. Through management accounting, we can calculate profitability by taking into account other factors besides purely financial considerations. For example, if you have several establishments you can tell which is most profitable or you can ascertain the return generated by the departments of marketing and finance, two types of department which are not strictly speaking productive.
Knowledge is power
From these examples it is clear what management accounting can bring to a company. But often the problem is the difficulty of getting the necessary information.
However, there are cost management tools which provide very important data and save time preparing a management accounting plan. Captio permits its users rapid, automated classification of company travel costs not just according to their type but also to department, cost centre, and even worker and means of payment involved. All this information may be exported by the user so that the data may be analyzed and classified in the most convenient form.