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My small business now makes a profit; I am only too aware of this, as I now face a big tax bill each year, when my tax accountant has prepared my annual accounts. However, I don't feel much better off personally, so this is not quite what I had expected when I took the risk of resigning my job and setting up my own firm. The accountant is now trying to persuade me to pay her even higher fees, by letting her prepare monthly 'management accounts' for me. She says that I would benefit from something called CVP Analysis on my various product lines, plus she claims that my working capital management should be improved.Â
I know that you are now doing an MBA...what does she mean here and is this likely to be worth my paying her for?"
Outline the differences between financial reporting and managerial accounting information and explain the benefits and potential problems associated withÂ EITHERÂ Cost Volume Profit (CVP) analysisÂ ORÂ with working capital management. How might the technique that you have discussed assist your friend in the effective management of his business' resources? What advice would you give him?
Yannick FRAIR Week_3 DQ
Management accounting is a process which aims to measure, to analyze and to interpret certain kind of data for internal users (including managers, employees, executives of the Company) only as they can then evaluate, plan and control with the accountancy resources. Management accounting helps for providing financial reports for financial group such as shareholders, creditors and tax-authorities.
As expressed above, financial accounting aims to provide accounting data for external person of the Company such as shareholders, creditors and tax-authorities. External persons need the financial data to compare where the Company is currently standing up with the current industry in which it operates. The objective is to provide a quick recap of the financial status of the Company that should lead to plans for corrective actions or adjustments. Those reports should provide to the external users necessary information to understand whether the Company is progressing as planned.
To sum up what has been stated above, management accounting is responsible for assuring effective and informative internal reporting within their departments and between departments by supervising financial reporting, by preparing/coordinating cost/budget forecasts, by supervising orders, by purchasing and to have a treasury role for cash management at all levels and by investing cash to maximize the ROI whereas the financial management abbreviates information needed to monitor the Company's mid/long-term activities by implementing new IT tools to successfully accurate forecasting, budgeting an reporting, to review of costs budgets and forecast, to prepare the P&L forecast. All of items cited above are aimed to drive management's decision-making process.
Then, in your situation it is compulsory to pay fees that accountant is requesting from you because "this involves the establishment of policies and the formulation of plans and budgets which will subsequently be expressed in the financial terms." (NetTOM, nd) Despite of what it has been mentioned above, management accounting has no regulation as its goal is to provide internal data information versus public whilst the financial accounting is regulated by the Public Company Accounting Oversight Board (PCAOB), by the Financial Accounting Standards Board (FASB), and the Securities and Exchange Commission (SEC).
However my friend, you informed me that your business now is making profit and let me tell ou that this does not mathematically mean that your WC (Working Capital) is positive. "WorkingÂ capital measuresÂ how much inÂ liquid assetsÂ aÂ companyÂ has available to build itsÂ business".Â (investWords.com, nd)
WC is the difference between (current-assets) - (current-liabilities).
In other terms if you are able to pay back your short-term liabilities. You have to know that a decreasing of your WC can induce treasury issues in the future. On another hand, profit reflects the net benefice you gained after selling your products.
Major elements of current-assets are (1):
Trade receivables (debtors)
Cash (in hand and at bank)
Major elements of current-liabilities are (2):
Trade payables (creditors)
[(1), (2)] Liverpool
It does exist three ways to interpret the WC:
Assets of your company (inventories + trade receivables + cash) are higher than your liabilities (trade payables + bank overdraft); meaning that your assets met with the long-term needs of your company. Finance is then balanced and it is thus respected. With the surplus of WC your company can auto-finance itself for others needs in short-term.
Assets are equal to your liabilities, meaning that your assets met with the needs of your company. However, even if the finance seems to be reached, you do not have any surplus of long-term resources. This highlights that your Company has a limited auto-finance itself for others needs in short-term. Then you have to think with new decision-making.
Assets are lower than your liabilities, meaning that your assets did not meet at all with the needs of your company. In this particular case, one of the options you have is to finance your long-term activity with the help of short-term resources. In this latest case, you need to be careful that you are close to be insolvable. Then you have to provide with a fast-action in decision-making in order to attain the WC>0
This technique will allow you taking correct making-decision as acting as manager and the accountant will give the relevant data information to succeed with your Company. Nevertheless, here are some tips below to help you further as advices.
Managing inventories (stocks) at the first level because there are significant cost associated with inventories. You have to know either you are handling high amount of inventories or your level of inventory is too low, both are associated to costs. To manage your inventories with efficiency here are some tools such as the average turnover period which is defined as being the financial ratio. It will give you with an average of inventories demand. Although this you should have a proper recording and reordering systems to "ensure that the amount of physicals inventories held is consistent with what is indicated by the inventory records" (Laureate Online Education, 2007, p200).
A weighing of control of inventories against the nature of the inventories to be held; "ABC is based on the idea of selective levels of control." (Laureate Online Education, 2007, p201).
Economic Order Quantity assumes that the demand is constant and it allows calculating with finest the volume of a purchase order by taking account the cost of holding inventory and the cost to ordering inventory.