The role of management accounting in small businesses

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The first to written about "Management Accounting" is know what means. To know its meaning, we focus on the definition from business dictionary.

"Process of preparing management accounts that provide accurate and timely key financial and statistical information requires by managers to make day-to-day and short-term decisions. Unlike financial accounting (which produces annual reports mainly for external stakeholders such as creditors, investors and lenders) management accounting generates monthly or weekly reports for the firm's internal audiences such as department managers and the chief executive officer. These reports typically show the amount of available cash, sales revenue generated, amount of orders in hand, state of accounts payable and accounts receivable, outstanding debts, raw material and in-process inventory, and also include trend charts, variance analysis, and other statistics."

Based on definition, Management Accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basic to make informed business decisions that will allow them to be better equipped in their management and control functions.

The principal objective on management accounting is categorized and computes costs of production. Management accounting gives future prediction for expenses and profits, which is known as budgeting. It gives information on which investment decisions can be based. One can also discover inefficiencies within company. The same way use to manage costs and manage the flow of cash. Management accounting also helps in seeking opportunities which could be exploited by the firm.

Small businesses use a mix of management or financial accounting with business operations. Management accounting focuses on the allocation of business costs to goods or services, creating budgets for business functions, and preparing financial information for business decisions. Financial accounting prepares financial statements listing sales revenues, expenses, assets, liabilities, and cash flow for the small business. Both types are used to secure external financing or report financial performance to business stakeholders.

Accounting information allows business owners to assess the efficiency and effectiveness of their business operations. Prepared financial statements can be compared to industry standards or to a leading competitor to determine how the small business is doing. Business owners may also use historical financial accounting statements to create trends for analyzing and forecasting future sales.

Small business owners can purchase accounting software computer programs to track, record, and report financial information. While small or home-based small businesses can use spreadsheets or other basic programs to track financial information, specialized accounting software helps business owners maintain accurate financial records. Computerized accounting systems can compute payroll taxes for employees, too.

Business owners may consider hiring a public accounting firm or individual certified public accountant (CPA) to create or review a company's accounting system. Hiring a public accountant is often expensive for many small businesses. However, the experience and expertise public accountants bring to analyzing small business accounting may be an invaluable resource for running a business. Small business owners may also use these outside accountants to prepare business tax returns.

The advantages and disadvantages of management accounting in small business can put in order and know what benefices and loss of value in the company.


1. Improves Profitability

Management accountants can improve the profitability of their company by carefully monitoring each operational process. Cost allocation, waste reduction and efficiency reviews are tasks conducted by management accountants that may have significant impact on a company's profits. Improperly allocating costs may interfere with recouping the production costs of materials, labour or overhead. These costs could quickly outpace revenues, causing the company to lose profits. Reducing wasted production materials is another important area of management accounting. Poor production processing may create too much materials waste, increasing overall product costs. Efficiency reviews will determine if production labour is too slow when producing goods or adding to production process waste.

2. Stronger Decision Making

Traditional business decision making consists of executive managers reviewing potential deals with other companies and pulling the trigger if they feel good about the decision. Management accountants help executive managers make that decision by giving them an objective review on the potential financial impact of the decision. Accountants may also conduct sales forecasting or cash flow calculations to determine the growth potential of future business decisions.

Companies may specifically development management accounting teams for reviewing business decisions and determining how potential acquisitions or new product lines will affect current business operations. Adjustments to the company's cost allocation method may also need to be reviewed during the business decision process.

3. Better Financial Reporting

Strong management accounting systems may improve financial reporting since management accountants are intimately involved with the collecting and reporting of financial information. Variances or deviations from current accounting policy found by management accountants can be corrected before financial statements are prepared and released to external stakeholders. Improved financial reporting may help a company secure debt or equity investments from outside sources. Improving the external financing portion of their business operations usually helps companies expand or improve operations. Better financing operations may also create a competitive edge over a company's competitors; this competitive edge can be used to gain market share over other companies and improve overall profitability.


1. Lack of Standardization

Financial accounting is highly standardized, with financial accountants using guidelines such as Generally Accepted Accounting Principles (GAAP). In stark contrast to this, management accounting does not have a set of standard procedures. A management accountant can devise her own systems and metrics to evaluate the finances of an organization. The disadvantage of this is that one accountant's method can vary greatly from another's method. This can result in inconsistencies in the way that financial benchmarks and evaluations are measured. It also requires accountants to be much more knowledgeable and able to interpret the accounting systems developed by others.

2. Over-emphasis on Quantitative Information

Quantitative data can be valuable in making informed business decisions. Management accounting, however, focuses exclusively on quantitative measures and ignores factors that cannot be measured in dollars and cents. For instance, it might appear to make financial sense to relocate a production facility to a region with lower wage costs. Management accounting can calculate the wage savings and certain increases in cost that might occur (for example, shipping costs or import duties). Management accounting cannot, however, factor in things such as the savings related to the goodwill of community members in the region, or public relations problems that can arise from such a decision. Management accounting is very rational, but sometimes being entirely rational can be a disadvantage.

3. Subjectivity

Management accounting allows for a great deal of subjectivity when creating metrics and methods for measuring performance. This is problematic because the accountant's personal beliefs and biases can have an impact on the way performance is measured. For example, if a management account is required to measure the productivity of workers, she may focus exclusively on outputs and not take into account worker inputs that can have a profound effect on overall productivity. This affects both the company and employees. The company is affected because the information that it is using may not be the best and employees can be affected if they feel they are not being evaluated fairly.

Management accounting is an important internal business function. Many companies use some form of management accounting to record and report their internal financial information. While financial accounting is concerned with preparing financial reports and releasing information to the general public, management accounting focuses on preparing financial information for internal review and decision making by business owners, directors and managers. Management accounting offers several important tools for measuring the company's operational performance.

Management accounting focuses on three main business issues: allocating costs to goods or services, cash management or budgeting and financial forecasts. Management accountant's use cost allocation methods to allocate various business costs for each item produced by the company. Cash management and budgeting outlines all future expenditures to ensure business operations generate enough capital to pay for business expenses. Financial forecasts provide business owners and managers with expected operational output or consumer sales under certain business conditions.

The accounting information system within an organization has two major subsystems: a management accounting system and a financial accounting system. The principal distinction between the two systems is the targeted user. The management accounting system produces it for external users. Thus management accounting could be properly called internal accounting, and financial accounting could be called external accounting. Specifically, management accounting identifies, collects, measures, classifies, and reports information that is useful to managers is planning, controlling, and decision making.

It should be emphasized, however, that both the management accounting information system and the financial accounting information system are part of the management accounting information system. Unfortunately, all too often the content of the management accounting systems is driven by the needs of the financial accounting system. The reports of both managerial and financial accounting are frequently derived from the same data base, where the data base was originally established to support the reporting requirements of financial accounting. There is a need in many organizations to expand this data base in order to satisfy more fully the needs of the internal users. For example, a firm's profitability is of interest to investors, but managers need to know the profitability or individual products. The accounting systems should be designed to provide both total profits as well as profits for individual products.


Internally focused

Externally focused

No mandatory rules

Must follow externally imposed rules

Emphasis on the future

Historical orientation

Internal evaluation of segments carrying strong behavioral ramifications

External evaluation of firm as a whole

Detailed information

Information about the firm as a whole

Broad, multidisciplinary

More self-contained

Management accounting is used primarily by those within a business. Reports can be generated for any period of time such as daily, weekly or monthly. Reports are considered to be future looking and have forecasting value to those within the company or organization.

In the other way, financial accounting is used primarily by those outside of a company or organization. Financial reports are usually created for a set period of time, such as a fiscal year or period. Financial reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company.

Management Accounting is the branch of accounting that deals primarily with confidential financial reports for the exclusive use of top management within an organization. These reports are prepared utilizing scientific and statistical methods to arrive at certain monetary values which are then used for decision making. Such reports may include:

Sales Forecasting reports

Budget analysis and comparative analysis

Feasibility studies

Merger and consolidation reports

Financial Accounting, on the other hand, concentrates on the production of financial reports, including the basic reporting requirements of profitability, liquidity, solvency and stability. Reports of this nature can be accessed by internal and external users such as the shareholders, the banks and the creditors.

About time period, is possible to say that management accounting provides top management with reports that are future-oriented, while financial accounting provides reports based on historical information. There is no time span for producing managerial accounting statements but financial accounting statements are generally required to be produced for the period of 12 previous months.

In contrast to financial accountancy information, management accounting information is:

Designed and intended for use by managers within the organization, instead of being intended for use by shareholders, creditors, and public regulators

Usually confidential and used by management, instead of publicly reported

Forward-looking, instead of historical

Computer by reference to the needs of managers, often using management information systems, instead of by reference to general financial accounting standards

Common types of cost allocation methods and management accounting include job costing, process costing and activity-based costing. Job costing allows business owners to allocate costs to specific jobs. This process is most common in construction companies. Process costing attributes costs to products as they go through each production process in the business. Activity-based costing applies business costs on the number of activities needed to produce a product.

The most important methods for management accounting in small businesses are:

Just in time

Inventory Management


Variance Analysis

Cost Volume Profit Analysis

Linear Programming

Activity Based Costing (ABC)

Focusing on one of the methods that have generated more controversy, can said to, in contrast to traditional cost-accounting methods, ABC methods are not inherently constrained by the tenets of financial reporting requirements. Rather, ABC have the inherent flexibility to provide special reports to facilitate management decisions regarding the costs of activities undertaken to design, produce, sell, and deliver a company's products or services. At the heart of this flexibility is the fact that ABC systems focus on accumulating costs via several key activities, whereas traditional cost allocation focuses on accumulating costs via organizational units. By focusing on specific activities, ABC systems provide superior cost allocation information-especially when costs are caused by non-volume-based cost drivers. Even so, traditional cost-accounting systems will continue to be used to satisfy conventional financial reporting requirements. ABC systems will continue to supplement, rather than replace, traditional cost-accounting systems.

In most cases, a company's traditional cost-accounting system adequately measures the direct costs of products and services, such as material and labour. As a result, ABC implementation typically focuses on indirect costs, such as manufacturing over-head and selling, general, and administrative costs. Given this focus, the primary goal of ABC implementation is to reclassify most, if not all, indirect costs (as specified by the traditional cost-accounting system) as direct costs. As a result of these reclassifications, the accuracy of the costs is greatly increased.

According to Ray H. Garrison and Eric W. Noreen, there are six basic steps required to implement an ABC system:

Identify and define activities and activity pools

Directly trace costs to activities (to the extent feasible)

Assign costs to activity cost pools

Calculate activity rates

Assign costs to cost objects using the activity rates and activity measures previously determined

Prepare and distribute management reports

ABC advantages:

Different structuring of the cost in their products

Increased effectiveness the costing information and therefore decision-making

Easy in the implantation of quality systems

Removes non-value residues generated

Easier competitive

ABC disadvantages:

Historical cost method

Possibility of increasing arbitrary allocations



Business owners should consider implementing an automated management accounting information system into their business operations. This information system can be as simple as creating financial spreadsheets for inputting information and calculating basic profitability. As small businesses continue to grow and expand their operations, more official management accounting systems may be needed to accurately track financial information. These systems often include several modules used for allocating production costs, budgeting, forecasting and other management accounting needs.

Management accounting can help small businesses create a competitive advantage in the business environment. Many business owners focus on creating consumer goods that are the lowest-priced and highest-quality product in the economic market. The ability to review and assess financial information through management accounting is an important step in creating a financial competitive advantage. Small business owners may be able to produce better quality by carefully monitoring business production processes on a consistent basis.Leer fonéticamente

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About the importance of management accounting industrial, in my own country. Is described the evolution car industry.

Up to the decade of the seventies, in the chain of value of the manufacturing plants of cars only his own productive distribution processes were included owed principally to the confidence lack in the productive systems of the suppliers, and on the other hand to the lack of attention to the clients due to the excess of demand on the offer.

It is for it that the cost systems were basing principally on the calculation and control of the internal processes. Nevertheless, nowadays, the total cost is had in consideration from the beginning of the design of a new product up to the retreat and recycling of the same one. For these motives the chain of value has been extended including in the same one to the principal and auxiliary suppliers in an end and to the clients in other one.

Today, the key processes of the manufacturers of car are conceived under a perspective of service to the client. Chasing this aim of satisfaction of the client, there is achieved that the opinion of the client, across pre-established criteria, is considered to be a relevant factor in the improvement of the process. This way, it allows implanting rapidly changes in the processes in order to increase the idealization of the clients and to correct, to eliminate or to avoid the critical points that do not contribute added value to the client.

Evolutions of the processes in the sector and importance of the available information constant

The systems of accounting management have evolved since not only they are orientated towards the cost calculation of products and the inventor valuation, but to the obtaining of information related to the performance measurement of the management in the different operative areas (that are departments, centers of cost, plants of manufacture …) what justifies the need to have real time information to try to optimize the management.

The manufacturing plants of cars act in an extremely competitive environment, demanding a constant effort in the improvement of his operative processes. For this motive, the majority of the companies of the sector have developed programs of Total Quality that concern the totality of the chain of value of the sector, optimizing the relations with the suppliers and the clients. It is a question of producing to the minimal cost obtaining the satisfaction, so much of internal as external clients. To evaluate the programs of improvement of the quality, there are in use the calculation and control of the costs related to she. Really, they are an effective tool to detect the areas with more problems inside the company, and to justify the actions of improvement of the quality and to measure his efficiency.

In the sector of the car, the functions of supply have changed very much, up to the point of turning into a normal fact that the car manufacturer helps to his suppliers to obtain improvements in the quality of his processes and to increase his productivity. Now, the manufacturers try to reduce the number of suppliers to one only for every piece or material. This way, they can develop activities joint and coordinated with the aim to obtain mutual advantages that redound to a major safety of the supply and in a cost reduction that could provide benefits to both parts.

With these changes in the processes, the manufacturer manages to reduce the time of manufacture and then, to increase the productive capacity obtaining major profitability of his facilities. The manufacture of cars is a waterfall of sequential and synchronized processes, therefore it is possible to obtain information about the condition of the production in the different phases and know the costs accumulated during the processes. For these companies, it is very important to obtain this information automatically in order to be able to control and correct any diversion that could take place during the phases of production.

To demonstrate the importance of the information systems in the motor sector, we are going to take the example of the functioning of the database of the purchasing department of a company of the sector and his flow of information towards other areas of the company.

Relate with other areas of the company

Flow of information contained and his usefulness

The follow-up of the received material

The database of the purchasing department forms a part of the system of follow-up and control of the materials, but the companies of motor manufacturers possess several processes of update of information since they are essential to the functioning of the accounting management of these companies. The most important are the following ones: system of purchase of materials, of receipt of materials, of follow-up and control of the materials, of human resources, of follow-up and control of the workforce, of industrial engineering, of planning of production and pre-production. In a general way, the fundamental routes of transmission of information in the sector of the motor sound: in the external area, the EDI, the Internet and the Extranet that they allow an exchange of bidirectional information between the company and the environment, and in the internal area, the Intranet that allows an exchange of information between the different members of the organization.


Finally I can say about car sector in Spain is based in organization and importance of the department of management control in the different companies. Given the dynamics and the great competition in this sector, the principal companies were pioneering in the introduction of a new technology of cost management. Bearing in mind that the influence of the company on the price of sale of the product is very limited, the only way to obtain a benefit is the cost optimization. This gives a lot of importance to the accounting management in the companies of the sector. The paper of the accounting management is to elaborate, to analyze, to control and to interpret the countable information needed for the capture of short-term decisions, so much tactical, since operative and of management control. For these motives, his structure must be formed basically by the areas of planning and budgetary control, analysis of costs and cost accounting.