When is Managerial Accounting Appropriate?

When Is Managerial Accounting Appropriate?

Managerial accounting is the type of accounting that provides financial information to managers and decision-makers within a company or organization. Managerial accounting, such as weekly or daily budgeting, is used to help managers make decisions that increase the organization's operational effectiveness and efficiency.

Managerial accounting is different from financial accounting in that financial accounting is centered on providing quarterly or yearly financial information to investors, shareholders, creditors, and others outside the organization. Conversely, managerial accounting is used internally to make efficiency improvements within the company.

Understanding When to Use Managerial Accounting

There are a number of common scenarios in which managerial accounting is appropriate. The first applies to those situations in which a company competes in a fast-paced and highly-competitive business environment.

Managerial accounting often involves several aspects of the company's financial results, including revenue, sales, operating expenses, and cost controls. A company's executive management team needs to plan and forecast at an enterprise-wide level. Below are three high-level areas that managerial accounting is often employed to enhance the internal financial metrics of a company.

Planning, Forecasting, and Budgeting

Managerial accounting involves forecasting and planning to project the financial direction of the company in the coming months and years. These plans often involve projections for revenue but also costs as well. Typically, this high-level planning involves creating a capital budget, which details the costs of any investments to be done in the future. The budget might outline the costs and projections for new equipment purchases and acquisitions. 

Project Management Decisions

Managerial accounting is used to perform cost-benefit analysis for new projects and provide ongoing reports for existing projects. These projects might involve significant outlays of cash or capital as well as new debt to finance them. As a result, managerial accounting is critical to ensuring that these projects are delivered within budget and in a timely manner while also being profitable. 

Performance Tracking 

Measuring and tracking performance using managerial accounting can help executive management make decisions in real-time. Measuring performance against the forecasts and budgets helps to avoid costly overruns and allows a company to remain competitive. 

Types of Managerial Accounting Analysis

The high-level plans, forecasts, and budgets need to be continuously tracked, monitored, and, if necessary, changed to meet the changing landscape. Below are a few of the types of analysis involved in managerial accounting to achieve a company's high-level objectives.

Managing Costs

Cost accounting is often a subset of managerial accounting. Cost accounting measures the various costs involved in running a company, including fixed costs, such as the purchase of equipment and operating costs, which are the costs of running the daily operations. Also, variable costs, which fluctuate with production levels such as inventory, and overhead costs, such as rent for the corporate office, are all part of cost accounting.

Revenue and Sales Projections

Revenue is the total income that a company earns from the sale of goods or services. Revenue represents the gross amount of income since it's the figure before expenses are deducted. Sales forecasts and the resulting revenue projections are often part of managerial accounting.

Managing Cash Flow

Cash flow is the net cash position for a company as a result of cash inflows and outflows for the period. Cash flow analysis is a part of managerial accounting since companies need sufficient cash to meet their bills.

A company that exhibits positive cash flow means that liquid assets exceed debt payments and short-term financial obligations. Positive cash flow enables a company to pay down debt, reinvest in its future, pay dividends or buyback stock, as well as add to retain earnings, which is a type of savings account for accumulated profits to be used in the future. 

Managerial accounting can be used in short-term and long-term decisions involving the financial health of a company. Managerial accounting helps managers make operational decisions–intended to help increase the company's operational efficiency–which also helps in making long-term investment decisions. Forecasting, monitoring, and tracking performance is a critical aspect of managerial accounting to ensure actual results meet the budgets and forecasts outlined at the onset.