The importance of management accounts

Management accounting is the implementation of principles of accounting and financial management to construct, maintain and increase value for stakeholders of enterprises in both public and private sector. This exercise can be considered a fundamental part of management.

Thereafter, the data is used in the making of informed strategic decisions and building business strategies. This assists with mapping out the long, medium and short term operations within the business in the following ways:

Managing operations to ensure the efficient use of resources

The reports provided can determine the company’s performance. Based on that, an analysis can be made on whether the planned objectives are in-line with the actual performances. Should any inefficiencies be identified, they can be dealt with promptly to ensure efficient usage of resources.

Identifying early signs of issues

When a product or service is not performing well, management is able to identify this early on. This helps in resolving the constraints promptly to avoid future loses.

Making informed operational decisions

Management accounts give an accurate reflection of the business on which future decisions can be made. We can also identify trends and see how past events have had a bearing on the business.

Improving Cash flow

When observing previous period sales we can create and maintain a forecast of increases and decreases in sales and expenditure. This allows a prediction of the future expenditure, such as rent and salaries, vs your expected income.

Designing reward strategies for employees, executives and shareholders

A reward strategy can be used to motivate employees and can be measured by productivity. Given that the rewards are monetary, this form of decision-making will depend on the performance information of the company.

Safeguarding tangible and intangible assets

Assets can be used to generate economic value and having the correct value of this can indicate whether the business will be able to settle its liabilities. This will assist the business in avoiding cashflow problems and managing liquidity.

Reporting financial and non-financial performance to management and other stakeholders

There are many financial performance indicators and these can assist in measuring components such as the solvency of a business. This provides an insight to stakeholders into the future matters such as the business operations and an overview on components such as stock.

Determining capital structure and funding that structure

Capital structure is the grouping of capital amounts from different sources of finance, like equity and debt. The target of this is often to maximise the value of the company with a capital structure that is at its peak. An assessment can be made as to whether the business may be needing additional capital.

When you have capital, you can easily generate growth in the business. Capital may also be utilised to help in settling debt.

Implementation of corporate governance procedures, internal controls and risk management

The objective of internal controls and risk management is to ensure that operations are conducted effectively and that the financial information is reliable. Continuously improving policies and procedures will help with the information being made available to stakeholders.

Reducing year end audit and accounting costs

Keeping the financials up to date and accurate will help minimise time spent and corrections needed when the annual audit is performed. Additionally, to have the management accounts up-to-date and accurate will help avoid unprofitable expenses, such as penalties and interest.

Helping with tax planning

Effective tax planning assists in reducing the amount of taxes the business may be liable to pay at the end of the year. This approach is helpful in reducing the tax liability of the company.