As a manager of an organisation, there is a great responsibility for decision making. The question lies in how a manager can utilise accounting information to make better decisions. Managerial accounting is a common practice within an organisation where accounting information is identified, measured, analysed, interpreted and communicated to relevant parties to pursue a goal.
Accounting information can be analysed in different ways and be used for different purposes. It’s important to identify the type of decision that needs to be made to ensure that the correct accounting information is gathered and analysed for the best decision making.
For instance, an organisation that wants to attract investors will depend mostly on cash flow statements and cash flow forecasts, the income statement and a balance sheet, whereas an organisation that needs to apply for a loan will rather look into certain ratios such as debt to equity and debt to service coverage ratios.
Managerial accounting is mostly used in scenarios where quick decisions need to be made to help managers optimize business operations. Accounting information is used by managers to plan, evaluate the company performance and manage risks. Budgeting is a great part of an organisation and financial reporting can help a manager to set a realistic budget and identify the need for funding. To measure the company’s performance certain ratios can be used such as the liquidity ratio which measures the company’s ability to generate cash to meet the short-term financial commitments, efficiency ratio that mostly relates to the inventory turnover and the profitability ratio can be used to measure the return on assets and net profit margins.
The first step to making an informed decision is to have information that is reliable and up to date, thereafter the accounting information can be utilised in different ways to ultimately form a report that would help management to make better decisions.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. (E&OE)