Management accounting

Why do companies need management accounting and reporting

As all of us are familiar with, the legislation obliges Ukrainian enterprises to keep accounting and, on the basis of it, prepare financial and tax reporting, the main users of which are state bodies. The mandatory form and standards of accounting and reporting, frequency of their submission to state bodies ares established by the applicable law. Typically, such reports are prepared once a quarter or once a year and contain a mandatory list of indicators defined by law. But one should not forget about the main users of the information about the results of enterprise, which uses it to make managerial decisions – its owners and management personnel. It already becomes clear that the information contained in the mandatory financial and tax reports will simply not be sufficient for managers who need non-generalized indicators for the company, and data broken down by subdivisions, types of activities, etc. Moreover, they need such information more than once a quarter, as stipulated by law, and at least once a month, or even weekly or daily, for prompt managerial decisions and ensuring the effective operation of the enterprise. Therefore, most companies require an alternative form of accounting and reporting that will meet the needs of internal users from owners and management. And this is function that is usually assigned to managerial accounting and reporting.

The forms and methods of managerial accounting and reporting are not regulated by the state and are usually developed by the enterprise, taking into account the peculiarities of its business processes and organizational structure. For example, enterprises with several types of activities usually require separate management reports to plan and analyze work results in terms of each activity. Companies that produce a wide range of products and services usually need to analyze the profitability of certain types of their products in order to identify unprofitable products in a timely manner and make appropriate managerial decisions regarding changes in pricing policies, cost reductions or adjustments to the range.

For the purposes of management accounting, the enterprise can develop its own methodology that determines the items of income, expenses and cash flows, liability centers (centers of expenditure, income, profit, etc.), principles of distribution of total expenses, forms and periodicity of management reporting, etc.

In most cases, management accounting does not require re-entering data into the enterprise’s accounting system. Management accounting is based on accounting data that is subject to further detailization and processing. For instance, for each business transaction, the accountant additionally assigns the center and the income or expenditure item, the responsible person, and other data required by the enterprise accounting methodology, that enables them to obtain the necessary information for the formation of management reporting. This fact allows you to create a rational and economical accounting system at the enterprise, when the amount of information is maximally needed for managerial decisions from the minimum amount of data.

The information contained in the management reporting is intended for business owners and managers and other internal users, so the form and content of the reports may vary depending on their intended purpose and the manager’s position for whom they are prepared. Since most of the data contained in the management reporting is necessary for the adoption of current management decisions, such reporting should be provided as quickly as possible and at times not even within a certain time frame, but immediately upon request of the manager. In addition, such reporting should be as complete, accessible and understandable as the form and content, and should include relevant data that corresponds to a specific request. For example, an enterprise`s accounts receivable report for the current date should reflect transaction data by debtors, including amounts debt, its origination and expected repayment, and so on. Separately there should be allocated overdue debts and measures taken to repay it. On the basis of such a report, the manager, for instance, may decide to stop the work with a particular buyer in connection with the violation of his contractual payment terms, or decide to adjust the terms of settlements with such a buyer and replace the delay of payment for advance payment. In the absence of such information or subject to late provision to the manager, the enterprise will continue to ship the goods to the debtor and may suffer losses as a result of the incurrence and accumulation of doubtful and bad debts.

For operational management reporting, we recommend to our clients to automate the management accounting and reporting system. Thus, at an initial stage, it involves certain costs for acquiring a new or refinement of existing software, but the benefits that the enterprise obtains from such automation is significantly higher than the cost of its implementation.

What benefits will the enterprise receive by introducing a system of managerial accounting and reporting?

First of all, managerial accounting and reporting play an extremely important role in the process of current and long-term planning and evaluation of the performance of both the enterprise as a whole and its individual units. With the help of management accounting and reporting, management can plan and control the results of the work of individual areas, such as activities, groups of goods or other elements depending on the specifics of the business, or structural divisions of the enterprise (departments, shops, legal entities, etc.). It is usually due to the implementation of the budgeting process at the enterprise, which consists in preparing budgets of different levels and monitoring their implementation as separate centers of responsibility (directions, divisions, etc.) and businesses overall. The budgeting system covers production, sales, marketing, procurement, and more. In budgets there are reflected production costs, sales, capital investment, administrative and other costs, as well as revenue from all types of activities, both in individual departments, and on the company as a whole. For example, preparing a cash flow budget enables an enterprise (or a separate unit) to plan its cash receipts and expenses in advance and to identify the need for additional financing. In the absence of such a budget, an enterprise may find itself in a difficult situation where current revenues will not be sufficient to cover payments that have come to an end, that will result in a delayed payment to suppliers, late payment of taxes or salary payments, and, accordingly, cause additional losses of the enterprise in the form of penalties, litigation costs, staff turnover, etc.

Management accounting and reporting is also an effective tool for monitoring the use of enterprise resources and allows you to control costs by tracking them by type and cost centers. To do it, the actual cost indicators on the results of accounting are compared with the indicators recorded in the budgets of relevant units (cost centers), then analyze the detected deviations, discuss their reasons with the person responsible for the budget, in order to eliminate such overheads in the future.

With the help of managerial accounting, an analysis of the effectiveness of the individual centers of responsibility in terms of the profitability of their assets or capital invested, the cash flows received, etc., are also conducted. This case enables to assess the performance of the structural units or individual business activities, the profitability of individual types of products, and to determine the trends and prospects for each unit (type of activity, product) in shaping the company’s profits at all stages from production to realization. Based on this assessment, management, in order to improve the performance of the company, may decide on the necessary changes in the structure of the enterprise, its business processes, revise the expediency of unprofitable business lines or adjust the range of nonprofit products/services.

Thus, by introducing the system of managerial accounting and reporting, the company will accumulate statistics about its incomes and expenses in a definite section of the types of activities, products and even individual processes, which will help identify the general trends and analyze them in order to increase the profitability of the business. Management reporting will give you a complete picture of every process that takes place at the company and, if necessary, optimize it. With the help of management reporting, management can plan the company’s revenue and expenses, monitor the efficiency of using enterprise resources, analyze the results of the causes, identify possible alternatives, and reasonably make managerial decisions. As a result, in the form of the system of managerial accounting and reporting, management receives an effective tool for achieving business efficiency. The absence of such a system, on the contrary, can cause significant losses for the enterprise, since the information from only accounting and reporting data is usually not enough to implement the control function and to make timely and well thought out management decisions. This is why we usually recommend our clients the introduction of automated system of management accounting and reporting, and we provide them with all the necessary support, starting with the development of the appropriate methodology, reporting forms, setting technical requirements for software developers, and ending with the testing of the system and training staff.