How Is Managerial Accounting Used in Business Ownership?
Small-business owners juggle many competing demands as they manage their investment. As owners navigate these decisions, managerial accounting information provides data that is relevant and useful for decision-making. Managerial accounting is the area of accounting that is most concerned with helping management use financial data internally to achieve organizational objectives. This differs from financial accounting, which is used primarily by external users. By understanding how managerial accounting is used in business ownership, small-business owners can focus on making data-driven decisions as they manage business.
Small-business owners can use managerial accounting information to plan their business. By building a budget, preferably with input from the management team and employees, owners can have an estimate of cash and inventory balances throughout the year. Further, budgets can project the amount of labor hours needed for production. This gives owners insight on hiring needs throughout the year. One of the most powerful uses of a budget is in goal setting. By making budget benchmarks somewhat of a stretch, owners can motivate employees to achieve more.
Once a plan is put into place, owners use managerial accounting information to control the business. By producing performance reports, owners are able to find out where the business is performing well and where to redeploy efforts to curb unsatisfactory behavior. In small businesses that segregate the ownership and management function, owners can use performance reports to keep an eye on the business without being involved in day-to-day operation. This allows the owner to pursue other investments or manage other enterprises.
One of the best uses of managerial accounting information is to help make data-driven decisions. Small-business owners need to decide what products to sell, how much to charge, what to market and how to expand, among many other decisions. While there is a place in business for gut feelings, by examining managerial accounting information, owners and managers can systematically evaluate decision alternatives.
For owners who do not manage their businesses, managerial accounting information can be used to evaluate business managers. The balanced scorecard uses both financial and non-financial data to provide a total picture of management performance. For ownership, this provides a way to evaluate performance while considering profit, but not making it the entire focus of evaluation. Managerial accounting systems are unique in that they will provide financial information, as expected, but also can be configured to provide non-financial information as well.