Financial accounting is typically used for documenting a company's financial transactions and keeping a record of its financial growth. Financial accounting is a fairly passive form of accounting. In contrast, management accounting is involved in the strategic planning of companies. Management accounting is focused on the future and how to make improvements that will result in better performance and greater profits for the company. For these reasons, management accounting is of great importance to businesses in competitive environments that need to constantly improve their processes and procedures. Management accounting has three main objectives that allow managers to make improvements and plan for the future: measuring performance, assessing risks and allocating resources.
Management accounting is concerned with measuring performance in businesses. There are two types of performance that are typically measured. The first is employee performance. This can mean assessing whether an employee has been an efficient producer or it can mean using accounting methods to determine if a manager has attained certain goals in order to receive a bonus. The second performance measurement is the measurement of efficiency. This is concerned with how efficiently resources, such as capital, worker hours or materials, have been used. Both types of performance measurement can be used to make corrections in order to improve performance.
Risks are an integral part of business. Taking risks can result in major losses, but being constantly risk-averse can result in missed opportunities. An objective of management accounting is to assess risks in order to maximize profits. An example of this would be determining the percentage of high- risk loans that a bank should make. A management accountant can identify a safe range in which the bank can expect to make profits without running the risk of collapse if the loans are defaulted. It can also be used for assessing the amount of money that should go into certain projects based on their expected return.
Resource allocation is important to any organization. Decisions need to be made about which projects to pursue, which products should be produced and how portfolios should be designed. An objective of management accounting is to provide a method for allocating resources. Management accountants will determine the most efficient way to divide resources and maximize profits. For example, a management accountant should be able to tell you the most efficient product portfolio for a manufacturer based on resource availability, selling price, manufacturing time and consumer demand. This information is vital to efficient production within an organization.