Managerial Accounting Tools for Business Decision-Making
Managing a business requires thought, care and insight. Analysis of the scope of activity may take many forms, such as tracking of workflow or evaluations of productivity. However, since profitability is typically a key concern for a business, analyzing performance using a range of tools derived from accounting data often makes the most sense. The results presents a view of business performance, with an eye on financial indicators that often contribute to the bottom line.
Managerial accounting describes the collection, analysis and reporting of business activities targeted toward the internal managers of a business, rather than the company’s external clients, such as banks, other lenders or shareholders. Company accountants who prepare managerial reports and analyses may be the same people who prepare financial data for external sources, or they may be dedicated to the creation of managerial accounting tools.
An accounting tool is a data set that’s collected and reported according to accepted accounting principles, accounting tools are many and varied. Perhaps the most commonly known tools are balance sheets and income statements, typically used to report the financial health of a business for banks, shareholders or persons interested in purchasing the company.
Accounting tools of use to internal managers generally look at aspects of the business over which a manager can exercise some control. A production manager may be concerned with staffing or inventory levels, while a sales manager would look toward revenue generated by products or services sold. For this reason, a complete list of managerial accounting tools is difficult to generate, since the needs of any business may be unique. These are typical managerial accounting tools:
- Break-even analysis: a calculation of the point where unit volume and sales combine to create neutral revenue, neither a profit nor a loss
- Capital budgeting analysis: an examination of proposals for acquiring fixed assets and how to allocate financing
- Constraint analysis: a tool that examines the primary bottlenecks of a business and how these affect revenues and profits
- Inventory analysis: useful for calculating cost of goods sold as well as placing a value on raw materials and unsold products
- Margin analysis: a profit analysis typically built around revenue generated by a specific subset of data, such as customer, region, product or business branch
- Transaction analysis: tools that look at specific transactions, such as sales to a particular customer or purchase of certain goods
- Trend analysis: tools that look at changes to data over time to permit examination of changes to business conditions, helpful for creating forecasts
Some typical accounting tools may have value to both internal and external stakeholders. The income statement, for example, gives a snapshot of the overall profitability of company, information that’s valuable when the business pursues financing or attracts buyers. Managers may also use income statements for analyzing performance of their departments from the perspective of the effects of operations on profit. Income statements used for internal purposes may be generated on shorter timelines, such as weekly or monthly, rather than quarterly or annually, more typical for external income statements.