Accounting information is collected about every business transaction that occurs – sales to customers, purchases from suppliers, the effort exerted by employees and rewarding shareholders/owners for their efforts. In the previous chapters we have examined how to record transactions, collate them and report them in financial statements. We have also examined how to conduct preliminary analysis related to the financial statements in terms of horizontal, vertical and ratio analysis. The financial accounting process provides a useful level of detail for external users, such as investors and creditors, but it does not provide enough detailed information for the types of decisions made in the day-to-day operation of the business or for the types of decisions that guide the company long term. Managerial accounting is the process that allows decision makers to set and evaluate business goals by determining what information they need to make a particular decision and how to analyse and communicate this information.
But who are internal users of accounting information within a business?
The easy answer is, who are all the people who work within that business? Every one of them will be making decisions in the business that could be informed by accounting information. Here are some examples:
|How they may use accounting information
|Examine sales trends to determine what sort of sales strategies may be used in the business to provide growth.
Determine which sales people are performing strongly so that they can be rewarded.
|Combine accounting information along with marketing metrics (such as the performance of various advertising streams like social media, print, radio) to make decisions about future marketing campaigns.
Work with the sales staff, combining information about sales, marketing and profits made on each item to decide on future sales strategies and negotiate discounts.
|Production / manufacturing staff
|Use information related to the costs of inputs for production (raw materials) and labour to evaluate the cost of producing the goods a business sells. Evaluating these costs may help the business achieve economies of scale, potentially reducing costs and increasing profits.
|Logistics / shipping staff
|Examine the sales trends over time to predict the need for logistical support. For example, there may be increased need around Christmas or sale periods for additional logistics and shipping staff.
The logistics team may also notice increased number of returned packages from customers – highlighting a potential product quality issue.
|Research and development staff
|The business must plan and decide what sort of research and development activities they engage in to continue business growth. This will require the preparation of budgets and an evaluation of the potential R&D activities and their potential benefits.
|Internal audit staff
|The internal auditors will use accounting information as well as information from other systems to determine whether there is any fraud or a failure to follow business processes.
Information is the most powerful tool that a business can use. Businesses are collecting more and more data about their operations and environment. Combining this information with accounting information allows businesses to hopefully become more agile in their decision making and make more optimal decisions for their current situation.
Business analytics is an emerging discipline – combining both data analytics and business knowledge – to unearth insights into the business and their environment that can be leveraged for better decision making, and hopefully greater organisational performance.