Management accounting
Introduction
Management accounting is not only applied in big organizations, but it is also essential in any type of business, big or small. From financial accounting, this is a very different type of accounting, only closely related. However, its concern lies with giving budgetary data which helps in administrative decisions. Management accounting entails much more than just counting and tallying finances and concentrates more on estimations and deep-rooted business decisions. This type of accounting also helps the executives or directors know the costs of different products by giving the orientation in regards to prices and also prudence. Management accounting can nail down the circuiting of the products currently in the market and even the oomph of the new products. The reason why management accounting is essential in minding the store is that it creates an internal report to govern the long-term business scheme. The query standing out in this type of accounting is: how to spend the company’s budget. To answer the question, management accounting strategizes the cost analyses to actuate the expenses currently on the table and confer ideas for future exertions.
Before a company makes any move, it is very important of it to investigate all the prospects and gauge the most suitable strategy to escalate the profits. This implies that the company’s management accountants must evaluate distinct marketing channels, activities, services and even products for them to dig up the most productive plan of action in their business. Audience targeting is yet another issue solved through management accounting. It is also believed that costing of products in medium-sized firms is done for two purposes: one, for measuring internal profit and meeting external financial requirements so as to allocate the incurred manufacturing cost; two, to avail vital information for managerial decision-making needs. These assertions are explained in relation to the importance of internal and external accounting in large enterprises, the varieties of accounting information users and the type of information each user gives, and the existing differences between financial and management accounting.
A great example of a company large enough to be used in studying these elements of financial and management accounting is Nike. Nike sells, markets, develops and designs athletic services, accessories, equipment, apparel, and footwear all over the world. It is, in fact, the world’s largest seller of footwear and sports apparel. The firm sells its products through company-owned stores as well as via digital platforms (which it has dubbed collectively as “Nike Direct”). Products are sold to retail outlets and an assortment of sales representatives, licensees, and independent distributors in practically every country in the world. The company’s goal is to provide its shareholders with value by constructing a profitable universal portfolio of branded accessories, equipment, apparel, and footwear businesses. It has a strategy to achieve long-term growth in revenue through the delivery of compelling consumer experiences (at retail and via digital platforms), building personal connections with customers through its brands, and creating innovative, “mandatory” products. The company has a strategy called the Triple Double which, using the Consumer Direct Offense, it intends to double the innovation impact, increase its marketing speed, and improve its direct link with consumers.
Importance of Internal and External Accounting in Large Enterprises
It is always vital that any business, whether big or small, comes up with strategies to protect the management and financial data of the company while adhering to the regulations and laws of the state in which it is located as well as the requirements of the federal government. Using internal financial (accounting) controls, a company establishes a procedure for how its money is handled during reception and reporting, and how management and administrative functions are carried out. A large enterprise, such as Nike, requires internal accounting controls for several reasons. First is for the establishment of procedures and protocols. A large company needs internal accounting to establish procedures and protocols that have to be followed by consultants and staff. Nike has mechanisms in place for informing its employees of such protocols and company regulations that require workers to follow these protocols in the performance of their daily activities. These established protocols have helped Nike maintain some significant level of cohesiveness and order in the company since everybody is aware of what is expected of them and others, as the internal protocols dictate.
Internal accounting on large organizations also goes a long way in reducing and keeping cases of fraud and theft at bay. Nike’s management admits that with the use of internal accounting methods in the past, such as internal audit reviews and reconciling bank statements, it has been able to unravel schemes where the company’s funds were being misappropriated by employees or managers. Internal accounting protocols also assist in the separation of employees’ duties and making sure that a system of checks and balances exists. For instance, Nike’s internal controls have been designed to ensure that the person who prepares the accounts receivable is not the same person who does the firm’s accounts payable. This also has the potential of reducing internal fraud and theft. Proper internal accounting also helps a company in the organization of its financial and management information. Productivity can be increased by organized data, which can also better prepare the business in case there is a need to generate files for litigation, or if there is a need to get hold of information for audits or compliance reviews. Sometimes this might involve providing every worker with a personal password for accessing data and files on the firm’s computer, or building a system for filing financial documents and client data, offline or online.
Internal accounting also helps a company, through training, to reduce errors, which can go a long way in protecting the organization’s reputation and save it money as well. Training employees is part of the internal accounting procedure. By training workers on procedures and processes, and informing them of new developments, it is highly unlikely (though not impossible) for employees to make or repeat mistakes. Training may involve teaching them on the operation of a computerized internal accounting program or learning a new process of work that is shared between departments. Lastly, internal accounting is good as it helps in upholding the Sabarnese-Oxley Act. This act emphasizes the importance of firms keeping internal accounting controls, especially with regard to financial reporting. It is a requirement of the act that both large and small public companies capture details of their internal accounts in their annual reports. Investors often require this information as it helps ascertain the integrity of a firm’s financial information and how it is managed.
External Accounting
The present business landscape is engulfed by a tougher regulatory environment which, following the advent of the EU GDPR, further raised the threshold for firms to realize financial losses. Consequently, a majority of businesses are probably running under loss against the profit they are speculating. This is the point at which external accounting has proven its worth to businesses. External accounting offers impartiality that cannot be offered by internal accounting. The absence of bias (in most cases) in external accounting, unlike in internal accounting, plays a massive role in the reinforcement of the credibility of the financial statements of a company and its general wellbeing.
External auditing can assure major stakeholders and appropriate review and revenue committees of an in-depth examination into the finances of a firm and its processes of accounting. This credibility is not only crucial to start-up and small companies but also to big business that may have encountered a data breach and are therefore working to restore their reputations and recover the loyalty of the public, shareholders, and their customers. In the face of increasing regulation, carrying out external accounting works to improve business practice inside the remit of compliance with the government. It is the duty of the person carrying out external accounting to point out where there is non-compliance and any problems with abuse of fraud in the firm. External accounting will probably go a long way to unravel these weaknesses since an external accounted has no affiliations with the organization and can look at it with an objective and fresh perspective.
In addition to pointing out the areas of non-compliance, external accounting may also identify other areas that may be in need of improvement. It is the duty of the person conducting external accounting to identify any sectors of the firm which could require tightening of processes so as to eliminate inefficiency and wastage. Recommendations made from such audits are vital for the major decision-makers of the company. They use the results to improve internal controls, or maybe install automation so as to make accounting and business practices uniform. An external accountant’s job may also include training the internal accounting team of a company. Making comparisons of the analysis modes between external and internal audits has the ability to enhance the performance of the latter moving forward and eventually improve the accounting capabilities of the firm. External accounting offers valuable and vital perspectives into the existing information within a business. Their results and processes of accounting give firms the reassurance and confidence that they are conducting their business well and safeguarding their information properly.
Types of Users of Accounting Information
A company’s accounting information is used by numerous stakeholders. This information is used by different people or groups for different reasons based on their needs. As such, a firm’s accounting information has to be designed in a manner that generates reports to the satisfaction of the information requirements of all concerned parties. The users of accounting information can be divided into two broad groups- external and internal users. Examples of internal users are the business owners and managers, while external users include employees, customers, the general public, government agencies, suppliers of goods, creditors of finances, and investors.
Internal Users
This type of users utilizes a blend of financial and management account information.
Management
Managers use accounting information to analyze and evaluate the position and performance of the organization and to make vital decisions and take appropriate actions to enhance the performance of the business with regard to cash flows, financial position, and profitability. One of management’s leading roles is to set procedures and rules or the achievement of organizational objectives. For this reason, the information generated by managerial and financial accounting is very critical to management.
Owners
The primary reason why owners pump money into a business to start and run them is to earn a profit. As such, they require appropriate financial information concerning the losses or profits they have made within a specific period. Based on such information, owners make decisions on future actions like contraction, expansion of business, and so on. Owners of large enterprises such as Nike take this information very seriously, mostly because of their sizes of their businesses.
External Users
It may be surprising that there are even more people from outside a business that are in more need of its accounting information than there are inside.
Investors
In corporate businesses, there is usually a distinction between management and ownership. Often, managers run the firm while investors (owners) provide the capital. Both potential and actual investors use the organization’s accounting information. The information is used by actual investors to track the usage of their capital by the management and predict the firm’s future performance with regard to growth and profitability. Based on this information, they decide whether to continue or discontinue their investment in the business. Potential investors, on the other hand, use accounting information to decide whether they should invest in a particular or not.
Lenders
Lenders are financial institutions or individuals who give money to organizations with the expectation of earning interest on the money they have lent. Accounting information helps them in assessing the financial position and performance of a business before they are assured of the business’s integrity, reliability, and ability to return the money lent to them in time and with the agreed interest.
Suppliers
Suppliers are organizations of business organizations that sell raw materials or other merchandise to other businesses, usually on credit. These entities use an organization’s accounting information to assess whether the business to which they are selling is creditworthy (if it is a new buyer) or decide if it is a good idea to continue supplying a given business with their merchandise on credit.
Government Agencies
For purposes of regulation and taxation, government agencies often require accounting information, especially for large enterprises. These are the kind of information that has been used by governments to catch businesses which avoid or evade tax. In such cases, the government will always use an external auditor to accomplish the task since, as noted earlier, external auditors (accountants) are not affiliated with the company and are less likely to be biased or bribed.
General Public
Although this might not be known by the vast majority of the said public, businesses must always submit their accounting information to the general public. Such information is used by the public for several purposes, such as educating students of finance and accounting; they are a source of information for researchers working organizational effects on the economy as a whole and the individual in particular.
Customers
Customers’ use the business’ accounting information to gauge the organization’s current position and arrive at conclusions concerning its future. Consumers can be classified into three- final consumers (final), retailers and wholesalers, and producers and manufacturing at different phases of production. Producers and manufacturing companies at each processing stage must be assured that the firm in question will be consistent in its provision of inputs like support, components, parts, raw materials, and many more. Retailers and wholesalers must also be certain that they will be continuously supplied with material. The final consumers or end-users might also be interested in knowing whether they will continue getting products and their associated accessories. These reasons and requirements make it very vital for the consumer groups mentioned to get the business accounting information.
Employees
Workers who do not participate actively in the fundamental management of the firm are regarded as external users of accounting information. These people usually have an interest in the accounting information of the firms they work for because, indeed, their future and present wellbeing may be linked to the failure or success of the business. When a business is thriving and profitable, workers such as the ones described are assured of better retirement benefits, promotions on the job, better remuneration, and job security.
Management and Financial Accounting
Managerial accounting and financial accounting are among the most significant branches of the accounting discipline (others are auditing and tax accounting). Although they have many similarities in usage and approach, there are considerable distinctions between the two. Central to these differences are target audiences, accounting standards, and compliance. Managerial accounting’s primary goal is to generate vital information for use inside the organization. Organizational managers collect information that motivates efficiency in the channeling of business resources, setting realistic objectives, and planning strategically. Financial accounting also has some internal uses, but much of the information it generates goes to external users. The financial statements or final accounts generate via financial accounting are meant to show the firm’s financial wellbeing and performance. So, whereas managerial accounting serves the organization’s management, financial accounting serves its industry regulators, creditors, and investors.
Financial accounting generates information that is completely historical, having data over a specified period of time. Managerial accounting, however, evaluates a business’s past performance and makes business predictions. This is the type of accounting that should inform business decisions. But, perhaps the most significant disparity between managerial and financial accounting is in their legal status. Managerial accounting generates reports which are circulated within the business, which means they lack a regulation system and are more time-consuming to generate. Financial accounting reports, on the other hand, are highly regulated, particularly cash flow statement, balance sheet, and income statement. Because this information is meant for the public and eagerly expected by investors, firms must always be very careful with their calculations, reporting of figures, and the construction of those figures.
Conclusion
Accounting is an important element of business, big or small. With many different branches, two of the most significant aspects of this discipline are financial and managerial accounting. Although they seem to have many similarities, they are quite different, especially with regard to the audiences they are meant for, compliance, and accounting standards. Large enterprises such as Nike must be very wary with the way they handle these two types of accounting because both have the potential to make or break the business. Otherwise, it is indeed true that medium-sized manufacturing businesses assign costs to products to measure internal profit and to generate useful information for decision-making purposes.