Management accounting provides data that can help a small business craft a strategy that can be used to meet their financial and organizational objectives by assisting in the decision making process. Examples of types of issues that a management accountant is equipped to analyze might include items such as product costing, relevant costing, capital budgeting, and operational or strategic planning. Furthermore, a management accounting can design, implement, and manage internal metrics that sustain timely decision making, planning, and control over the business’s most critical operations. Being able to determine financially which business activities are profitable and which could be refined is a critical part of any small business strategy and often can represent the difference between success and failure.
The field of management accounting, or managerial accounting, is rapidly evolving with new technology and analytical tools. The modern business environment is becoming increasingly competitive and sophisticated their strategic positioning. For example, in previous generations many managers would rely on simple heuristics to make decisions. However, in today’s environment this is simply not enough in many cases. Therefore a management accounting approach can provide the information necessary to take out much of the guesswork involved in decision making through analytic deduction. This significantly increases a small businesses chance for success by eliminating as much guesswork as possible.
The essential purpose of management accounting is to help an organization achieve its strategic objectives. While financial accounting provides an objective account of a company’s financial information, management accounting uses various metrics to help a company make sure that it moves in the right direction. Small business owners can use managerial accounting to ensure that they meet their strategic objectives and also ensure they are able to satisfy the needs of its customers and other stakeholders. Some typical stakeholders for a small business may include investors, creditors, suppliers, employees, and the local community.
A small businesses strategy will dictate the way in which a business firm positions in the market. This will include the strategy for which the business will distinguishes itself from its competitors. These factors generally include dimensions of quality, cost, or convenience. While some business will try to lure new customers by having the lowest price while others may focus on providing the highest service levels available. Determining the most effective strategy will depend on the condition in the target market. For example, if there are already two competitors in the market that are competing on price then it would probably make more sense in this circumstance to try to differentiate your strategy on something other than price.
With a thorough analysis of the target market, a small business can decide how and where they can create value for consumers. Such considerations fall outside the realm of financial account but they are essential to running a profitable business. With the market becoming increasingly competitive year by year, small business must conduct a managerial accounting audit continually so that they are in tune with their position in the market which provides them the insights needed constantly strive to meet their objectives. In this sense managerial accounting is the most important business function for small business to be sustainable and should never be overlooked.
Value to Business
The value from a managerial accounting approach comes from several different activities. However, first and foremost, the information that managerial accounting provides is intended to facilitate decision making. For example, say you would like to know what to price a new product at. To answer this question you might take steps such as looking at the competition, looking at the prices of other similar goods in your own store, consider the total costs that are associated with the goods, or maybe consider the margin that will be earned and the volume that is expected to sell. These are all examples of managerial accounting processes however the field has taken such data collection methods and developed these into a more systematic and rigorous process (Ittner & Larcker, 2001).
Managerial accounting can also assist with directing and controlling. For example, a small business owner may want to compare a set of estimated costs against the actual costs. This can help management determine what worked or what went wrong in budgeting. It can also highlight problem areas that may need more attention. For example, if the price of a raw material was found to be much higher than previously expected then this could be easily identified in a managerial accounting report. These reports can quickly and easily provide insights about business process that may need attention.
Whereas the traditional accounting system is more passive in nature, managerial accounting takes a more active role (Endencih, et al., 2011). As opposed to merely accounting for transactions, managerial accounting actually takes a leadership role in determining strategic next steps for the company. While there can be many cross-functional approaches to strategy preparation, the accountants analytical mind can offer a perspective that integrates financial insights into the process. Modern businesses do not generally have the luxury to experiment with strategy through trial and error. New projects or processes must be analyzed for their financial feasibility and expected returns. It is from this position that a management account can add the most value and make sure that the financial statements are perpetually moving towards the company’s strategic objectives.
Pricing and Product Lifecycle Example
There are so many different aspects to the managerial accountant’s role that it would be impossible to list them all here. However, to illustrate types of considerations that a managerial account might take into account, the product lifecycle model was selected as an example. There four phases of the product lifecycle are introduction, growth, maturity, and decline (Gorchel, 2010). These phases are necessary to understand in order to manage a product life from its beginning to end and design a pricing strategy to match. This model applies to just about all products including computers, software, vehicles, clothing, electronics, or any other product imaginable. All products must start with the design phase and eventually they will be phased out or revised as technology and production processes develop.
When a new product is introduced this begins the model. In this phase, designers start from scratch and dream up a new product or revise and existing design. This step often requires a great deal of innovation and imagination to find a product niche in the market. All lot of work will be target at specific details about what kind of product will be produced and how it will be marketed. It is almost always better to have marketing involved in this step because they can generally make contributions to what design features will work in the marketplace (Michalek, et al., 2005). For example, a marketing professional and a managerial account could work together and figure out the total expected volume, what the beginning price should be, what it will cost to produce, and what the expected returns are.
In the next phase the product will begin to take hold in the market. Consumer demand for the product will begin to grow while distribution networks are being refined. In the first phase products are usually priced higher because there is less competition and consumers generally like the newest products however in this phase the product will generally become more affordable to a wider demographic. This works on all levels from manufacturer to retail. These strategies will be continuously adjusted based on performance metrics to maximize the product’s demand on the target market (Middleton, 2008). Growth will continue until it stagnates and subsequently moves the product to the next phase in the life cycle.
Maturity is the third phase in which the product has been in the market for a while and the demand for the product has passed its peak. If the good is an electronics item, then newer technologies many have been already introduced. If the good is a clothing item then maybe a newer fashion is just emerging. In the maturity phase, although the product is popular it is beginning to lose traction in the market for one reason or another. The strategic goal associated this phase is to maintain this position as long as feasibly possible. At this stage, the competition may begin to steal market share as imitations of the product begin to develop. The mature product’s strategy is simply to stay in this phase for as long as possible until possible or to begin new development or a product revision (Suttle, 2011).
Once the product begins to lose market share or the entire market shrinks, then it enters into the decline stage. In this stage the company is basically trying to capture as many sales as possible before they slip away to oblivion. Once a product reaches this phase and is no longer profitable then the company will face tough decisions. A managerial accounting approach is vital in this position since the financial aspect of the declining returns will be pivotal to the plan. The decline stage can take many years however and doesn’t necessarily represent a product that is not profitable. Rather, it represents a product that has passed its peak in terms of holding market share. It can be a quick decline or some product niches may take decades.
One of the primary goals in any business is to maximize profitability. Therefore, it is important to understand the product life cycle model because it can help the organization to meet strategic objectives. Management accounting has much to offer in regards to when a new product should be designed and introduced or retired from production. Such strategic decisions might vary with different industries as well as within individual businesses. Thus all strategies should be customized to fit the specific organization with rigorous and detail financial planning as one of the core considerations that can help to guide the decision making process. However, the product life cycle model only represents one of many models that a managerial accountant may consider when trying to craft a strategic financial plan for a small business.
The modern business world is becoming increasingly competitive. A small business in today’s market might have to compete with a franchise or a multi-national company that has an enormous amount of resources, both human as well as financial. Under these circumstances, it is not enough for small businesses to passive in their decision making. There is generally not much room in the market for guesswork or experimenting by trial and error. It is necessary for businesses of all sizes to be more analytical in their approach to meeting strategic objectives.
The management accountant can serve a vital role in helping a small business thrive. The field of management accounting, or managerial accounting, is rapidly evolving with new technology and analytical tools. Using the product lifecycle model to assist in determining pricing strategies was an example of one perspective that a management accountant might consider. Using systematic approaches such as this can help a small business by providing the information necessary to take out much of the guesswork involved in decision making through analytic deduction. This significantly increases a small businesses chance for success by eliminating as much guesswork as possible.
Endencih, C., Brandau, M. & Hoffjan, A., 2011. Two Decades of Research on Comparative Management Accounting — Achievements and Future Directions. Australian Accounting Review, 21(4), pp. 365-382.
Gorchel, L., 2010. The Product Manager’s Handbook. 3rd ed. New York: McGraw-Hill.
Ittner, C. & Larcker, D., 2001. Assessing empirical research in managerialaccounting: a value-based management perspective. Journal of Accounting and Economics, 32(1-3), pp. 349-410.
Michalek, J., Feinberg, F. & Papalambros, P., 2005. Linking Marketing and Engineering Product Design Decisions. The Journal of Product Innovation Management, 22(42-62), pp. 42-62.
Middleton, R., 2008. Tweaking Your Campaign. [Online]
Available at: http://actionplan.blogs.com/weblog/2008/03/tweaking-your-c.html
[Accessed 26 July 2012].
Suttle, R., 2011. Brands & Product Life Cycle. [Online]
Available at: http://smallbusiness.chron.com/brands-product-life-cycle-785.html
[Accessed 27 July 2012].
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