Management Accounting: How to Make Better Decisions and Improve Profitability
Management accounting is the process of identifying, measuring, analyzing, and interpreting accounting information to be used by business leaders in making informed operational decisions and achieve business goals.
As a business owner, you are in a position where every decision you make could impact your company’s bottom line. As such, it is important to make educated decisions in order to drive your company’s financial performance.
Here are 3 steps you can take to help you make better decisions and improve the profitability of your company.
1. Understand and Analyze your Financial Statements
The first step is to familiarize yourself with three key financial statements: the balance sheet, income statement, and cash flow statement. Your financial statements reveal the historical data of your business and as such, are among the most important resources at your disposal when it comes to decision-making.
The balance sheet provides a snapshot of a company’s financial health for a given period. It lists the assets, liabilities, and equity line by line for the period. The income statement, also known as the profit and loss statement, or P&L, gives an overview of the income and expenses during a set period. Finally, the cash flow statement details the inflows and outflows of cash for a specific period. When analyzed together, these statements provide a holistic view of the financial health of your organization.
By reviewing the financial statements, as a business owner, you can make better decisions and improve profitability. The balance sheet and the cash flow statement reveal your company’s ability to generate cash and sustain operations. The statements also provide helpful ratios that are often used in analyzing how a company is performing such as productivity ratios, liquidity ratios, and solvency ratios. Through reviewing its income statement, you can gauge how your business is doing in relation to its expected performance. If your company is not profitable, you can review your operating expenses and cost of goods sold to determine which expenses you can eliminate to increase your margins. You can also look at your different revenue streams and decide whether to continue or discontinue certain activities of the business.
Understanding and being able to analyze financial statements will help you make better management decisions, improve your company’s efficiency and overall financial health.
2. Review Internal Reports
The next step is to look at internal reports and performance calculations like inventory turnover reports, accounts receivable aging report, and operational reports.
The inventory turnover report shows how quickly a company is selling its merchandise. A low turnover rate may mean that the inventory item is overstocked or no longer used. A high turnover rate, on the other hand, implies either strong sales or insufficient inventory. The inventory turnover report allows managers to manage inventory more efficiently by not having excess inventory that may eventually deteriorate or become obsolete or having so little inventory that may lead to loss of sales.
The accounts receivable aging report shows the unpaid invoice balances along with the duration for which they’ve been outstanding. This report helps businesses identify invoices that are open and find issues in your company’s collection process. Your company may want to sever ties with clients who regularly struggle to pay their invoices on time. If there are many defaulters, then you may need a complete transformation to tighter credit policies as cash flow is critical to the operations of any business.
Operational reports are vital for business owners as the reports provide crucial insight about the business. If the expectation is that your business should be performing at a certain level, but that is not happening, operational reports can show you where the inefficiencies lie. A restaurant, for example, can analyze several operational reports such as sales and expense reports, staff performance reports, prime cost reports, menu performance reports, and customer retention reports. Such reports will help you understand what works best for your business and maximize operational efficiency and profitability.
3. Implement and Monitor a Budget
Creating a detailed and accurate budget is an essential step in the decision-making process. Monitoring you budget will help you identify variances between actual results from budgeted amounts and quickly adjust plans to either decrease spending or increase revenue, which will ultimately increase profitability.
Improving your company’s profitability may seem like a difficult task. If you are unsure on how to get started or need assistance preparing these reports for your business, CPA by Choice can help. We are available to answer your questions, feel free to call us or send us a message.