Small business owners and managers are faced with countless decisions every business day. Management accounting uses information from your operations to produce reports that provide ongoing insight into business performance, such as profit margin and labor utilization, so you and your managers have data-driven input to make everyday decisions. Small businesses can leverage this powerful trove of calculations to improve decision-making over time for higher profitability and greater competitive advantage.
Relevant Cost Analysis
Managerial accounting information is used by company management to determine what should be sold and how to sell it. For example, a small business owner may be unsure where he should focus his marketing efforts.
To evaluate this decision, an accounting manager could examine the costs that differ between advertising alternatives for each product, ignoring common costs. This process is known as relevant cost analysis and is a technique that is taught in basic managerial accounting courses. The same process can be used to determine whether to add product lines or discontinue operations.
Activity-based Costing Techniques
Once the company has determined what products to sell, the business needs to determine to whom they should sell the products. By using activity-based costing techniques, small business management can determine the activities required to produce and service a product line. Embedded in this information is the cost of customers. Deciding which customers are more or less profitable allows the business owner to focus advertising toward the consumers who are the most profitable.
Make or Buy Analysis
A primary use of managerial accounting information is to provide information used in manufacturing. For example, a small business owner may be considering whether to make or buy a component needed to manufacture the company’s primary product. By completing a make or buy analysis, she can determine which choice is more profitable.
While this technique is certainly useful, small business owners should only use these analyses as a factor in the decision. There could be other non-financial metrics that are important to consider that would not be part of the analysis.
Utilizing the Data
Managerial accounting information provides a data-driven look at how to grow a small business. Budgeting, financial statement projections and balanced scorecards are just a few examples of how managerial accounting information is used to provide information to help management guide the future of a company. By focusing on this data, managers can make decisions that aim for continuous improvement and are justifiable based on intelligent analysis of the company data, as opposed to gut feelings.