You are on page 1of 10

MANAGEMENT ACCOUNTING

INTRODUCTION

The accounting process is three separate types of transactions used to record business
transactions in the accounting records. This information is then aggregated into financial
statements. The transaction types are:

The first transaction type is to ensure that reversing entries from the previous
period have, in fact, been reversed.
The second group is comprised of the steps needed to record individual business
transactions in the accounting records.
The third group is the period-end processing required to close the books and
produce financial statements.

STEPS REQUIRED FOR STARTING MANAGEMENT ACCOUNTING


SYSTEM

To set up your accounting function for your pre-funded startup, consider the
following:

1. Set up a simple accounting system. In the beginning, you just need a simple, low-
cost accrual-based accounting structure. There are many light-weight options available, such
as Mint or InDinero. While these arent true accounting systems, they are great for tracking
expenses. More substantial are low-cost, easy-to-use systems such as Quickbooks, which
80% of our clients use. There are also high-end options available, of course. While these are
great in many ways, honestly they are just too much effort and cost for an early-stage startup.

2. Set up your Chart of Accounts. Ive addressed this in detail in a previous post,
Creating Your Chart of Accounts for Your Startup. Suffice to say that at the core of whatever
accounting system you use will be your chart of accounts (COA). Its essentially an
accounting system, designed specifically for your company, that aligns with your financial
structure and helps you to track and report your income and expenses.

1
3. Open a business banking account. A business banking account with online
component will help you to eliminate unnecessary manual processes and better manage your
cash flow. Your bank account should automatically invoice your customers and help you to
avoid cash shortfalls, by pulling in receivables and stretching out payables. Also, your
account should seamlessly integrate with your accounting software.

4. Separate personal and business expenses. It seems obvious that youd want to
keep your business expenses distinct from your personal ones, but, as I wrote about in a
previous article (7 Biggest Tax Mistakes Startups Make), its surprising how many
entrepreneurs conflate the two. At best, this leads to confusion. At worst, you could be sued
and forced to pay additional taxes. Your company could even be stripped of its corporate
status. Avoid this by establishing corporate checking and savings accounts and maintaining a
separate income statement and balance sheet. Use checks from your business banking
account, or separate business credit/debit cards to pay for all of your business transactions.

5. Keep records of receipts and invoices. While the IRS regulation requires you to
keep records for all receipts over $50, I always recommend recording all receipts, period.
You can keep physical copies or in the cloud, but be sure to keep track of your records so
youre not trying to dig them out come tax time.

6. Be mindful of tax obligations. Speaking of taxesmake sure that you start


thinking about taxes before you start earning revenue. This starts at the very beginning when
you select the best legal entity for your company. Youll also want to do your due diligence
to understand all of your federal, state, and city tax obligations, including regional fees and
registration. Since youll be separating your business expenses and keeping records, this will
make it easy for you to deduct business expenses. Stay on top of your payroll taxes and 1099s
and pay quarterly taxes. Hiring a tax professional is the best way to stay on top of your tax
situation.

7. Set up a system to collect payments. Setting up a formalized accounts payable


system early helps you to maximize cash flow and create essential financial reports. Work
with a professional to identify the best tracking system for your needs. Once the system is set
up, youll need to enter every expense and establish your invoice AP schedule. Place vendors
on net 30 payment terms and work hard to ensure that you always pay your bills on-time and
up-front. This will help you to build a reputation for financial stability.

2
Contact Early Growth Financial Services for help with accounts payable/accounts
receivable.

8. Create a payment collection process. Setting up an AR process will help you to


improve cash collections. Your system should allow you to list all open invoices and
balances. For new clients, put your payment terms in writing. Establish credit guidelines and
create a collection timeline so clients know what is expected. In these early days, your
payment collection process should be simple, so you can just accept checks or use Stripe or
Paypal to accept online payments.

9. Select a payroll provider. If you have employees in these early stages, youll need
a payroll provider. Depending on your needs, you may choose a provider who offers
piecemeal services or one that provides a full-service HR solution, including employee
benefits. Whichever solution you go with, make sure you cover workers compensation and
payroll taxes as well.

10. Forecast expenses. Record all of your anticipated expenses to help you to manage
your cash burn. (If youre looking for ways to reduce your cash burn, check out my previous
post: Reducing Your Burn Rate.) If you can see that you will run out of cash, thats when
youll need to start raising fundsand move on to the next level of financial management
and planning.

11. Open a bank account for the business. The bank account will be necessary for
accepting payments and paying your creditors. If you will have employees, a separate payroll
account should be set up as well. When you accept a payment in cash, credit card transactions
clear the credit card company and you need to pay your employees, this account is where the
money will be deposited and withdrawn.

12. Choose a computerized accounting system and enter the data. A business can
choose from various accounting systems, including Peachtree, Quicken and QuickBooks.
Choose the accounting system that works best for your business. Keep in mind that each
computerized accounting system requires a certain level of experience. Peachtree is for users
with at least a familiarity with accounting, and QuickBooks can be used by someone with
limited or no accounting experience.

3
13. Make a list of creditors. This list will become your liability accounts in your
accounting system. Include everyone to whom you owe money, such as vendors, credit card
companies, mortgage companies, banks and finance companies. Make sure to include the
amounts owed to each of your creditors.

14. Create a list of items and materials the company owns. This list will become
your assets in the accounting system. Examples include cash, office equipment, buildings,
vehicles and office supplies. Include the value of the assets when you make your list.

15. Determine the amount of discounts you will offer. If you are going to extend
credit to your customers, determine if you will offer a discount to customers who pay
promptly. For example you could offer your customers a 3 percent discount if they pay off
their accounts within 10 days of purchase.

ADVANTAGES OF MANAGEMENT ACCOUNTING

Management accounting has various advantages. Through an effective management


accounting system, it is possible to enhance the overall performance of the company.
Management accounting is needed in business because it has capacity to change the business
performance and financial position. Let us have a look at the advantages of management
accounting.

1. Increases Efficiency of the company: Companies opt for Management accounting


as it increases the efficiency of company in performing operations. It contributes in striving
for better performance by evaluating and comparing. Management accounting makes it easier
to achieve various results. This indirectly motivates the employees to strive for better
performance. As a result, they receive rewards in the form of promotions. Thus, management
accounting indirectly increases the efficiency of the company at a whole.

Management accounting increases the efficiency of operation of company. Everything


is done in management accounting with a scientific system for evaluating and comparing the
performance. With this, we find deviations. We will take promotional decisions on this basis.
Other employees will also be motivated with this because if their performance will be
favourable, they get reward of this. Thus management accounting increases efficiency.

4
2. Increases the bar of Profitability: Management accounting includes budgetary
control and capital budgeting. The use of this method makes it easier for the company to cut
short the extra expenditure for performing vital operations. This indirectly increases the bars
of profits for the company, as the company is able to reduce its pricing on the products. Using
of management accounting's budgetary control and capital budgeting tool, company can
easily succeed to reduce both operating and capital expenditures. After this, company can
reduce its price and then company will receive super profits.

3. Cost transparency: In the corporate world, majority of the costs comes from the
Information Technology (IT). The work of management accounting in the firm is to work
with the IT department closely. This action ensures a within budget actions and provides cost
transparency to the company.

4. Simplifies the decision making in Financial Statements: Managerial decisions


and other activities of management require a simplified report of the financial statement of
the company. For this action, management accountant creates a detailed technical report with
simpler interpretations. Here, he represents the key facts of the financial statements. This
enables the managing officers to take up appropriate decisions for the betterment of the
company. For taking different managerial decisions, management accountant provides deep
technical reports with simple interpretations in which he mentions the facts of financial
statements, after this, company's management officers understand what is in financial
statement and how will they use this for company's progress.

5. Enables the fluctuation of business monetary fund: One of the essential factors
in business is the monetary fund. Management accounting enables a control over the
fluctuation of this monetary fund. Management accounting studies the flow of the funds in
detail. Moreover, it helps in maintaining the emergency fund in case of any urgency. Further,
it also helps in eliminating any source within the company that misuses the fund. After all,
emergency preparation should always be kept aside before setting up any business.

6. Assist in goal completion (Objectives): The objective of the report presented by


the management accountant is to assist in achieving a long-term goal. It becomes possible to
achieve the goal due to the detailed information of the management accountant, which
highlights the strong and weak points of the company. In addition, this information helps to
identify the weakness and takes measures to overcome them.

5
7. Flexibility and freedom: Management accounting system is of flexible nature.
These reports do not require to be made yearly, monthly, or weekly. Therefore, the
accountant gets enough time to prepare a perfect report.

8. Future prediction from past result: Every new system that evolves for the
corporate world has a single motive. It is to attain success in the competitive market. With
similar intend, management accounting system also strives for betterment in performance.
Thus, with the help of given data of the past (of the company), it provides a chance to prepare
for better future results.

9. Advanced technique and features: The reasons because of which the


management system seems reliable are the special tools and technique. To form an accurate
and valid report special techniques like budget controlling, marginal costing, control
accounting, etc are used. Use of the technique may differ according to the issue at hand.
However, this technique makes it easier to make decisions in the favor of the company.

10. Marginal costing: Marginal costing is possible with the aid of management
accountant. It fixes the selling price of the products created in the organization. Further, it
also suggests several ways to use the scarce materials and resources. It also recommends
actions based on fixed cost, contribution and other extras. Although management accounting
does not promise perfect decisions, they do increase the chances of taking effective and
efficient decisions.

11. Control of Business's Cash Flow: It is one of important advantage of


management accounting that it can be used for controlling of business's cash flow. We all
know that cash in hand is better than in fixed properties if there is emergency to pay our loan
or debt. So, management accountant deeply studies from where is money coming and where
is it going. To check on misuse of money will surely control of business's cash flow.

12. Business-critical Decisions: To take business - critical decisions, now


management accounting will become more powerful. Global management accountants are
coming for join on one plate-form for taking all business critical decisions.

6
FUNCTIONS OF COST & MANAGEMENT ACCOUNTING

Functions and objectives of cost and management accounting include the following:

Planning
Decision Making
Monitoring & Control
Accountability

1. Planning

Planning is an important function of management accounting which is most


effectively performed by the preparation of budgets and forecasts. Forecasting is the process
of estimation of the expected financial performance and position of a business in the future.
Common types of forecasts include cash flow forecast, projected profit and loss and balance
sheet forecast. Forecasts assist in determining the likely change in the financial performance
and position of a business when considered in the context of the various assumptions used in
forming the projections. Forecasting is the starting point in determining the resource
requirements of a business which are quantified into budgets. Budgets quantify the financial
targets to be achieved by the management of an organization.

Budgeting process often begins with the preparation of a master budget which is then
used as a basis for the preparation of departmental and operational budgets. Budgeting helps
in the effective allocation of resources of an organization between competing needs (e.g.
departments, products, etc) in order to achieve the financial goals of a business. Budgets and
forecasts help businesses to deal with potential problems proactively and avoid foreseeable
bottlenecks in business resources.

2. Decision Making

Management accounting facilitates the provision of financial information to


management for decision making. Management accounting also involves the evaluation of
alternative strategies and actions by the application of techniques and concepts such as
relevant costing, cost-volume-profit analysis, limiting factor analysis, investment appraisal
techniques and client / product profitability analysis.

7
3. Monitoring & Control

Control process in management accounting system starts by defining standards


against which performance may be measured such as standard costs and budgets. Actual
results are measured and any variance between targets and results are analyzed and where
necessary, corrective actions are taken. Management accounting plays a vital role in the
monitoring and control of cost and efficiency of the routine processes and as well as one-off
jobs and projects undertaken by an organization.

4. Accountability

Management accounting lays great emphasis on accountability through effective


performance measurement. By setting targets for strategic business units and as well as for
departments, management accounting assists in the assignment of responsibility for the
achievement of business targets by individual managers. Responsibility accounting is
achieved by appraising the performance of managers responsible for their business units
while giving due consideration for factors not within their control or influence.

5. Financial Analysis and Interpretation

The management accountant analyses the data and presents it before the management
in non-technical manner along with his comments and suggestions so that the owners and the
top personnels in the management may understand it and take decisions without any
difficulty.

6. Communication

The management accountant prepares various reports to communicate the results to


the superior, to motivate the employees, to exercise effective control on their activities and to
enable the management to take sound decisions. He also communicates with the outside
world about the progress of the business through published accounts and returns.

7. Special Studies

The management accountant tries to maximise the profits of the concern by


conducting various cost and economic studies on regular basis.

8
He tries to determine the needs of long-term and short-term capital, recommend
appropriate capitalisation for the enterprise, evaluation of alternative capital expenditure
proposals and their impact on the return and profits of the concern.

8. Protection of Business Assets

The management accountant will be responsible for the protection of business assets.
He is to see that sufficient funds are available for repairs, maintenance and replacement of
fixed assets so that production capacity of the enterprise may not be badly affected. He is also
to see that business assets are properly insured.

9. Tax Policies

The management accountant is responsible for tax policies and procedures. He will
make available the reports required by various authorities. He will make proper provision for
taxation and he is to ensure that quarterly payments of taxes paid in advance as required by
the Income Tax Act are made in time to avoid penal interest payment on delayed payment of
tax.

10. Miscellaneous Functions

Besides the above functions, the management accountant supplies useful information
to different functional authorities, provides necessary accounting information and advice for
price determination and pricing decisions and helps to make strategic decisions as seasonal or
temporary suspension of production, make or buy decisions, replacement decisions and
expansion or closure of particular division or department, etc.

9
CONCLUSION

An accounting system is an important part of a business. Without a definitive system


in place, a business cannot keep track of what it owns, to whom it owes money and any
outstanding accounts from its customers. Also, a company's cash flow must be
tracked to ensure it is not spending needlessly and as a gauge for its pricing. Creating an
accounting system need not be an overly complicated task; as long as a business knows what
it owns and to whom it owes money, an accounting system can be set up with relative ease.

REFERENCES

http://www.wikihow.com/Become-a-Certified-Management-Accountant-
%28CMA%29
http://earlygrowthfinancialservices.com/10-essentials-for-setting-up-your-
accounting-function/
http://smallbusiness.chron.com/start-accounting-system-new-business-3765.html
http://www.accountingtools.com/questions-and-answers/what-are-the-steps-in-
the-accounting-process.html
http://accounting-simplified.com/management/introduction/functions.html
http://www.svtuition.org/2011/03/advantages-of-management-accounting.html
http://content.wisestep.com/management-accounting-process-advantages-
disadvantages/
http://www.managementguru.net/advantages-and-limitations-of-management-
accounting/
http://www.accountingnotes.net/management-accounting/top-10-functions-of-
management-accounting/5864

10

You might also like