Articles

A Manager’s Guide to Accounting Systems

Categories: Business Management

Companies strive to maintain or enhance their competitiveness in today’s fiercely competitive cleaning industry by utilizing accurate and relevant information to make informed decisions. Traditionally, financial accounting information was used for planning and controlling operations, assuming it accurately reflected product and service revenues, costs, channels, and customers.

However, this article reveals how many companies, masked by an illusion of precision through broad averaging allocation of indirect costs—also known as corporate overhead, inadvertently provide decision-makers with misleading information. Consequently, suboptimal decision-making occurs, necessitating a deeper understanding of financial data to transform it into actionable management accounting information.

Understanding accounting systems

Accounting systems serve as measurement procedures that aim to provide valuable information about a company. Hence, it’s important to acknowledge that different users have distinct needs.

For instance, while creditors require information about a company’s ability to repay debt, managers focus on factors such as product profitability, budget deviations, and divisional performance. Thus, internal decision-makers demand accounting systems capable of organizing economic data using diverse methodologies.

Financial accounting vs. managerial accounting

Financial accounting primarily serves external parties, such as investors, creditors, and regulators. Standardized rules, known as Generally Accepted Accounting Principles (GAAP), are in place to reduce the risk of accounting information manipulation by managers with more comprehensive knowledge about their company.

On the other hand, managerial accounting, which we refer to as internal economic measurement procedures, helps managers run their businesses efficiently. As this information remains within the company, the need to expose financial information externally diminishes, thus eliminating the need for regulatory standards. Regulatory standards are replaced by goal congruence (explained later in the article). Managerial accounting operates based on strategy and economic principles tailored to each company’s unique road map.

Objectives of managerial accounting

Evaluating decision alternatives: The decision-making process in running a business relies on sound judgments. While monetary criteria may not always be the most crucial factor, understanding the economic consequences of decision alternatives is vital. Whether it involves discontinuing a product, outsourcing production processes, securing supply contracts, or offering discounts, quantifying the impact of these decisions on economic performance is essential. This aspect, traditionally known as profitability analysis, enables a thorough evaluation of the alternatives’ future economic impacts.

Evaluating the performance of the business: Managerial accounting aids managers in assessing various aspects of their businesses. It allows for quantifying profitability across products and customers, evaluation of divisional performance, analysis of budget deviations, internal price setting (transfer pricing), and the design of informative key performance indicators (KPIs). Allocating revenue and costs across divisions, products, or customers based on the company’s strategy, profitability, capacity utilization, and budgeting can be effectively analyzed.

Evaluating employee performance to achieve goal congruence:  In decentralized organizations, delegating decisions to operation managers and other personnel can introduce conflicts of interest. To align the company’s interests with those of individuals, monetary incentive systems are commonly used. Performance evaluation plays a crucial role in achieving goal congruence, whereby employees’ behavior is shaped by the criteria used to assess their contributions to company performance. Managerial accounting helps establish fair measurement criteria, considering factors like corporate overhead costs, profits, and allocation systems, to incentivize goal-aligned behavior among employees.

Managerial accounting empowers

Accounting systems are indispensable tools for decision-making and performance evaluation in the cleaning industry. By distinguishing between financial and managerial accounting, managers can leverage the latter to better understand their businesses.

Effective utilization of managerial accounting empowers decision-makers to evaluate alternatives, assess business performance, and foster goal congruence among employees. As managers delve into the intricacies of accounting systems, they will be better equipped to make informed choices and drive their businesses toward success.

Discover valuable insights and access a previously published webinar and article on financial accounting. You will have to log into your ISSA membership portal to access this: issa.com/budgeting.

Enhance your company’s efficiency, productivity, and profitability, and welcome to the world of management decision-making!

About the Author.

Jon Hill is the CEO of Cobotiq and presents to business managers how to create and implement profitability information. He is a frequent speaker and presenter on the future impact of automation and technology in the cleaning industry.