Management accounting deals with the identification, measurement, analysis, interpretation, and communication of financial information to the managers so that the company’s goals can be achieved. Managerial accounting is an important aspect of any organisation as it helps in informed decision-making. Decisions that are backed by strong evidence contribute to the effective growth of an organisation.
An important aspect of decision-making is performance measurement. In order to assess the effectiveness and enhance the performance of an organisation, it is important to measure and evaluate it from time to time. Performance can be measured by choosing the most appropriate metrics, proper data collection, and communication with the stakeholders. This shall help the organisation to identify the areas of improvement and make data-driven decisions.
You can build your expertise in management accounting if you pursue a US CMA course from Imarticus Learning. Read on to learn more about the role of management accounting in performance measurement and decision-making.
How to Measure Performance
Listed below are the steps that one should follow to conduct an effective performance analysis:
- Identifying the organisation goals and objectives: For the proper measurement of performance, it is important to have a clear idea about the goals and objectives of the organisation.
- Selecting the metrics to assess the performance: Organisations have to choose the indicators based on which the company’s performance will be evaluated. These can either be quantitative measures like profit margins, revenue, etc., or qualitative aspects such as employee satisfaction and customer feedback.
- Reporting the performance: This is the last step of performance measurement. The result has to be written and the report has to be shared with the stakeholders. The report should highlight the key areas for improvement and performance trends.
- Data collection and analysis: After the metrics or the indicators have been decided, the next step is to collect the relevant data. Analysing the data will help to determine the performance. Data can be collected from internal sources like customer databases, and external sources like industry benchmarks or market research.
What are the Benefits of Performance Measurement
Measuring the performance of an organisation is a straightforward method of tracking the organisation’s progress toward the achievement of its goals. Having a well-defined set of goals helps individuals understand their targets well.
The performance measurement metrics help individuals to measure their progress and also assess their individual contribution towards the accomplishment of the goals. It also enables improved accountability and helps individuals identify the areas for improvement.
Performance management helps in informed decision-making. Measuring performance also helps organisations improve their resource allocation, which in turn helps to reduce wastage and increase efficiency. By analysing the data, organisations can be informed about patterns, trends, and opportunities. Therefore, the advantages are many.
Some Instances to Show the Importance of Management Accounting in Decision-Making
After the data is updated and analysed clearly, it helps to generate important insights. Listed below are some instances that show how management accounting helps in efficient decision-making.
Accounting data can be used to create forecasts, and also plan budgets. By clearly analysing the data, one can draw a comparison between the forecast and the organisation’s actual performance. Management accounting helps to gain visibility on the change in trends. This helps to refine the budget and predictions accordingly.
Gaining insight into the organisation’s profit and loss and its cash flow helps to understand its financial health. This way, organisations can identify the risks that need to be addressed and also look for new opportunities for improvement.
The inclusion of key performance indicators in management accounting helps to continuously analyse how the organisation is performing on each of the grounds. These KPIs are tailored based on the needs and preferences of the organisation. KPIs help to monitor the performance of the various operation areas that are spread throughout the business.
Management accounting also helps organisations to identify the scope for attracting new investment. Management accounting helps to identify the most attractive scope for investment and also allocate where the cash should be invested so that it can reap the most benefits.
Performance measurement helps to have a clear understanding of the operational changes that have to be made, such as controlling the stock levels, managing the working cycles, controlling overheads, and establishing the break-even points to ensure the profitability of the organisation.
Managing accounts does not only support decision-making; it is also responsible for supporting key marketing strategies. This is done by measuring the changes in the gross margin percentages. Sometimes sellers may have to cut the prices to measure the increase in sales, and in other instances, they can earn benefits by putting up the prices of certain services or products.
However, this decision is based on the information that is derived from management accounts. Managerial accounting surrounds the different aspects of accounting that help in strengthening the information related to the metrics of business operations. Managerial accountants derive information regarding cost and sales revenue generated from the goods and services of the company.
The US CMA course offered by Imarticus Learning is an advanced-level course that covers the different aspects of business, accounting, finance, and analytics.
If you are looking forward to establishing a successful career as a management accountant, you can appear for a CMA exam that will help you validate your knowledge and certify your expertise in the domain, thereby improving your chances of seeking good employment in the sector.
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