Freeze please! Take time to answer the following questions in the first place.
* Do you know the true cost of your services and products?
* Do you know the true cost of your business processes and activities?
* Do you know what processes, products or services should be outsourced and at what price?
* Do you know which products, customers or channels are profitable?
* Do you know how much can key business processes be improved without destroying value?
* Do you know the correct charge for shared services?
* Do you know the right product mix to the right customers?
* Do you know your value-added and non-value-added activities?
* Do you know how to allocate resources based on performance efficiently and effectively?
Do you know the cost of not knowing your costs?
If the answer is yes, congratulations! But if you linger to answer, then proceed.
The above questions and many more are the most challenging inquiries many businesses today have to face and address. Every organization, be it public or private, operates in an environment that is going through fundamental and ongoing changes. It is vital, therefore, that these organizations equip themselves with the management tools that will allow them to progress at the same rapid pace.
You may go to your finance department to find the answers, but most surprisingly they linger even more to reply. The finance people are supposed to be the right people to know the answers. Right? Wrong. Simply looking at the financial reports including P&L statement, balance sheet and cash flow, you will find them inadequate to address the issues raised above.
What we have to notice to disentangle this dilemma is to contemplate financial accounting vs. management accounting differences.
Why Management accounting?
* You may admit that financial statements above are primarily generated for financial reporting to external parties such as shareholders, creditors, supreme audit court, auditing bodies, etc. whereas management accounting intend to provide information and reports for decision making to internal users i.e managers.
* Financial accounting focuses on financial transactions that occurred in the past to produce its financial statements, while management accounting has a future orientation to firstly help managers spot problems before they occurs and secondly to provide estimates to better manage future.
* In order for managers to make effective decision, they need both financial and non-financial information. In fact, non-financial data are the very drivers to drive financial bottom line which is ignored in financial accounting as it concentrates on the purely financial aspects of a business, while management accounting focus on both financial and operational aspects of a business.
* Last but not least, timeliness and relevance is often more important than precision to managers. Managers would rather receive relevant estimates now than wait a week to get precise data to make an immediate decision.
Now, given the fact that planning, budgeting, cost management, performance management, etc. are the primary parts of a manager’s job, suffice it to say that we need an approach which can more greatly ensures decision making vs. financial planning, future orientation vs. past focus, operational data vs. financial data, and timeliness and relevance vs. precision and objectivity. To put it in a nutshell, we need management accounting.