Introduction:
This report will be prepared to discuss the planning tools that are available under management accounting to support business activities. The report will be created in two parts and each part will deliver elucidated image of management accounting concepts. In the first part of the report, planning tools of management accounting will be discussed whereas the second part will elucidate the application of management accounting practices for the removal of financial problems.
(Part A):
Planning tools of management accounting
The management system includes several planning tools that can be applied by a business organization for the overall betterment in business events. These planning tools help the owners in effective forecasting, systematic planning and elimination of threats to assure that aims will be accomplished and financial problems will be removed at the initial stage.
Management accounting:
It is set of some analytical procedures that are useable for the analysis of income, expenditure and non-monetary operational data so that internal managerial reports can be prepared and delivered to top management to support the quality of decision-making activities.
In a more explanatory view, it is the process which includes different assumptions, analytical practices and management tools and, utilised in the creation of internal financial reports to enable high-quality decision-making in business.
Above two explanations are presenting that management accounting is:
- A system which is useable for efficient planning of future activities and establishment of effective control on all operational events.
- It supports performance evaluation activities that can be made through the comparison of actual and budgeted financial data.
Some planning tools and their use for the removal of financial problems is provided below:
- Cash flow budget:
Cash is one of the most crucial issues of business because it is related to working capital requirements and a shortage of cash may affect the sustainability of the entity. Cash flow budget is part of budgeting activities which are performed to evaluate the future figures of financial factors by analyzing recent trends (Pinheiro, 2014).
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Use of Cash flow budget in the removal of financial issues:
A cash flow budget is highly supportive in cash management activities because it provides tactful information about the allocation and availability of funds. For example, managers can transfer additional working capital of one department to another department by evaluating the need for cash funds (Pinheiro, 2014). Similarly, a cash flow budget informs about the need and availability of cash resources in the future so that managing-authorities can arrange additional funds when required.
- Variance analysis:
It is explainable as the set of some analytical arrangements that are available for a business to compare the pre-budgeted standards against real outcomes. This tool is useable for both financial and non-financial aspects and, highly popular to determinate the efficiency of business operations and the accuracy of budgeting practices (Cleartax, 2018).
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Use of Variance analysis in the removal of financial issues:
Lack of efficiency and inappropriate planning are major factors which create financial problems for a business and, both factors can be eliminated from the organizational process through the utilization of variance analysis (Cleartax, 2018). For example, low employee performance increases the cost of operations which ultimately affects the profitability. Through applying Variance analysis, individual employee performance can be compared with applicable standards to insure the deportation of precarious ingredients.
- Investment appraisal techniques:
There are several appraisal techniques which can be adopted by a commercial organization to correctly evaluate the suitability of capital projects. For instance, NPV (Net Present Value) informs about the current value of profits that are expected to be generated by investment options (Lindvall and Larsson, 2017). Similarly, the payback period informs about the period that is required for a project to generate an amount of investment back.
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Use of appraisal techniques in the removal of financial issues:
Inefficient investment decisions can be presented as the major factor which is liable for the financial problems in many business entities. Through the application of suitable appraisal techniques, the acceptability of a project can be evaluated correctly and decisions can be made in the light of such evaluation so that the threat of financial problems can be excluded.
Following are some major factors which are liable for the financial problems in business organisations:
| Performance issues | Lack of cash resources | Unbeneficial investments |
| Employee performance is a primary concern for each organisation because each improvement in employee performance comes with an improvement in overall profitability. It can arise due to a lack of monitoring and training arrangements. | Due to the unavailability of cash resources, a business may face problems in continuity of operations. For example, cash unavailability may affect the appropriate continuity of most beneficial segment of the business and lead for the heavy operational losses. | Investment decisions are required to be made with enough analysis and caution to ensure that desired profitability. Due to an inappropriate investment decision, a business may loss whole capital and gone into liquidation. |
Above problems can be resolved through the use of selected planning tools in the following manner;
| Variance analysis | Cash budget | Appraisal Techniques |
| Variance analysis is one of the most popular tools for the analysis of monetary and non-monetary data. Through this tool, budgeted data can be compared with real outcomes to outline and remove the factors of low performance. It is also useful in comparison to departmental performance to remove managerial issues. | Cash budget presents the structure of cash-ins and cash outflows so that application of cash funds can be monitored correctly. Through a cash budget, sufficient resources can be allocated to each department and cash-unavailability can be resolved timely. | Through the use of appraisal techniques, all investment offers can be evaluated correctly. For example, NPV can be utilised to identify the net profitability of a project considering the time factor. By adopting appraisal techniques, a business entity can select the most suitable project which will maximise the business growth and profitability. |
CVP analysis:
This term stands for the cost-volume-profit analysis which can be presented as the group of some cost analysis techniques to interrogate the impact of alteration in volume and costs on incomes. It works on the assumption that selling price and fixed expenses are fixed (Akmese, 2016). Through the use of CVP analysis, the impact of each alteration in cost can be identified against alteration in profits to assure the escalation of incomes.
CVP analysis as a problem-solving tool:
It is a popular tool to identify the impact of volume and cost alterations on newt incomes. For example, each reduction in production volume will reduce the consumption of variable cost but improve per unit absorption of fixed cost. Similarly, the increment in variable cost will reflect in the reduction of net profits. Through CVP analysis, management can identify a most appropriate combination of costs and volume so that the objective of profit escalation can be accomplished.
(Part B):
To handle the financial issues and evacuate the threat to the sustainability of entity, management accounting is a highly suitable and popular tool for business owners. Through the application of management accounting tools, financial problems can be handled in the following manner:
- Key-performance indicators:
KPI stands for the set of some standardized parameters that should be adopted by an organization compare the internal performance against applied individual standards (Bakertilly, 2015). For example, most accepted level of short-term liquidity is 2:1 and, a business organization can compare liquidity of business against this applied standard to investigate the areas of problems.
Through the Application of KPI’s, organizational performance can be measured against applicable standards. It will help to identify the problem-containing areas which need improvement. After the identification of such areas, an effective strategy can be made and implemented by management to remove financial issues and insure sustainable growth.
- Benchmarking:
This term stands for the process which is related to comparison among industry-based-standardized-values and after-effect of business operations (Bakertilly, 2015). For instance, 18% net profitability is assumed better in Retail supermarket industry of UK, so a company is which is gaining profits 18% or more will be assumed good whereas a company that is not generating profits as per industry standard will be assumed, low performer.
Benchmarking is a very essential tool in systematic management of business operations to insure the availability of sustainable success. Through the application of benchmarking, a business can improve internal performance level up to industry parameters to insure good profits and expansion (Markgraf, 2019).
- Financial governance:
Financial governance is an indicator of those ethical regulations that are needed to be applied in a business corporation to insure security from loess that may occur due to non-presence of ethical arrangements. Actually, losses from theft or fraud are one the major factor for the financial problems in business and the adoption of financial governance creates an environment of ethical working (Bwise, 2019). Also, it leads to the establishment of sound internal controls in organisational procedures which prevents the entity from capital losses.
Conclusion:
From the above discussion, it is identified that unethical working of employees, low performance of staff and inefficient investment planning are major factors for the financial issues in business entities and, it can be removed through the application of management accounting tools. Findings of discussion are enough to wrap up that the use of management accounting system is very beneficial for business corporations in the consummation of targets.
References:
- Akmese, H., 2016. The use of cost-volume-profit analysis in turkish hotel industry.
- Ayres, C., 2017. 12 Advantages and Disadvantages of Performance Appraisals. [online] ConnectUS. Available at: https://connectusfund.org/12-advantages-and-disadvantages-of-performance-appraisals [Accessed 18 Mar. 2019].
- Bakertilly, 2015. Benchmarks and key performance indicators (KPIs) – the hidden gems of financial management tools | Insights. [online] Bakertilly.com. Available at: https://bakertilly.com/insights/benchmarks-and-key-performance-indicators-kpis-the-hidden-gems-of-financial/ [Accessed 9 Mar. 2019].
- Bwise, 2019. Financial Governance. [online] Bwise.com. Available at: https://www.bwise.com/solutions/governance/financial-governance [Accessed 9 Mar. 2019].
- Cleartax, 2019. Variance Analysis – Overview, Budgeting, Benefits. [online] Cleartax.in. Available at: https://cleartax.in/s/variance-analysis [Accessed 9 Mar. 2019].
- Lindvall, N. and Larsson, A., 2017. Investment Appraisal in the Public Sector–Incorporating Flexibility and Environmental Impact. Journal of Advanced Management Science Vol, 5(3).
- Markgraf, B., 2019. Difference among KPI and benchmarking [online] Yourbusiness.azcentral.com. Available at: https://yourbusiness.azcentral.com/difference-between-benchmark-indicators-key-performance-indicators-23945.html [Accessed 9 Mar. 2019].
- Pinheiro, J.D.O.G., 2014. Cash budget versus financial budget: advantages and disadvantages: a case study (Doctoral dissertation).