Accounting is for accountants, right? Well, not exactly.
If you’re making any type of decision—financial or non-financial—you’ll need to understand managerial accounting.
When asked about your annual budget, do you have the answer or do you bounce it over to your finance team?
When developing marketing personas, do you know the financial value of that type of customer? Will going after that persona have a positive impact on your bottom line or is that strategy too costly? With this special type of audience targeting, you can invest additional time and resources in markets that can bring you more profit in the long-term perspective.
When bringing a new product or service to market, what is the cost to the organization if it’s a two-person team or a global network of colleagues? How does the cost impact the project plan?
When tasked with formulating a solution to a business need—beyond assessing strategy, operational processes, and procedures and requirements—are you taking into account the cost and budget to bring that solution to fruition?
If you ask instructor Marisa Sudano, there are myriad instances where managerial accounting comes into play every day:
“Businesses are craving for employees with analytical skills who can look at the situation at hand, determine what is relevant information, gather that information and then apply that information in making timely decisions. The basic skills gained in managerial accounting can be applied to many different areas of a business: marketing, supply chain management, human resource management, production management, customer service, just to name a few.”
Instructor Stephen Jacobson concurs:
“You are designing the specs for a new product. What is the most cost-effective-approach?
“You are planning a fundraising drive for your local non-profit theater. What will be the cost and how does it compare to your fundraising goals?
“You are managing a production process. How does performance compare to plan? Are there areas where you can improve quality and/or reduce costs?
“You operate a restaurant that’s open only for dinner, but are considering opening for lunch. Can you produce a menu that meets your quality standards while making an acceptable profit?
“You are an HR professional evaluating your department’s recruiting efforts. Were those efforts successful? How do you measure performance? Should you make changes to the process?”
These are the types of questions that can be answered by understanding managerial accounting—and this knowledge brings greater clarity to not only your projects and objectives, but also to the organization as a whole.
The basic skills gained in managerial accounting can be applied to many different areas of a business: marketing, supply chain management, human resource management, production management, customer service, just to name a few.
Marisa takes this one step further:
“One of the most important managerial accounting skills that people can employ in their career is using only relevant information/data to apply to their decision making. In this day and age of technology and the influx of data, the large amount of information gathered can overwhelm anyone. Learning the importance of distinguishing between what is relevant to the situation at hand to what is not is key to being successful in any job. In managerial accounting, students learn how unprofitable decisions can be made without using the relevant information.
"For example, some companies have made the decision to drop a product line because they believe it is losing money. If they don’t understand the relevance between fixed costs and variable costs, a company can make a decision that results in a decrease in profits for the firm as a whole. This is just one of many examples that emphasize the importance of understanding how to distinguish what information is valid for making decisions.”
To be sure, finance and accounting are core management skills, just as people skills are. By understanding managerial accounting, you are set up to better meet your operational and strategic objectives, become a financial-savvy manager and boost your financial literacy.
What is Managerial Accounting?
Let’s get some definitions out of the way.
Financial accounting focuses on providing information to persons or companies outside of the organization, such as creditors.
On the other hand, managerial accounting, also called management accounting, focuses on providing information to help individuals inside an organization make better operational decisions.
Managerial accounting gives business leaders and managers the decision-making financial data that they need to identify, track and achieve their goals. At a high level, managerial accounting skills contribute not only to you—as a manager or leader—in meeting goals, but also propel the organization forward in hitting milestones.
“Managerial accounting is the art of compiling and analyzing information that can be used to plan, control, evaluate performance and make decisions,” adds Stephen. “It can help you see the big picture. It includes activities such as developing key metrics; analyzing the profitability of companies, divisions, products or customers; measuring the effectiveness of business initiatives; performing cost-benefit analyses; and planning for the future. I can’t think of an industry or position where those skills aren’t useful.”
When you study managerial accounting, it shows you are working to make yourself more valuable to an organization. It’s a great differentiator.
Managerial Accounting At Play
Let’s break down this concept into three overarching buckets of work:
Planning for the Future
Detailed reports about market research, product viability, regional information and the like help you make decisions on which steps to take moving forward. Develop a baseline in order to establish realistic goals and the process to achieve them. If you’re in a project management role, being able to project the cost of the project is absolutely critical. Managerial accounting allows you to simplify complex financial data and turn them into actionable insights.
While financial accounting focuses on historical records of data, managerial accounting gives you actual performance and compares it to future outlooks and goals. This is a great way to identify and solve potential problems when creating your next fiscal budget. If you’re running your own business, use managerial accounting to find your true full cost: Assign all the costs of keeping your venture up and running so that you can easily identify where there are any deficits and how to solve for efficiencies.
According to this Investopedia article, “Not only does performance measurement help a company course-correct flawed or unprofitable operations, but this crucial benchmark is instrumental in letting a company compare its performance with that of its direct market competitors.”
Managerial accounting gives the data necessary for leaders to make sound business decisions—today, tomorrow, even next year.
Beyond the practical technical skills of managerial accounting—including becoming a master at spreadsheets and data analysis—you’re also primed for a successful management career. How?
According to Marisa, “One aspect of managerial accounting is using technology, specifically spreadsheets, in helping to analyze and present information in order to help make decisions. We use spreadsheets in many of the topics such as in capital budgeting and looking at net present value or in evaluating profitability through return on investment. Being able to use spreadsheets in business applications and analyzing alternatives is an extremely important productivity skill in today’s workplace.”
Gain interpersonal skills by communicating your management-accounting findings and recommendations with various stakeholders and through multiple mediums.
- Enhance your visual-aid or presentation skills.
- Effectively sell your findings and recommendations
- Strengthen your project management and writing skills
Marisa sums it up nicely:
“As the name implies, managerial accounting entails providing information to managers to use within the organization in order to facilitate the managerial functions of planning, controlling and decision making. Planning includes establishing goals and specifying how to accomplish them. Controlling includes analyzing actual results against plans in order to evaluate them and if they need to be modified based on changes in circumstances. Finally, decision making includes selecting a course of action from alternatives. All of us—no matter what career choice, industry or position—will need to know how to plan for the future, how to make progress toward a goal, and how to make timely and rational decisions.
“In addition, managerial accounting lays a strong foundation of understanding one of the most important aspects of a business: knowing the costs of what they produce or the costs of the service they provide. Understanding the importance of having an accurate picture of the company’s costs will help determine how profitable the company is. For example, some companies do not allocate their costs correctly to different products and they may actually be losing money on some products if they are not priced accordingly. These are all concepts that are discussed and applied in managerial accounting.”
Managerial Accounting at the Contributor Level
While it may seem that the skills learned from taking a managerial accounting course are applicable only to the decision-makers, that’s not always the case.
Stephen asks you to think about your personal productivity.
“How do you spend your workday? Which tasks add the most value and do you allocate your time accordingly?
“Do you have all the information you need to do your job? What additional info would be useful? How could you improve the quality and/or timeliness of that info?
“How efficient are the processes that you use? Could they be improved so you’re working smarter, not harder? Which tasks could you automate?
“Having managerial accounting skills lets management know that you’ve acquired the tools to handle a wide range of business issues and problems,” Stephen adds.
“It also signals your commitment to self-improvement. Many people want to advance in their careers, but not everyone puts in the necessary prep work. When you study managerial accounting, it shows you are working to make yourself more valuable to an organization. It’s a great differentiator. Employees with managerial accounting skills can set standards, measure performance, evaluate processes, improve quality, enhance profitability, solve problems and see the big
picture. What organization wouldn’t benefit from having employees like that?”
Prime yourself for career advancement by enrolling in Managerial Accounting today!