Most Important Management Accounting Tools

Small business owners and managers have to make numerous critical decisions every single day. Management accounting tools help them make such decisions by providing data-driven input hence improving decision making for their businesses.

In this article, we first highlight the three most important management accounting tools. After that, we provide an exhaustive list of commonly used tools.

In the year 2019, CIMA conducted a survey called “Management accounting tools for today and tomorrow”. According to its result financial forecasting, cash forecasting and variance analysis are the most often used management accounting tools.

Financial Forecasting is an essential management accounting tool. According to CIMA’s 2019 survey, 85% of respondents indicated using this technique.

In essence, forecasting is the process of predicting the year’s end result while the year is still ongoing. This will allow the business to take corrective action if needed.

For many management accountants, forecasting is a logical follow-up task to budgeting. A budget is normally calculated once a year and before the year actually starts. A first forecast is then used to incorporate new insight gathered after finishing the budgeting process. The amount and the rhythm of forecasting varies from company to company.

Are you interested in more information about financial forecasting?

See also our 4 Tips for Efficiently Forecasting Financial Statements.

In our article 5 Types of Powerful Financial Forecasting Models we discuss several robust techniques to provide an accurate forecast.

Cash forecasting is another crucial management accounting tool. Nearly 80% use this technique as stated by CIMA.

The main goal of cash forecasting is to predict the cash positions, e.g. bank accounts, in the future.

This is such an extremely important task because running out of cash can ruin a company. Remember the saying “cash is king”? Even if a company has some assets and revenues, if there is no cash available, it risks going bankrupt.

Variance analysis is the third absolutely important management accounting tool we like to mention. As claimed by CIMA, nearly 75% use this tool.

The aim of variance analysis is to compare two values. Very often, this comparison takes place between a planned and an actual figure.

The process of this is normally defined by the company’s closing schedule. If a company produces a monthly closing, variance analysis occurs monthly as well. If the closing happens quarterly, so does the variance analysis. And so on…

For further reading we recommend these three articles:

Budget vs Actual: 5 Key Benefits of Variance Analysis

How to Design a Variance Analysis Report the Right Way

How to Use Variance Analysis Formulas in Practice

The most important operational management accounting tools are:

• Variance analysis: Comparison of two different values, like a budget to an actual figure.
• Overhead allocation: Apportionment of a company’s indirect costs to produced goods and services.
• Standard costing: Assignment of expected (standard) costs instead of actual costs.
• Absorption costing: Capture of all the costs related to the fabrication of a certain product, namely direct materials, direct labor, variable manufacturing overhead and fixed manufacturing overhead.
• Cost-plus pricing: Addition of a certain markup to a unit’s production cost to determine the selling price.
• Market based pricing: Derivation of the price according to similar products on the market.
• Financial year forecast: Prediction of the financial results at the year’s end.
• Cash forecast: Prediction of the available cash position at the year’s end.
• Rolling forecast: Continuous re-planning of the next some periods, like 12 months.
• Product/service profitability analysis: Comparison of revenues and costs of a product or service.
• Relevant cost for decision: Gathering and considering all relevant costs impacted by a decision but ignoring not relevant costs.
• Customer profitability analysis: Similar to product or service profitability but applied to customers.
• Break-even analysis: Calculation of the point where revenues and costs (fixed and variables) of a product are at the same level.
• Net present value: Accounting for the time value of money, like future payments.
• Payback: The time it takes for an investment to break-even.
• Benchmarking: Comparision of figures to other companies or the whole industry.

The most used tools to manage performance are:

• Balanced Scorecard: A tool for management to implement strategy, identify and improve processes as well as communicate among different hierarchies.
• Business process re-engineering: Redesigning business processes in order to improve important metrics like quality, output and cost.
• Activity-based management: Analyzing all aspects of a business to determine strengths and weaknesses what then leads to improvements and better profitability.

Strategic decision making is an important management accounting task. The following tools are popularly used by businesses:

• Strategic planning: Process of defining a strategy and making decisions on allocating resources to follow the defined strategy.
• SWOT analysis: Identification of a company’s strengths and weaknesses as well as the market’s opportunities and threats.
• Risk management: Identification and management of risks.
• Mission statement: Brief statement why a business exists.
• Long-range planning: Systematic planning of the longer future of a business.
• Competitor analysis: Assessment of existing and potential competitors.

Management accounting tools provide a data-driven focus on how to successfully run small, medium and large business enterprises. By relying on the data obtained from such analysis, the management is able to make decisions aimed at continuous improvement of the enterprise. The decisions will be justifiable based on intelligent analysis as opposed to relying on individual instincts and guts.