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Tools of Management Accounting

>> March 25, 2011

In previous educational contents, we've explained functions and advantages of management accounting. Both contents were published to tell the importance of this branch of accounting. We want to take this conversation a step further today, and discuss tools and techniques of management accounting that can be helpful to management for providing best information. Take a look at some of best tools and techniques of management accounting outlined below:

1st Tool : Analysis of Financial Statements

Analysis of financial statements is the main tool of management accounting. In this tool, we collect four financial statement, one is profit and loss account, second is balance sheet, third is cash flow statement and fourth and last is fund flow statement. After this, we calculate more than 30 ratios and also analyze the financial statement by financial analysis, fund flow analysis and cash flow analysis. Main aims of analysis of financial statements are following :

1. Profitability - its ability to earn income and sustain growth in both short-term and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;

2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term;

3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;

Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time.

4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators.

2nd Tool : Budgetary Control

This is that tool of management accounting in which we make budgets for planning and control of fund. All budgets are made with past historical accounting data and future expectations. After this budgeted data is compared with actual recorded accounting data and performance is calculated on the basis of deviation between actual and expected performance.

3rd Tool : Decision Accounting

There are lots of decision which businessman has to take on the basis of tools of management accounting. One of management accounting tool is decision accounting. It is helpful to take main decision which we can explain following ways :

a) To Buy or to construct any fixed asset

b) Do's or Dont's to do any business activity

c) To choose best alternative

d) Calculation the price of product

4th Tool : Throughput accounting

Throughput Accounting (TA) is a dynamic, integrated, principle-based, and comprehensive management accounting's tool  that provides managers with decision support information for enterprise optimization. Actually this is the extension of decision accounting. Throughput accounting  is relatively new in management accounting. It is an approach that identifies factors that limit an organization from reaching its goal, and then focuses on simple measures that drive behavior in key areas towards reaching organizational goals.

5th Tool : MIS

We MIS tool, management accountant provides information needed to manage organizations effectively
. If we have to understand MIS, we need to understand ERP, SCM, CRM, DSS and other computer techniques for providing information with effective ways.

6th Tool : Financial Policy

Financial policy is that tool of management accounting which is needed to make good structure of capital mix We decide the proportion of share capital and loans in capital structure. Financial and operating leverages are also its sub-tools.

7th Tool : Working Capital Management

With this tool of management accounting, we manage short term assets and short term liabilities. All cash management, debtor management and inventory management will include in working capital management. We make also working capital cycle for knowing the firm's ability to convert its resources into cash. If there is low time for conversion of raw material into sales and then cash from debtor, it is good indication.

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