How Can Managers Use Accounting Information?

Those responsible for managing a business from day to day require accounting information to:

1. Ensure that business resources (including cash) are protected and applied in the best manner possible.

2. Plan the business activities within the resources available.

3. Establish targets such as how much they hope to earn and the amount of expense they
are likely to incur.

4. Control costs, a task which is essential for survival in a competitive market – for example, the owner of Mary’s Coffee Shop may lose customers if her costs and therefore her prices were higher than those of her competitors.

5. Establish business strategies, e.g. whether to buy or rent the business premises; whether to invest in a faster coffee-making machine; whether to diversify and sell soup as well as coffee; and whether to maintain the competitive advantage by, say, choosing between lowering the price and improving the quality.

Managers make decisions on a day-to-day basis and for this, they require accounting information tailored to meet specific needs. For example, they may need to:

■ use information on past performance in order to estimate likely future performance, e.g. in deciding how best to advertise they will need information on how successful different forms of advertising have been in the past;

■ analyze and evaluate the outcome of decisions already made so that the successful aspects may be exploited and unsuccessful ones mitigated;

■ predict the likely outcomes of alternative courses of action.

In contrast with all other groups who require accounting information, managers are at an advantage because they are able to obtain accounting information which is:

comprehensive – being more detailed than that which is usually provided to other users;

timely – being available as and when needed;

relevant – being specific to their particular needs.

The production and application of accounting information to satisfy the needs of managers is the role of a management accountant and this major branch of accounting is known as management accounting. Accounting to satisfy the needs of the other groups who are external to the business is known as financial accounting