Introduction
There is a need to have some accounting knowledge as long as one is a manager of a given organization since the knowledge helps in management and performance evaluation. Knowledge in accounting is important for managers, regardless of whether one is an accountant or not. Accounting deals with the preparation and presentation of organizational financial records. These are records that give an indication of the way an organization is performing. In turn, the performance of the organization influences the decisions that managers make. For instance, managers should make decisions that counter the trend of below-par performance. On the other hand, managers should make decisions that maintain good performance and ensure performance better (Barnett 39).
Accounting knowledge is very useful for managers in the course of executing their mandate. Managers have to read and understand financial statements prior to making investment decisions. Managers need to have some accounting knowledge for them to better understand accounting language and the implications of financial statements for the organization. Such managers are most likely to make good decisions that have a positive impact on organizational performance. It is worth noting that every organization, whether profit-making or non-profit making, strives to become the best among its competitors. Therefore, making good decisions is an important factor in this course. Accounting has various sections, and the most important section that helps managers in decision-making is management accounting. Management accounting uses tools that help in providing necessary information to managers, thereby helping them perform managerial duties. Among the tools that are used in management accounting include analysis of financial statements, cash flow analysis, budgetary control, costing techniques, management reporting, and statistical research techniques among others (Bhattacharyya 7). This is a research paper that will focus on the ways accounting is used as a tool for management performance evaluation.
How accounting information can help in decision making
Decision-making is the most important activity for any organization. Making decisions is the duty of various members of the organization. However, managers are mainly given the responsibility of making decisions in most organizations. The decisions they make, in one way or the other, have an impact on organizational performance. Therefore, the decisions being made must be informed. Managers need to assess various sources of information for them to be able to make the right decisions that will impact the organization positively (Barnett 39). One of the most important sources of information that can influence some of the most significant decisions in an organization is accounting. Accounting information is very important when it comes to business decision-making. It represents the financial transactions that have been made by an organization over a given period of time, which is usually at least one financial year. Almost all organizations present financial statements as the standard form of financial information. These statements have information that relates to sales made during a certain period, operating costs and expenses incurred, assets and liabilities of the organization, as well as sources of finance and equity information. This is the information that managers need mostly to make decisions regarding the performance of the organization.
People need sufficient information for them to make decisions in an organization. It, therefore, follows that accounting provides competent information that can be used and be relied upon in decision making. As mentioned earlier in this article, accounting plays an important role in measuring activities that take place within an organization and then communicates the same to appropriate parties. It is important to note that not all accounting information can be used in decision-making. Therefore, it is important to understand the business activities measured in accounting that can be used in decision-making. First, financing activities should be measured since they give information on the amount of money that the organization has and can invest. Financing activities are external sources of funding that the organization can access. When getting finances for an organization, managers have to find the cheapest source and a source that has the least risks (Bhattacharyya 7).
Basically, there are two major sources of finance for any organization. The first source is the owners’ investment funds. This is an internal source of finance. The owners are also shareholders who contribute their money towards the investment activities of the business. Other internal sources are retained earnings. These are arguably the cheapest sources of finance. However, a start-up company does not have any retained earnings. On the other hand, the amount of retained earnings available highly depends on the performance of the organization. If the organization has been performing poorly, then the amount of retained earnings will be little and insufficient to finance the operations of the firm. Another factor that is likely to affect the amount of money available as retained earnings is dividend policy. Fewer amounts will be available for financing the business when more dividends are paid to shareholders. This is likely to affect decisions made by the organization regarding the dividend policy. Management accountants will need to have all this information while making decisions on activities that the organization will engage in, as well as the type of investment projects to be spent on (Bhattacharyya 7). In addition, this information might be important in preparing organizational budgets and performance projections.
The second source of finance is through creditors and banks. These are external sources of finance. Creditors lend money to organizations. Creditors may include debenture holders, among others. Organizations get loans from banks in most cases. Loans are either long-term or short-term, and they have different costs depending on the bank from which the loans are sourced. External sources of finance are relatively costly compared to internal sources. This means that managers need to get the detailed information regarding external sources of finance. If the source of finance is too costly, it reduces the number of profits since the level of expenses becomes high. Managers should also consider the risks involved in various sources of finance. The organization can make an investment once it gets the money (Bhattacharyya 7).
The second activity that is measured entails investment activities. This measure calls for a very informed decision since it is what determines the success or failure of an organization. Managers have to make decisions on investment activities that present the best opportunities for the organization. Investment activities include buying and selling of resources. They could be long-term resources or short-term resources. Assets such as land and machinery are regarded as long-term resources for the firm. Buildings also fall in the category of long-term resources. Resources that are involved in the daily operations of the company are known as short-term resources. Stock is one of the many short-term resources. The organization ends up performing dismally if the wrong decisions are made regarding investment activities. The choice of investment, therefore, becomes the most critical decision for managers (Bhattacharyya 8). Once the investment decision has been made, the management decides on the operating activities that now involve the day-to-day activities that are carried out in the organization. These include transactions that go on to generate income. It is at this point that managers make decisions regarding strategies that can be used to maximize competitive advantage for the organization. The business environment today is highly competitive; therefore, the best decisions have to be made regarding operating activities. Providing quality products and services to customers is one major decision that should be made. Others decisions include determining costs, such as advertising costs, utilities, wages, rent, utilities, and other operating expenses. All this information can be sourced from financial statements. This makes accounting very important when it comes to decision-making and measuring performance evaluation for organizations.
Accounting information and internal performance evaluation
Most business organizations, especially companies, are required by the law to prepare financial statements after every financial year. The information in these financial statements can be used in conducting an empirical examination and comparison between the accounting-based performance and the decisions made by lower level, as well as top managers (Drury 399). For instance, manager turnover is usually high when performance is low. On the other hand, manager turnover is low and promotions are more when the performance of the company is good. Companies are owned by shareholders. Shareholders contribute capital for investment. Shareholders also hire managers to manage the capital and make relevant decisions in order to maximize the level of profits made by the company. It is important to note that the main objective of shareholders is to maximize their wealth. Therefore, the role of managers is to ensure that the company engages in activities that maximize shareholders’ wealth. It follows that shareholders might reach a decision of firing managers if managers make decisions that result in poor performance of the company. Thus, poor decisions can be associated with high managers’ turnover. On the other hand, managers are likely to get promotions, especially if they are lower-level managers if they make decisions that result in good organizational performance.
Various challenges face the process of determining the performance of managers. It is, especially, more challenging to measure the performance of lower-level managers. It is important to observe and understand the subunits of the firm through observing market values for a more reliable measure to be conducted. Generating information regarding the way subunits are performing is a major role that should be done by internal accountants. Therefore, the internal accounting system should be designed in a manner that generates relevant information on this performance. Unfortunately, most organizations tend to overlook the role of internal accounting systems in generating this information. Instead, most firms focus more on the performance of top managers. The performance of top managers is usually judged by the general performance of the organization as a whole. However, the general performance of the organization is highly dependent on the subunits’ performance. Management accounting information from various departments, which are also the subunits of the organization, is what provides the most relevant information that is used to make decisions and in turn influence performance. It is the same information that should be used to evaluate the performance of lower-level managers (Drury 399).
Organizational managers need to use management accounting principles to be well equipped in making the right decisions and exercising their management functions. Management accounting information is different from financial accounting information. However, both can be used in decision-making. The information given by management accounting is not reported to the general public, as opposed to the data given by financial statements. Management accounting data is confidential and only used by the management staff. It is also important to note that this information focuses on the future, rather than historic events. Decisions are about what the organization should do in the future; therefore, management accounting is important in this determination process. However, accounting information is supposed to inform where the organization is coming from, where it is currently, and where it expects to be in the future. Therefore, while management accounting is important in making future decisions, financial accounting is also relevant since it gives information about where the organization is coming from. Managers should, therefore, use financial accounting information to know the history of the organization and management accounting information to aid in making future decisions (Kimmel, Jerry, and Donald 1074).
Management accounting can simply be defined as the process in which organizational managers identify, analyze, interpret, and communicate information that is used in planning and evaluating, as well as ensuring proper utilization of a firm’s resources. A management accountant uses his or her knowledge in preparing the financial information and any other information that can be used by the organization managers to make policies and prepare plans. The accountant also prepares information that can be used to take control of organizational operations (Kimmel, Jerry, and Donald 1074). It is for this reason that management accountants are, at times, viewed as value creators since they are responsible for very sensitive and significant information compared to the rest of the accountants. Management accounting gets its information from various organs of the organization, such as marketing, pricing, valuation, information management, and logistics among others. The decisions made through the use of management accounting information influence the performance of the organization. The information is also helpful in evaluating the performance of managers since bad decisions lead to poor organizational performance, while good decisions lead to organizational success and indicate good performance by managers.
Conclusion
Accounting is very important for any organization since accounting information summarizes most information related to an organization’s performance. Accounting information can be used by stakeholders to make decisions. Accounting information helps users, who are mainly organization managers, understand where the organization is coming from, where it is at the moment, and where it will be in the future. Data from management accounting finds wide usage in the decision-making process. Financial accounting, on the other hand, is historical and can be used to evaluate the performance of an organization and that of managers. It is, therefore, important for organizations to emphasize the importance of accounting information since this information helps managers in decision-making. It can, therefore, be concluded that accounting is a pertinent tool for management performance evaluation.
References
Barnett, Ian. Management Accounting Performance Evaluation. Oxford: Elsevier, 2007. Print.
Bhattacharyya, Debarshi. Management Accounting. Delhi: Pearson, 2011. Print.
Drury, Colin. Management and Cost Accounting. London: Thomson Learning, 2007. Print.
Kimmel, Paul D, Jerry J. Weygandt, and Donald E. Kieso. Accounting: Tools for Business Decision Making. Chichester: John Wiley, 2008. Print.