Managerial accounting which is alternatively referred to as internal accounting primarily deals with the internal business-building role of collecting, measuring, classifying, and reporting useful information to internal users in activities like planning, controlling, and decision making (Hansen et al., 2006 p. 8). Put more contextually, managerial accounting supports decision-making processes through planning and controlling (Introduction to Managerial Accounting, n.d., para.4). Managerial accounting concerns prospects. It should be flexible and timely, and it should provide employees with both qualitative and quantitative information.
Managers depend on the information to make decisions. The decisions made by managers rely heavily on the accounting information at their disposal. The information obtained from financial accounting is not sufficient for informed decision-making. It must therefore be broken down into finer details. For instance, cost information must be disintegrated to enable them to conduct forecasts and what-if analyses.
This paper will evaluate the concept of managerial accounting about Timothy’s Fine Tobaccos, a company established in 2003 by Tim Soccer to carry on the business of providing a wide range of cigars and cigarettes and related accompaniments like humidors. The business has over the years grown fivefold. Tim, the proprietor, moved the business from his home to busier premises, a rented space in a historic building on a highly discernible street in Bay City (Biskup & Reisinger, n.d, p.8). This paper will commence by considering the company’s corporate environment and describing its corporate governance. It will highlight the issues and options the company has, as well as how managerial accounting can assist its management in tackling the issues and options. It will further analyze which managerial accounting tools might be of use to the company and how they may be used to manage employees.
Every business has to interact with its environment as the business environment has a direct relation with the enterprise (Shaikh, 2010, p.1). The corporate environment imposes various constraints on the business. It also has considerable influence on the direction and scope of its engagement. Further, whereas the internal environment of a corporation reveals its strengths and weaknesses, the external environment reflects its threats and opportunities.
As pertains to corporate governance, Timothy’s Fine Tobaccos belongs to a sole proprietor. He works full time together with his two employees. He makes executive decisions solely and based on nonfinancial and financial information. He and his employees are extremely knowledgeable about the products and the business industry. The business operates via a single shop located in a strategic area within an urban center. It adjoins dining establishments, clothing boutiques, and coffee shops. The business has undergone rapid growth. As for 2005, the business has experienced a 500% growth in sales. After having moved to the current place of business, the business has grown in sales by 200%, as a result, Tim is considering moving it to bigger premises.
As pertains to employees, he has employed two: a friend and his daughter.
The company has two serious competitors, The Stables and the Midland Tobacco Shoppe. They both offer the same products and services. The Stables’s points of weakness are that their selection of cigars is small, they are highly-priced, and the employees’ knowledge of cigars is limited. The Midland Tobacco Shoppe is similar to Tim’s business. The employees are knowledgeable, it has a small lounge and its customer base is large. Other competitors include Smoker’s Place, gas stations, and online cigar vendors. However, these are not considered to be serious competitors because of their positioning and weaknesses.
The main strength of Tim’s business is that it is a first-class operation. Unlike most of his competitors, it has a wide range of both cigars and cigarettes: 250 different types of cigars and pipes, as well as nearly 50 accessories like lighters, cutters, and humidors; it has enough space: two levels in a building, and big and classy lounge, it has a mailing system and knowledgeable employees.
From the foregoing analysis, the company’s main weakness pertains to the number of employees. The fact that the business has grown by 200% in a year implies that its customer base is increasing. It further implies that the two employees may not be sufficient to serve customers. Delay and queuing for services may cause the business to lose a substantial number of customers. There is not much similar business, and those that exist are not at par with his business. This creates an opening, an opportunity for expansion as the Big City Bay provides a viable market. Further, he can access markets in two other urban areas namely Siganaw and Midland (Biskup & Reisinger, n.d, p.11). The greatest threat is the competition from Midland Shoppe and online vendors. Online shopping provides an easy means of accessing goods in large volumes and discounts. Further, online shopping is becoming extremely popular. Therefore, Tim must improve his business by, for instance, developing an online ordering system.
Issues and options
Timothy’s Fine Tobaccos is a retailer in the cigar industry. Forecasts in the industry indicate increased popularity in cigar smoking (Biskup & Reisinger, n.d, p.14). As of 2007, there had been a 4.2% growth in cigar consumption from 2006 (Biskup & Reisinger, n.d, p.14). Research indicates that cigar smokers are less sensitive about price than purchasers of products in other industries (Biskup & Reisinger, n.d, p.14) because most believe that cigars are a luxury. Consequently, the cigars industry is less affected by economic fluctuations (Biskup & Reisinger, n.d, p.14). Despite economic hardship, cigar smokers continue to purchase cigars at almost the same prices (Biskup & Reisinger, n.d, p.14). The implication of this is that a retailer in the cigar industry can fairly make projections and make more stable decisions about the business prospects.
Timothy’s Fine Tobaccos experienced a 200% growth in sales in one year. This worries the proprietor as the figures indicate that the demand for his products and services may overwhelm his current business location. The demand may require him to move to a new and bigger location (Biskup & Reisinger, n.d, p.13). On this issue, he has two options at his disposal. He could rent another space or purchase the building where his business is currently operating (Biskup & Reisinger, n.d, p.13). He dislikes the uncertainty of renting space as the landlord could increase the rent anytime or evict if he wished so. He appears to be keenly evaluating the viability of purchasing the building which would cost him $165, 000 exclusive of renovation costs and insurance. The business would need to generate over $ 300,000 in sales to justify the move (Biskup & Reisinger, n.d, p.13). Other than purchasing the building, Tim is considering purchasing a small city park to cater for weddings and private parties (Biskup & Reisinger, n.d, p.13). This would make him the biggest cigar retailer in Michigan (Biskup & Reisinger, n.d, p.13). This implies that prestigious cigar companies will be interested in supplying their cigars to him and, secondly, that the shop will become a destination point. Considering it will be the second time he is moving in six months, it is debatable whether the risk of moving is worth it.
This is not the only issue posed by the increase in demand; Tim must also consider the issue of hiring other staff to assist in running the business. Other than the costs of renting a bigger place or buying the building and the park, he might need to invest in more employees and employee training to impart the necessary knowledge about the business in general, ethics, and other appropriate issues.
Significance of managerial accounting concepts
Much of managerial accounting entails gathering information about costs for planning and controlling decisions (Managerial Accounting Concepts and Principles, 2011, p.4). Planning entails setting goals and putting measures in place to achieve them. Big companies formulate long-term plans for up to five or ten years and eventually refine them with time (Managerial Accounting Concepts and Principles, 2011, p.4). Tim’s planning may benefit significantly from the concept of planning. Under this concept, he can set strategic and operational plans. Strategic plans will include those that relate to the future of his business if he wants the business in five or so years to come. He should develop a roadmap based on the available opportunities such as capital investments and new markets. After developing a strategic plan, he should develop medium and short-term plans which are operational (Managerial Accounting Concepts and Principles, 2011, p.4). As these plans consist of well-defined goals and objectives, they are more concrete. They are capable of translating the strategic plan into action (Managerial Accounting Concepts and Principles, 2011, p.4). Short-term plans consist of what is commonly known as a budget and commonly extend for one year. Setting out his plans will enable Tim to define whether the move is justifiable or not. The concept of planning would inform him that his most strategic move would be to re-evaluate his budget, analyze the market and consider whether he has garnered himself a sufficient customer base to guarantee continued growth in sales.
Control is another concept of managerial accounting, which might be of importance to Tim’s business. This entails monitoring planning decisions, business activities, and employees (Managerial Accounting Concepts and Principles, 2011, p.4). It consists of measuring and evaluating actions, outcomes, and processes (Managerial Accounting Concepts and Principles, 2011, p.4). This concept will allow the proprietor to revise his decisions promptly and institute corrective measures to correct undesired outcomes. In Tim’s business, a proper way of evaluating the option of acquiring more business space is to collect feedback from his customers. Feedback will assist in projecting the consistency of sales so that he is certain of generating the desired income from sales.
The basic concepts discussed above, therefore, consist of planning, controlling, and organizing. The flowing diagram explains the cycle of these concepts in any given enterprise.
Other than these, he must acknowledge that management accounting is an evolving process. Its evolution should match with the changing or growing nature of an enterprise. At this juncture, the focus for his business is to generate information to foster better decision making. The focus should shift from information provision to resource management when the business grows substantially. He should, therefore, keep the following graph in mind when evaluating his options.
Managerial accounting tools
Accounting information consists of both qualitative and quantitative data (International Federation of Accountants, 2009). Both types are crucial in decision making. These can be categorized into three; traditional accounting information (Monetary/Financial information), non-Monetary quantitative data and qualitative data (non-financial information). Under these three categories, there are components which provide information to managers. Financial information derives from balance sheets, income statements, operating expenses, gross margin, cost of goods manufactures and other financial statements (Sheikh, 2010). Non-monetary quantitative information derives from the number of customer complaints, sales returns, number of defects, budgeted hours, warranty claims among others (Sheikh, 2010). Qualitative information on the other hand, includes information on issues like service and product quality, employee satisfaction, customer satisfaction etc. (Sheikh, 2010).
Various decision making tools have been built to help managers in utilizing information, both qualitative and quantitative, in decision making. Enterprise Resource planning (ERP) systems are such systems. They capture both qualitative and quantitative data, organize it into information, transform the information into knowledge and ultimately communicate it to the relevant persons within an organization.
Since his business is growing rapidly, Tim may require such a tool to assist him in planning and decision making. Such a tool would organize the raw data he possess and convert it into knowledge. There exist software tools for monitoring work hours performance etc. For instance, Tim May implement a system for measuring the performance of employees. He may select the approach of establishing benchmarks against which their performance will be measured. For instance, how many cigars an employee sells. The items then become the benchmarks against which employees’ performance is measured. This is an easy system which Tim can implement to manage his employees.
Managerial accounting is a pivotal concept in decision making. It helps managers in making organizational, operational and strategic decisions. Timothy’s Fine Tobaccos is a company managed by one proprietor. It is a successful business which is experiencing rapid growth in sales. The growing demand leaves the proprietor in a dilemma on whether to acquire another business space. He has various options at his disposal. He may rent another space, buy the building he currently rents or buy a small park nearby. Managerial accounting concepts like planning, organizing and controlling can assist him in making informed decisions and in managing his employees. He can further implement a system based on the qualitative and quantitative information he has to improve the management of his business.
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Sheikh, S. (2010). Business Environment, 2/E. New Delhi, India: Pearson Education India.