So in terms of serving the needs of managers, your financial statements may be a good start, but that’s all they are.
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Redmond, WA (PRWEB) April 10, 2017
Generally Accepted Accounting Principles (GAAP) is both extremely useful and relevant, and is the product of decades of thoughtful and careful analysis of the need to report to “others” that all businesses must address. The key, however, is that while “others” includes lenders, investors, even governmental agencies, the focus is on reporting to outsiders.
“So in terms of serving the needs of managers, your financial statements may be a good start, but that’s all they are,” said Gerry Michael, a Certified Management Accountant at Falco Sult and frequent author, speaker and seminar facilitator for various industry groups. “For accounting to be useful to managers, it also has to meet such needs as helping to make business decisions, helping to consider the effects of change on the company, to weigh the relative benefits of alternative courses of action, and to create sound and meaningful financial and cash flow plans that are based on a solid business plan.”
Michael lists the following four tips on how to create a true management accounting system:
No. 1: Focus attention on only the things that are likely to change in the business, not those that are fixed and historical. “I once had a client ask me, ‘What do you think of my depreciation expense as a percent of sales?’ The answer is, ‘Who cares?’” said Michael. Depreciation is locked in based on decisions made in the past, and accounting rules. If one can’t manage it, they shouldn’t spend time on it as a manager.
No. 2: Look at marginal differences, not total ones. “I once had a client tell me they were going to make a $3 million investment in a machine tool because they were convinced it would produce revenues of over $1 million a year for at least ten years,” noted Michael. “But of the revenues she was looking at, the client was already generating $800,000 using existing equipment. So the real benefit was only the increase of $200,000 -- still significant, but entirely different than she was looking at.”
No. 3: Be aware of unexpected effects, sometimes called “collateral damage.” When a firm Michael was working with added new technology that gave them access to new markets, they almost forgot to include costs such as employee retraining, marketing, new sales and customer service staff, possible bad debt losses, and other expenses that while not specific to the technology, were required to support the “push.”
No. 4: Identify the key assumptions for all the decisions one makes, then turn them into Key Performance Indicators. “If you want to achieve change, you need to measure it, and the measurements have to be meaningful,” concluded Michael.
About Gerry Michael, Falco Sult
Gerry Michael specializes in business valuations, strategic business planning, including exit planning; industry consulting on such issues as equipment investments, technology, and profit improvement; financial management in graphic arts firms and more. Falco Sult is a West Coast accounting firm serving clients nationwide. For more information, please call (425) 883-3111, or visit http://www.falcosult.com. The office is located at 16150 NE 85th Street, Suite 203, Redmond, WA 98052.
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