A recent business-game experiment conducted by a business school in America tested the theory that poor business decisions are often repeated because it is easier, or feels safer, to repeat what may have contributed to a positive result in the past rather than risk a decision change.
The results of the experiment showed that relying on emotional responses without looking at the bigger picture can cause irrational decisions, which could end up having disastrous consequences to a business.
However, the use of a good internal reporting structure supplied by a management accountant should help managers to be analytical in their decision-making, control and planning.
The management accountant will explain the financial consequences of any decision the managers of the business have to take and will also advise on the integrity behind the decision.
Before any new project is undertaken, managers should ask for a internal audit of the relevant factors and the competitive landscape, as well as an analysis of the financial implications and any risk attached to going ahead.
Unlike financial accounting, which typically produces reports for external stakeholders, management accounting is more concerned with strategy and decisions that will affect the business’s owners and shareholders.
But management accounting should not be seen as something that only large businesses need to do. Any business, no matter how big or small should prepare some form of management accounting information, as it can give the owners of the business a “snap shot” of how it is performing throughout the year.
Management accounts allow the owner to compare actual performance with the expected performance, helping him or her to make improvements and plan for the future.