Management Accounting for Entrepreneurs

Over the last two decades as result of IT development entrepreneurs must construct more creative business models comparing that before. Nowadays, personal drive, positive energy, vision ad being able to lead and inspire other are not enough for business success. There are a number of entrepreneurs that will succeed just by being lucky and also a number that will succeed by trial and error. Several researchers argue that entrepreneurs lack very important business skills, such as financial skills. They also somehow isolate themselves from people with skills and especially from their employees from the fear of disloyalty. In my opinion this is a enough argument for the need that entrepreneurs need to have a business education. 

Many entrepreneurs struggle with basic financial reporting and analysis. On the other hand, understanding and using financial information is fundamental for the business to survive and eventually grow. By grasping the fundamentals of accounting and financial reporting their effectiveness off managing operations and especially making informed decisions improves substantially.

Eventually, level that every entrepreneur aspires is the growth, not just surviving. The corresponding level of financial information is using it to plan, devise strategy, and make an informed decision, typically known as ‘scenario’ planning. Inevitably there will be several situations that the business can embark on, each of them with its own potential but also its risk. Which is the best one will be decided by the person making decision. However, decision making is helped by some sort of a model which will aid entrepreneur in evaluating each scenario and therefore make a better-informed decision.

Planning the future strategy is very much linked with understanding the relationship of costs and revenues; where and how funds are coming from and on what and how much they will be spent? How revenues will be affected with each spending decision? At this stage thinking and calculating the profit in the end is not enough. Ability to understand relationship between, for example, price manipulation and quantity sold, financing options to reduce risk, and combining those, and others, to improve return on the invested funds. Solid understanding of costs and its impact on sales and profits. In other words, managing a business is not just looking at figures at the end, Balance Sheet and Profit & Loss Account. Prior to that is the decision-making stage about how to optimise firm’s resources in order to bring best outcome. Traditional financial statements look backwards. Entrepreneurs need a set of techniques that will enable them to plan what is going to happen to the business, or an estimated set of financial statements.

Let us turn our attention to the role of management accounting. As a starting point is to acknowledge the role of accounting in helping to make better-informed decisions. Both accounting branches, financial and management, are concerned with collection and analysis of all financial information, and then communicating it to other parties according to their requirements. In order that information is to be useful for decision making/maker accountant must be well informed about for whom and for what purpose is to be used. Management accounting information is typically provided for use by managers, or those making decision in the case of smaller firm. Planning for and day-to-day management of the business involves a wide range of decision-making, such as;

• Develop new product or service (as is the case of e-commerce where new products are launched frequently)
• Increase or decrease the price or quantity of existing product or services (social media advertising and other social media services)
• Borrow money to finance new or existing project
• Increase or decrease operating capacity as in the case of farms or logistic activities.
• Change the method of production (switch between in-house production or outsourcing or domestic or overseas)

Examples above give only a taste of how broad management accounting information can be, so that it can be useful in identifying and assessing outcomes of decision such as those mentioned above. The quality of such information would be determined by the extent to which the decision maker’s need have been met. In general terms management accounting information is expected to possess certain qualities, pass the threshold of;

• Relevance
• Reliability
• Comparability
• Understandability
• Materiality

In broad terms an entrepreneur should see for the information that would satisfy the first four criteria and assess if its Material enough to help her/him make a better-informed decision. For illustration, let us think of a small hostel owner wanting to establish the price per night. An idea is to find out how much other competitors are charging for similar product; what is known as target pricing; as the starting point of the target costing approach to cost management, a target selling price needs to be identified. Using market research, and so on, a target unit selling price and a planned sales volume are set. This is the combination of price and quantity demanded that the business would derive from its estimation of the product’s demand function. Thus, the target price is the market-determined price that the business seeks to meet, in terms of costs and profit margin. Only obtaining this information will probably cost money. Therefore, immediately a decision must be made on a cost-benefit analysis in having such information. Next would be which hostels are to be targeted to find out about the price. The list of duties will go on, but all will come at a price. The provision of management accounting information can be costly, and very often these costs are difficult to quantify. Staff are not such a problem to put a price on, other less obvious costs, such as time spent on analysing and interpreting information should also be taken into consideration. 

Only a small part of management accounting is mentioned here. It comes with no surprise that the role of the management accountant within the business has changed. With IT development those working in the field have witnessed a relieve from much of the routine work and has provided them with he opportunity to take a more proactive role within the business. This has led to the possibility that management accountant be used as part of the team, and a chance for the entrepreneur to use them in planning and decision making. At the same time this raised a new requirement for management accountant’s skills in order to contribute successfully. In particular, certain ‘soft’ skills, such as interpersonal skills for working as part of a team as well an ability to effectively communicate financial information to users with no financial background.