Managerial Accounting


Managerial accounting refers to the internal use of accounting statements by managers in planning and directing the organization’s activities. Perhaps management’s greatest single concern is cash flow, the movement of money through an organization over a daily, weekly, monthly, or yearly basis. Obviously, for any business to succeed, it needs to generate enough cash to pay its bills as they fall due. However, it is not at all unusual for highly successful and rapidly growing companies to struggle to make payments to employees, suppliers, and lenders because of an adequate cash flow. One common reason for a so-called “cash crunch” or short fall is poor managerial planning.

Managerial accounting is the backbone of an organization’s budget, an internal financial plan that forecasts expenses and income over a set period of time. It is not unusual for an organization to prepare separate daily, weekly, monthly, and yearly budgets. Think of a budget as a financial map, showing how the company expects to move from Point A to Point B over a specific period of time. While most companies prepare master budgets for the entire firm, many also prepare budgets for smaller segments of the organization such as divisions, departments, product lines, or projects. “Top-down” master budgets begin at the top and filter down to the individual department level, while “bottom-up” budgets start at the departments or project level and are combined at the chief executive’s office. Generally, the larger and more rapidly growing an organization, the greater will be the likelihood that it will build its master budget from the ground up.

Regardless of focus, the major value of a budget lies in its breakdown of cash inflows and outflows. Expected operating expenses (cash outflows such as wages, materials costs, and taxes) and operating revenues (cash inflows in the form of payments from customers and stock sales) over a set period of time are carefully forecast and subsequently compared with actual results. Deviations between the two serve as a “trip wire” or “feedback loop” to launch more detailed financial analysis in an effort to pinpoint trouble spots and opportunities.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

Threat of Entry


New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Companies diversifying through acquisition into the industry from other markets often leverage their resources to cause a shake-up.

The seriousness of the threat of entry depends on the barriers present and on the reaction from existing competitors that the entrant can expect. If barriers to entry are high and a newcomer can expect sharp retaliation from the entrenched competitors, he or she obviously will not pose a serious threat of entering.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

All about Reactivity


Reactivity simply means changes that come about in the client/system or in the problem due to the act of measurement itself. Reactive measures are those of which the client/system is aware and to which the client/system reacts. When reactivity occurs, the observation or monitoring process leads to change in the problem without any other intervention taking place. Conversely, non-reactive measures are those which do not themselves bring about change in whatever it is you are measuring.

 

Reactivity in a sense really affects the accuracy of your information. If the problem changes simply because of the measurement, you obviously would have a difficult time evaluating the intervention process and separating out the effects of the recording from the effects of your intervention. Reactivity, in short, affects the accuracy of the information you are recording. In addition, if any changes do occur as a result of reactivity, they often are not mentioned over time, leading to even more difficulty in achieving success in the long run.

 

There are a number of types of reactivity as well as ways of overcoming or diminishing reactivity. Primary among these ways of overcoming reactivity is attempting to select a measure that is non-reactive or unobtrusive. Our primary guideline in selecting a measure is, when everything else is equal (which, of course, it rarely is), try to use the least obtrusive measure possible. That is, try to use non-reactive measures when you can, or if you are using more than one measure, try to include at least one non-reactive measure.

 

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight