Managerial accounting, sometimes called cost accounting, is the study and analysis of financial data as it applies to operational issues within a company. Accountants are not always managers, but good managers should be aware of how the accounting in their company is being handled. Managerial accounting formulas help managers assess the financial health of different areas in their business. This information will help managers make informed business decisions.
Instructions
1. Find a qualified finance person. Managers cannot do everything, and it is important to have a qualified person to compile data for you. Although you can do your own calculations, those formulas and results are useless if the beginning data is incomplete or inaccurate.
2. Ask for regular financial summaries. If you are a small-business owner, you may need to create these yourself, but it is important to review them on a set basis. Even small businesses should review their financial status on a weekly basis. Review expenses, revenue and any outstanding client payments. At the end of each fiscal month, ask for traditional financial statements such as a balance sheet, income statement and statement of cash flows as well as unbilled receivables and outstanding receivables. Larger companies may have more reports that show profit and loss, backlog of work and revenue and expenses by project or job.
3. Research your industry. Study the financial statements and calculations of publicly traded companies in your industry. Look at what formulas they are using. Success in business is often judged in comparison to other companies in the same industry.
4. Decide which formulas will help you the most. There are dozens of accounting formulas. You do not need to use all of them, and what works in one type of business may not work for another type of business.
5. Calculate return on equity (ROE). No matter what other formulas you use, ROE is considered the most accurate measure of a company's bottom line. ROE = net income / average stockholders or owner's equity. Average equity can be calculated as (beginning equity + ending equity) divided by 2. High ROE signifies that a company is increasing in value. The only way to know if your ROE is high is to compare it to other businesses in your industry. ROE percentage will vary greatly between different industries.
6. Calculate accounts receivable turnover, which is sometimes called days sales outstanding or DSO. No matter how many sales you make, if clients are not paying, your business will not thrive. This calculation is a two-step process. Average sales per day = total sales divided by 365. Then take the average collection period = accounts receivable divided by average sales per day. Again, compare your numbers with other companies in your industry. An airplane manufacturer is going to have a much higher DSO than a pencil maker.
7. Do a SWOT analysis based on your formulas. SWOT = Strengths, Weaknesses, Opportunities and Threats. Look at where your company is doing well and where it needs to improve. Make short-term and long-term action plans to fix the problems and maintain the systems that work.
