The Impact of Management Accounting Techniques on Profitability

Management accounting techniques give business leaders the tools to measure and increase profit margins while lowering operating expenses. The scope of analytical techniques is large enough to fill college textbooks, and the Institute of Management Accountants offers certifications highly valued by the accounting industry. Through careful application of management accounting techniques, leaders are able to steer their organizations in the right direction and enhance profitability.

Breakeven Analysis

  1. A breakeven analysis allows members of management to gauge how much of a product or service they need to sell to recoup operating costs and turn a profit. This involves calculating variable costs, fixed costs and expected sales volumes. Although the calculation is straight-forward in nature, determining the variable and fixed costs takes careful analysis. Administrative costs, rent and insurance are among the expenses that factor into the equation. If a breakeven analysis is performed properly, businesses stand a better chance of generating a profit.

Expense Budgeting

  1. Expense budgeting is a key management accounting activity that helps leaders allocate cash and remain within spending thresholds. Budgets are typically made for calendar years and are adjusted given changes in sales volumes or operational activities. Expense budgets are created for entire organizations and individual departments, which makes it easier for line managers to reduce their spending. Without budgets, managers have the potential to overspend or misallocate resources and reduce bottom-line profit.

Inventory Management

  1. Too much inventory, inaccurate tracking systems and a lack of priorities have the potential to disrupt operations and reduce profit margins. Just-in-time inventory management and related calculations help managers keep holding and reordering costs to a minimal level. As a result, the business is able to maintain or increase profit margins. Other inventory management methods also help reduce costs and maintain effective turnaround times. Although service businesses do not carry finished goods inventory, they do have to allocate their personnel in an efficient manner to turn a profit.

Capital Budgeting

  1. It is important to know how much money to allocate to new projects or equipment and still turn a profit. Capital budgeting calculations take into account initial cash outlays, the time value of money and estimated useful lives to help management make decisions. Knowing the expected rate of inflation and return on investment is critical for capital budgeting and profitability assessments. Management staff must be able to make capital purchases and be confident they are acting in the best interests of their organization.