Importance of accounting information for managers. How to make better decisions?

When you think of accounting, the first things that pop up in your mind are those complicated documents with infinite numbers, reports, and balance sheets. And being a manager in any company means being able to correctly interpret such reports and make crucial decisions affecting every single person in your company. That is, without a doubt, a huge responsibility.

The first step to effective decision-making is understanding the concept of accounting information and its functions.

In this article, you will find out about the importance and types of accounting information, as well as its positive impacts in the decision-making process. Read on to learn how good decision-makers use this information for better management of the business.

What is Accounting Information?

Accounting information is any data that appears from business transactions. The information is collected and organized in useful forms and presented to decision-makers, i.e. the management.

Other users of accounting information include:

• Owners
• Investors
• Suppliers
• Government
• Customers
• General public

Everyone knows that decision making is a difficult task. Often indecisiveness can be as devastating as making an invalid decision. That’s why the managers are constantly challenged by the problem of making optimal decisions, especially when the resources are limited and scarce.

There are 3 main types of accounting information:

1. Statutory Accounting Information – the information provided in accordance with existing regulations.
2. Budgetary Accounting Information – for internal planning, assessment, and decision-making purposes, the information is provided in the form of a budget.
3. Additional Accounting Information – other relevant information used to raise the effectiveness of decision-making.

With the use of accounting information not only it is possible to regulate the present processes by evaluating the past data but also do future planning.

The forms of delivering accounting information:

• Annual Financial Statements
• Financial ratios (relative figures)
• Raw data presented from Accounting System (absolute figures)

It is essential that managers have access to accurate and relevant accounting information, properly organized to serve as a decision-making tool.

Why Do Managers Fail?

In general, there are 2 main reasons why accounting information is not applied accordingly:

1. Unqualified accountants fail to produce quality and reliable information.
2. The managers forgo the use of the information due to their inability to interpret data.

The objective of accounting is to generate information about the company’s activities and overall condition. Unfortunately, this information is terribly misused if at least one of the above-mentioned factors exist.

As a result, managers fail to implement accounting information as a decision-making tool and rely on factors that do not provide enough base for choosing the right course of action.

The Process of Decision-Making

Decision-making is the process of evaluating different alternatives and choosing the one best fit for the requirements, goals, values, etc. It is meant to decrease, but not necessarily eliminate uncertainty, as there is always a certain amount of risk involved.

Usually, the decision-making process includes the following 8 steps:

Step 1. Defining the problem

It is essential to accurately identify the issues, limiting conditions, organizational boundaries, and any stakeholder problems. Usually, it is advised to prepare a short-written material, where the manager clearly expresses the problem statement, which should be agreed by all decision makers.

This is an important step and should be properly completed before proceeding to further steps.

Step 2. Determining the requirements

Every acceptable solution must conform to previously determined conditions (requirements). These conditions must be expressed in quantitative form, in order to precisely decide whether the solution meets the stated requirements or not.

This may help the managers to avoid any debates throughout the decision-making process.

Step 3. Establishing goals

Goals express the wants and desires and hence, they go beyond the requirements. Managers need to state broader statements as well to have an overall idea of what they want to achieve.

Step 4. Identifying the alternatives

Considering various approaches helps to find the best solutions. Every alternative must be checked if it meets all the requirements. As a result, managers create a short list of alternatives for further consideration.

Step 5. Defining the criteria

Goals are a necessary element in defining decision criteria. How well the given alternative reaches the goals? This is what managers should ask themselves when they consider an alternative.

If there is a large number of criteria then you can group them in a set and assign criteria weights to single out the important ones.

A criterion should have the following characteristics:

• Compare the alternatives.
• Include all the previously stated goals.
• Be meaningful, operational and specific.

Step 6. Selecting a tool for decision-making

Generally, the simpler the tool, the better. But sometimes it may not be the case with complex decision problems. The choice of the method primarily depends on the complexity of the problem and the decision maker’s objectives.

Step 7. Evaluating alternatives

After having selected the decision-making tool, managers need to use the assessment of the alternatives against the criteria as input data.

The evaluation may be objective, based on a measuring unit (for example money) or subjective, which is based on a judgment.

When the assessment is done, the determined decision-making tool will be applied to list the most successful alternatives.

Step 8. Evaluating solutions

When the decision method is applied, the managers should always check if the selected alternatives conform to the requirements and goals of the problem. Often, in complex problems the alternatives indicate that the decision model needs to include additional goals and requirements.

Accounting Tools for Decision-Making

The main goal of most businesses is to increase profitability. Meaning that good accounting information is absolutely valuable for achieving that goal.

Managers can apply accounting information to evaluate the financial state of the company. Ratio analysis is one of the frequently used tools for business performance analysis.

Ratio analysis is used to identify the strengths and weaknesses of the company and evaluate various issues, such as the efficiency of operations, liquidity, and profitability. They are simple and easily applicable tools for evaluating the quality of the business.

There are four types of ratios:

1. Liquidity ratios – show if the firm is able to meet its current obligations.
2. Activity ratios – show how the firm’s assets create revenue and output.
3. Leverage ratios – indicate if the company finances itself more with debt or equity.
4. Profitability ratios – evaluate the company’s ability to generate earnings.

The type of accounting information depends on the type of decision and business activity.

Effects of Accounting Information on Decision-Making

There are a number of positive impacts of accounting information on management decision-making. Here is the full list:

1. Firstly, it may help managers to allocate the scarce resources and use them more effectively. In a fast-moving business environment, when everything is of the essence, better resource management could be a great advantage for the business.
2. Accounting information allows managers to improve the overall performance of the company by making informed financial decisions.
3. Managers should also be able to interpret financial statements, as they give a clear understanding of the business’s position.
4. Also, with the implementation of accounting information, it is possible to do the rational and systematic decision making.
5. Forecasting and strategic decisions become more straightforward with relevant information.
6. The managers can have an essential idea about the business’s profitability and hence change the strategic actions accordingly.
7. Important decisions regarding the productivity, effectiveness, and growth of the organization are made with the help of accounting information.

Bottom Line

The main goal of accounting is preparing useful and relevant information for managers to use in decision making. It also provides information on the company’s financial state and overall performance.

The types of accounting information depend on factors like the company size and legal structure (whether it is publicly owned or private), and the types of decisions to be made by the managers.

A study based on statistical analysis has shown that the improper implementation of accounting information by managers hinders the effectiveness of business operations, as wrong decisions are made. Therefore, in order to make informed and effective decisions, managers need to have access to proper accounting information.

Quality accounting information should meet all the requirements determined by the managers and contain valuable information facilitating the decision-making process.

Time factor also plays an important role here, as the managers should accurately define the time interval of reporting (fiscal year, quarterly, monthly). In this way, accountants will clearly know the expectations of the management and will provide the necessary reports in a timely manner.

It is equally essential that the company employs professional accountants and experienced managers that will establish effective information flow between the top and lower levels of management and accounting department. Also, every decision-maker, in this case, the manager must have a clear understanding of accounting concepts and terms to make accurate decisions.

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