Managerial accounting is an important concept in running an organization; the concept assists managers to make appropriate decisions for their companies. The concept involves two things: studying a company’s revenues to establish the most effective ways to increase them, and critically investigating its expenses to find how to minimize them and increase its overall profitability. This paper uses Timothy’s Fine Tobaccos Company to outline how the concept of managerial accounting assists managers to make internal decisions within their companies.
Overview of Timothy’s Fine Tobaccos and its Corporate Governance
Timothy’s Fine Tobaccos is a small refined shop that is run by one individual, Tim Socier, who is also the owner. The shop is in a strategic position in the CBD of Bay City in Michigan. The small company deals mainly in cigars with its most popular brand being “The Good life.” Tim Socier depends on re-investing the profits he makes into the business to enable it grow. This strategy has been working for him as the shop has expanded two times in a very short duration. Tim now thinks of buying the building in which his business is located to avoid cases of anomalous rent increases (Biskup & Reisinger, 2008, p. 8).
The corporate environment of Timothy’s Fine Tobaccos consists of Tim, the manager and the owner, his daughter and friend as the only employees. However, Tim is the sole decision maker, meaning he is the party that decides what is done in the shop. For instance, he decides when the business needs to be relocated or expanded and when to re-invest the profits. The main stakeholders of Tim’s business are his customers. He gives the customers discounts on several occasions to attract and retain them (Biskup & Reisinger, 2008, p. 8).
Issues and Options that Timothy’s Fine Tobaccos Faces
There are a number of issues that Timothy’s Fine Tobaccos is facing at the moment. The first issue involves the competition the business encounters from the other companies that deal in the same line of products. Some of Timothy’s competitors include: The Stables, The Smoker’s Palace, The Midland Tobacco Shoppe, and online cigar vendors. Although he has been able to overcome competition from the three companies by applying tactics such as price reduction, the online cigar vendors remain the biggest threat to Timothy’s Fine Tobaccos. The online cigar vendors offer their products at very low prices thereby attracting more customers than Timothy’s (Biskup & Reisinger, 2008, p. 9).
The other issues that Tim faces in his business are an unsupportive economy of Bay City and the restrictions imposed on cigar smoking by the health department officials. Despite the numerous interventions by the government, Bay City still has an unemployment rate more than 7%, which is quite high. In addition, the health officials keep on warning people against smoking cigars as it is harmful to their health. The two factors have negatively impacted on the business of cigars in the city (Biskup & Reisinger, 2008, p. 11).
Lastly, Tim has options of expanding his business to accommodate more customers and to enable him increase his sales. However, there are challenges that hinder him from executing the plan. For instance, if Tim wants to buy a bigger space for the business, he will have to look for more money to implement the plan. A bigger business will require more associates, which means that he will have to spend more money on hiring, training and retaining the new associates (Biskup & Reisinger, 2008, p. 12).
Using Managerial Accounting Concepts to Address the Issues at Timothy’s Fine Tobaccos
Tim can apply managerial concepts to address the issues he faces and implement the options that he has. The first issue, which involves the competition he faces from the companies that deal in similar products, will require financial intervention. Tim might have to consider lowering his prices further to ensure that he remains the best seller of cigars in that region. In fact, for him to continue attracting more customers, he will have to ensure that his prices are the lowest in the downtown CBD of Bay City. However, he should be careful not to set the prices too low as that can interfere with the profits (Garrison, Noreen, & Brewer, 2012).
The second managerial accounting intervention involves the use of more funds to advertise the business in the city. Since the city has numerous economic problems, Tim may employ marketers to help him advertise his business and the products he sells to other parts of the city (Garrison, Noreen, & Brewer, 2012). Tim can only apply the managerial concepts to address the economic problems but not the health issues, as the latter is a requirement of the law.
Lastly, Tim should seek the intervention of a qualified accountant to assist him in making a decision of whether to move to a bigger building. In that case he should evaluate the expenses involved in the extension and the resources available to execute the plan. If Tim is not in a position to raise the capital required for the plan to extend the business, he should halt it temporarily and continue with the business as it is to enable him collect more funds from capitals (Garrison, Noreen, & Brewer, 2012).
Important Managerial Accounting Tools in Management
There are three most important managerial accounting tools that can be used to successfully manage a business organization. The first tool is an analysis of organization’s financial statements. The financial statements that are supposed to be included in the analysis include: the balance sheet, the profit and loss account, and the cash flow statement. The analysis helps the managers to determine profitability, stability, solvency, and liquidity of an organization (Debarshi, 2011).
The second one is decision accounting tool, which assists to evaluate the issues and options that a business has. It helps to make major decisions that are likely to improve a company’s ability as well as its profitability (Debarshi, 2011). It is this tool that managers rely on when they want to choose an option over another and make decisions regarding the kind of activities to incorporate in an organization. The tool is also used in calculating the best price for which particular products are supposed to be set (Garrison, Noreen, & Brewer, 2012).
The last one is budgetary control tool, which is used by accounting managers to control the flow of funds in a company. The tool ensures that budgets are made with these two main factors in mind: the company’s historical information and its future expectations. This is done to ensure that the company only engages in activities that it can support exclusively by using it resources (Garrison, Noreen, & Brewer, 2012).
How Timothy’s Fine Tobaccos can Use the Accounting Tools to Manage Its Employees
Tim should apply the managerial accounting tools to manage its employees especially after the expansion of Timothy’s Fine Tobaccos, which will require him to hire more of them. The managerial accounting tools can assist Tim to evaluate expense limits that he is supposed to set when planning for transactions and other important activities (Debarshi, 2011). Tim can also use the tools to determine the processes that he should retain, expand or do away with in the shop. The two aspects determine the number of employees the business requires and ways of rewarding them (Garrison, Noreen, & Brewer, 2012).
The most appropriate tools that Tim can use to effectively manage his employees are financial statements’ analysis and budgetary control. The financial statements’ analysis tool will assist in analyzing financial ratios in the shop so as to choose which activities require to be expanded or terminated (Debarshi, 2011). The activities to be expanded are those that are efficient, which could require more employees. On the other hand, the budgetary control tool will assist Tim to set limits for expenses, which will include wages and salaries for his employees (Garrison, Noreen, & Brewer, 2012).
Since Timothy’s Fine Tobaccos is a small company, implementing the managerial accounting tools will not be a complicated process. Tim will be required to employ a qualified accounting manager to help him incorporate the tools into the management system of the business. The shop’s financial statements should also be analyzed regularly to help Tim to ascertain the financial position of his business when necessary (Garrison, Noreen, & Brewer, 2012).
Managerial accounting is an important concept given that it assists managers to make the best decisions needed to run business organizations effectively. Timothy’s Fine Tobaccos is one of such companies that rely on the managerial accounting concept to carry out its businesses. The most important managerial accounting tools include: the analysis of financial statements, budgetary control, and decision accounting.
Biskup, M., & Reisinger, C. (2008). The society for case research: The good life. Business Case Journal, 15(1), 8-16.
Debarshi, B. (2011). Management accounting. Delhi: Pearson.
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2012). Managerial accounting (14th ed.). New York, NY: MCGraw-Hill.