What is managerial finance

Posted: 02/09/2007--25/11/2008 || Rate this Article: 3 || Views|| Sign In || Register ||Hello Guest

Managerial finance covers two areas: corporate finance and management accounting. Corporate finance is probably what you think of first when you talk about it. This area deals with cash flow in and out of the company, debt, inventories and so on. This is summed up as working capital management and capital investment decisions, such as buying machinery, facilities and other necessities.

To keep up to date with all this, companies typically use computerized systems. Managers can then use powerful analytical tools to sift through and organize data into neat reports. This data then forms the basis for forecasts, sales projections as well as quick decisions in response to unexpected events. As you will see, there is a great deal of overlap with the second part of managerial finance.

Management accounting is focused on providing management with the kind of numbers it needs to make good decisions for the company. This is different from the kind of accounting that is done externally, i.e. what is provided to investors, tax authorities and the like in terms of scope, accuracy, speed and compliance.

When a manager must make an important decision, he or she needs current and relevant information with short notice. For example, if the defect rate in a product has gone up something needs to be done quickly. But should they buy solution A, which is cheap and takes 14 days to implement, or solution B, that is expensive but only takes 3 days to implement? That's where the manager wants to know how the cost differences balance out. There are plenty more factors at play of course, but this simple example shows how speed is crucial to managerial accounting.

What about accuracy? In many cases, it's enough to get it mostly right. When you need a snap decision getting the report ready in 30 minutes, while being a few dollars off, is more important than waiting two days to have it be perfect. In other words, the potential loss from minor miscalculations and estimates is irrelevant as the cost of waiting would be far more costly.

In light of the infamous accounting scandals over the past few years this kind of intentional sloppiness may seem inappropriate, but keep in mind all this is for strictly internal use. Generally Accepted Accounting Principles (GAAP) and other regulations do not apply, just like regular rules of the road do not apply at a NASCAR racing track.

In fact, it is in the company's best interest to not leak any of the internal information as this may provide competitors with valuable information. For example, if a competitor knows that your break-even point for a product is X dollars, they can use that information in pricing their competing product to steal market share or inflict economic damage.

Since there is so much overlap and between disciplines it is hard to nail down a specific educational background for those working in managerial finance, but most tend to have at least Bachelor's degrees in accounting, finance or other business-related field. In large companies, you're likely to see MBAs with managerial finance as the specific discipline.