This document discusses how management accounting can increase business profits. It explains key management accounting concepts like cost analysis, cash flow projections, budgets, and financial ratio analysis. These tools help businesses understand costs, cash flows, and financial performance over time. Ratio analysis in particular can serve as an early warning system by identifying potential problems. Understanding a business's finances through management accounting allows owners to better manage costs, anticipate issues, and improve overall profits.

1. Increase Your Profits With
Management Accounting
Dennis L. Thompson, CPA, CFE
206-390-9432
www.dlthompsoncpa.com

2. What is Financial Accounting
• Production of Financial Statements
– Income Statement
– Balance Sheet
• Bookkeeping
• Used for Tax Returns
• Designed for External Audience
– Bankers
– Tax Collectors
– Creditors and Investors
• Backword Looking

3. What Is Management Accounting
• Analysis of Costs - Breakeven
• Projection of Cash Flows
• Budgets
• Ratio Analysis
• Designed for Internal Audience
• Forward Looking
• The Information comes from your
Accounting System and Reports

4. How Can Management
Accounting Increase Profits?
• What Products/Services Most Profitable?
• Who are Best Customers?
• Are You Generating Cash on Operations?
• Are You Having Cash Flow Problems?
• Are Your Margins Shrinking?

5. Financial Statements-Compass
For Your Business
•Ultimate Goal of Accounting System
•Best Friend or Worst Enemy
•Tells You Where Your Company
– Has Been
– Where It Is Now
– Where It Is Going

6. Financial Statements-Compass
For Your Business
• Think of Your Business as a Small Plane
• Think of Your Accounting System as an
Instrument Panel
• Two Potential Problems
– Your Accounting Info is Wrong
– You Don’t Use Your Accounting Info

7. Categories of Financial
Statements
• Income Statement
– Where You Have Been
• Balance Sheet
– Where You Are Now
• Cash Flow Projection & Budgets
– Where You Are Going

8. Profit & Loss
• Measures Business Activity Over a Period
of Time
• Income & Expense Accounts Are
Temporary & Closed to Retained Earnings
• Expenses Can Be Classified As Variable or
Fixed
• Most Useful If Compared to Different
Periods

9. Profit & Loss – One Year
Variable Expenses
Gross Margin

10. Analysis of Costs - Breakeven
• Sales Price Per Unit or Service
– How much Gross Income per product or
service.
• Variable Cost Per Unit or Service
– What are the Directs Costs associated
with the product or service
• Fixed Costs (Overhead)
– Costs that need to be paid whether you
make a Sale or not, e.g. Rent, Insurance

11. Breakeven - Example
• Sales Price Per Unit $10
• Variable Cost Per Unit 7
• Contribution Margin Per Unit $3
• Fixed Costs $15,000
• Contribution Margin Ratio
– $3/$10 = 30%
• Sales to Breakeven = Fixed Cost/CM Ratio
• $15,000/30% = $50,000
• $50,000 - $35,000-$15,000 = $0

12. Breakeven Graph

13. Breakeven Schedule

14. Never Run Out of Cash

15. Never Run Out of Cash-
Philip Campbell

16. Sample Cash Flow Projection P1

17. Sample Cash Flow Projection P2

18. Statement of Cash Flows
Increase
Increase
Increase
Decrease
Decrease

19. Management Accounting
Reports
• Sales By Customers
• A/R – Aging Analysis
• Purchases By Vendor
• A/P – Aging Analysis
• Profit & Loss – Comparison
• Balance Sheet - Comparison

20. Sales By Customer Summary

21. Accounts Rec – Aging Analysis

22. Purchase By Vendor Summary

23. Accounts Pay – Aging Analysis

24. Profit & Loss - Comparison

25. Balance Sheet - Comparison

26. Balance Sheet - Comparison

27. Budgets
• Why Budget?
– Forces you to think strategically about
your business and goals
– Can help you anticipate problems
– Can help detect Fraud
– Sets Expectations for Employees

29. What is Ratio Analysis
• Comparing different line items of the
Balance Sheet and Income Statement to
each other.
• For example, Current Ratio = Current
Assets/Current Liablilities

30. Ratio Analysis – Why Care
• Banks use Ratio Analysis in deciding to
extend Credit
• Ratio Analysis can serve as an Early
Warning System for your company
• It is useful to compare your Ratios to
Industry Standards

31. Ratio Analysis - Categories
• Profitability – e.g. Return on Equity
• Activity – e.g. A/R Turnover
• Leverage – e.g. Debt to Equity
• Liquidity – e.g. Current Ratio

33. Nine Ratios that Measure Effect Current Assets/Current Liabilities
Current Liabilities/Net Worth
Total Liabilities/Net Worth
Inventory/Working Capital
Accounts Receivable/Working Capital
Long Term Liabilities/Working Capital
Net Profit/Net Worth
Net Sales/Fixed Assets
Net Sales/Working Capital
Six Causal Ratios Fixed Assets/Net Worth
Days Sales in Accounts Receivable
Accounts Receivable/(Credit Sales/360)
Net Sales/Inventory
Net Sales/Net Worth
Net Profit/Net Sales
Misc Assets/Net Worth
The Meaningful Interpretation of Financial Statements – Donald E. Miller

34. Fixed Assets/Net Worth
• Measures extent that Net Worth consists of
long term, non current assets.
• Can have negative impact on Working
Capital and Current Ratio.
• Might be increasing Fixed Costs through
borrowing.
• Might be distorted by low Net Worth

35. Accounts Receivable/(Credit
Sales/360)- Collection Period
• Measures efficiency of Company receivable
collections.
• Early warning system for delinquent
accounts.
• Important to measure against Industry
competitors.
• Need to subtract cash sales to arrive at net
Credit Sales.
• Low number can be indicative of restrictive
Credit Policy, thus reducing profit.

36. Net Sales/Inventory=Number of
Times
• Measures how quickly Inventory is turning
over.
• Low turnover indicates potential writeoffs.
• Also could indicate potential shrinkage.
• Could adversely impact Cash Flow.
• However, with Inventory management,
need to seek a balance of too much and
not enough.

37. Net Sales/Net Worth
• Measures extent Company’s sales are
supported by invested capital.
• High ratio can mean that Company is
supporting sales through debt, i.e., Fixed
Costs.
• Can negatively impact Break-Even point.
• Can increase chances of Company failure
because of Fixed Costs.
• Over emphasis on sales can lead to selling
to marginal customers.

38. Net Profit/Net Sales
• Impacts all the other ratios.
• Profits add to Net Worth
• Losses increase the need for Long Term
Borrowing, which can impact Working
Capital.
• Losses threaten Company’s ability to
survive.

39. Misc Assets/Net Worth
• Examples : Loans to Employees
• Prepaid Expenses
• Usually not a significant part of Balance
Sheet.
• Don’t want to tie up much Captal in these
type of assets.

40. Current Assets/Current Liabilities
• Standard used to be 2:1
• Working Capital = Current Assets-Current
Liabilities.
• Problem with Current Assets
– Includes Inventory
– Includes Receivables

41. • Understanding Cost Structure and
Breakeven Analysis can help you manage
your business better.
• Cash Flow Projections can help you avoid
running out of cash and having to shut
down your business
• Budgeting forces you to plan and anticipate
problems
Summary

42. Summary
• Financial Ratio Analysis can serve as an
early warning system.
• Ratio Analysis assumes that Accounting
information is accurate.
• Improve your Company’s chances for
improved Profitability or even Survival by
conducting Ratio Analysis.
• Especially important to compare your
Company to Industry Standard Ratios.