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What is the Management Cycle? (11m:01s)

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Slide 1 (:11s) Welcome to Introduction to Accounting Preparing for a User’s Perspective
What is the management cycle and how does accounting facilitate it?

Slide 2 (:33s) What is the management cycle?
The management cycle is the process by which the leaders of an organization help workers throughout the organization ensure that it achieves its objectives. When management effectively uses the management cycle, the organization’s workers become enabled. They take a more proactive role in solving the organization’s challenges by identifying problems, making suggestions, giving input, discussing and implementing solutions.

Slide 3 (:37s) The management cycle is not perfectly sequential in that many of the steps of the management cycle tend to occur at the same time. However, the general flow of the management cycle is made up of the following essential components which tend to have a general flow to them:

Plan
Direct
Control
Improve
Decide

And back to Plan again.

In this topic we will discuss the components of the management cycle and discuss how accounting helps to facilitate it.

Slide 4 (:15s) Plan
The planning phase of the management cycle is the phase in which management determines what the organization's key objectives are and then develops plans or strategies on how to achieve them.

Slides 5-6 (1m:2s) Management is responsible for leading an organization toward the successful completion of its objectives. Often an organization’s objectives are passed down to company management by the company's owners, or the board of directors, such as “We want to increase shareholder value by $1 billion”, at other times the owners allow management more flexibility in determining the organization’s objectives. In either situation, the owners usually expect company management to develop the specific objectives and related plans to achieve them. Therefore the "plan" phase of the management cycle includes both the development of objectives and the creation of the related plans. Simply put, when company management develops objectives and appropriate plans to achieve them, they tend to be more focused and successful in achieving such objectives.

As a takeaway on the "plan" phase, remember that “A goal without a plan is just a wish” Antoine de Saint-Exupéry.

Slide 7 (:24s) Direct
The process of directing is an essential component of the business management process. Directing is the day-to-day process by which management ensures the effective and efficient operations of the business. The best managers keep the organization’s overall objectives and plans in mind to ensure the operations support achievement of the company’s objectives.

Slide 8 (:26s) For example, if one of FedEx’s objectives is to deliver all overnight shipments within one day, the manager of its supply-chain-logistics department would need to put appropriate processes and systems in place and operate them effectively (meaning it achieves its objectives) and efficiently (meaning it does so using the appropriate amount of resources).

Slide 9 (:23s) Or, if one of the company’s objectives is to collect all sales on account within 30 days, the credit manager would need to have processes in place to ensure credit is granted to credit-worthy customers, and the accounts receivable manager would need to have processes in place to follow-up in a timely manner on unpaid amounts.

Slide 10 (:31s) Control
The control process is closely tied to the direct process. Management uses control processes to discover areas of the company that are not performing according to its plans and related objectives. If you would like to see how this plan went wrong, click on this link here

Slide 11 (:21s) Controlling is like taking a company’s temperature to see how healthy it is as compared to its plans. If the company’s actual temperature is significantly higher or lower than what its plans say it should be, management jumps into action to determine the cause of the difference and decides what, if anything, should be done about it.

Slide 12 (:27s) This process of controlling the company by comparing the company’s actual results to its planned (i.e. budgeted) results is called “management by exception”.

When managers control using a "management by exception" system they tend to focus much of their managerial attention on determining why certain actual results fall outside of a narrow band around the budgeted results.

Slide 13 (:28s) In other words, management will generally act upon significant variances from plan and ignore insignificant variances from plan. However, what is considered significant by one management team may not be considered significant by another. In companies striving for zero defects, even the smallest of variances will likely be acted upon.

Slide 14 (:19s) Variance analysis can also help you manage your own finances. We were able to discover that our home’s hot water line had a leak when both our water bill and our heating bill were significantly higher than we budgeted, thus helping us avoid bigger bills the following month.

Slide 15 (:47s) For example, a clothes retailer may have a budget that would result in a 25% gross margin on all of its product sales. If the retailer’s actual gross margins turn out to be 25% (or pretty close to it), management may conclude it is on track; however, if the company’s actual gross margin % (i.e. (net sales revenues less cost of goods sold)/net sales revenues) turn out to be significantly greater than, or significantly less than planned, management will likely investigate to discover the causes and develop plans for eliminating them, replicating them, or ignoring them, as appropriate.

Slide 16 (:36s) One of my friends, who previously worked as a manager at a fast food hamburger restaurant, noticed that his actual gross margin percentages were significantly lower than his budgeted gross margin percentages resulting in an "exception". This "exception" caused the manager to jump into action to discover the cause of the exception and to develop an appropriate plan to fix it. His investigation of the numbers and interviews with employees helped him discover that some of his employees were regularly giving away free food to their friends, and they had a lot of friends.

Slide 17 (:12s) Management by exception can be an effective control process used by many businesses to help the company stay on plan toward achieving its objectives.

Slides 18-19 (:25s) Improve
The improve process helps the company make continuous improvements throughout the organization in relation to its production processes, services rendered and its employee's abilities.

In any company, the company's products, services, processes and the people involved in such processes have the potential to be improved.

Slide 20-21 (:42s) For example, Motorola created Six Sigma, which is a set of tools and strategies specifically designed to improve processes. Since the development of Six Sigma in 1986, many companies have used it to improve their companies. The goal of Six Sigma is to systematically discover and eliminate the cause of production and process defects, thus nearing “zero defects”.

Another example is General Electric which has been very successful at using Six Sigma to develop and deliver “near-perfect products and services”.

Slide 22 (:24s) Six Sigma has become so wide spread that some consulting firms are filled with people, known as Six Sigma Black Belts, that are very successful at helping company’s improve processes and eliminate defects. Six Sigma is just one tool that companies use to help them constantly improve their products, services, processes and people.

Slides 23-24 (:56s) Decide
All of the components of the business management process would be useless if management didn’t make any decisions when valid alternative courses of action presented themselves. The "decide" phase is the point at which management reviews the results along with the various alternative courses of action that employees and management have developed and chooses the best future course of action based on those presented. The data provided by the accounting information system is an essential source of useful information when deciding between valid alternative courses of action.

A manager's ability to choose the best alternative course of action is one of the most important skills for which management is paid because management is usually compensated based on the quality of the decisions they make and on the results that their decisions help the company achieve.

Slides 25-26 (:38s) In order to be able to make good decisions, management will need a variety of knowledge, skills and awareness. This introduction to accounting course is unable to delve into all of them.

However, this course can introduce you to the type of accounting information management receives, how it is developed, and how management can use it to make decisions that lead to its objectives. This internal accounting information is called managerial accounting which helps facilitate the various phases of the management cycle we have been learning about.

Slides 27-28 (:33s) How does accounting facilitate the management cycle?
All phases of the business management cycle need information to assess where the company has been, where it is now and where it plans to be in the future.

The accounting profession has effectively accepted the responsibility of being the chief information identifier and analyzer, recorder, summarizer, and reporter in companies throughout the world.

Slide 29 (:29s) Without the information provided by a company’s accounting information system, it would be impossible for management to effectively and efficiently perform the business management cycle. The information needed to develop objectives and plans, direct, control, improve, and make necessary decisions regarding the business’ operations and results would simply be unavailable.

Slides 30-31 (:27s) Companies that do not choose to invest in reliable accounting information systems are like jumbo jet pilots flying in a dense fog who choose not to turn on their instrument panels. They effectively would be flying blind. Similarly, companies that do not have sufficient accounting information systems effectively fly their businesses blind and rarely, if ever, are successful.

Hopefully by the end of this course, you will better understand the basic flow of accounting information systems and how the information they produce help management succeed in achieving their company objectives.