Cost accountants work in manufacturing units and management consultancies. Cost accountants take care of journal entries, monthly accounts process, quarterly accounts reports, do inventory analysis, increase the cash flow, calculate the depreciation, generate PPV reports, review the general ledger, analyse the cost of raw materials, control overheads and do a cost-benefit analysis. The skills of a cost accountant are helpful for small, medium and big firms. Organic food manufacturing, textile business, smartwatch manufacturing, solar panel manufacturing, portable charger manufacturing, electric bike manufacturing, bio-gradable plastic manufacturing, and personalised phone case manufacturing are some of the small-size emerging business trends. Cost accountants use ratio analysis concepts to understand the production and marketing of these products. The blog intends to provide insights into the need for ratio analysis in a small-size manufacturing firm.
The skills of a cost accountant:
Cost accountants should have strong basic knowledge, analytical skills, technical proficiencies, presentation skills, and communication skills. Cost accountants should understand capital budgeting, statistics, risk management, corporate taxation, auditing process, ethics, costing, macroeconomics, research qualities, problem-solving skills, international trade process, guidelines for mergers and acquisitions, decision making, forecasting, performance management and cost management.
The fundamentals of cost accounting are the breakeven point formula, activity-based costing, gross margin and contribution margin, business awareness, asset management, accounting processes, marginal costing, risk and asset management. Financial accounting is sufficient for small businesses. For big and medium size businesses, cost accounting concepts help with efficient management. A cost audit examines the documents and transactions of the company.
Analytical skills are essential for a person working with numbers. The job of a cost accountant deals with the following things, and these avenues need analytical skills. The cost accountant thinks about the investments, business ventures, contracts, cost drivers, and budget development process, prepare a periodical forecast, prepare reports for multiple departments, decision making, review the actual and predicted costs and check the mismatch in the data.
Cost accountants use software and tools to manage voluminous data. The list of software the cost accountants use are QuickBooks, enterprise 21 ERP software, Zoho books, KPMG spark, SAP, Oracle, cloud computing, blockchain, artificial intelligence, wave financial, oracle, and MS. Excel. The information and data disclosed by the cost accountant help process the activities, decision making, control the activities and evaluate the activities. Cost accountants collect the information and prepare statements. In some cases, the cost information is unsuitable for decision-making.
Cost accountants require presentation skills to explain the services and products to the clients. Cost savings are possible with a healthy relationship with the clients. Write reports with clear interpretations. Cost accountants collect information from the department’s heads and managers. Listening and communication skills are essential to handle a big group of people inside the organisation.
Ratio analysis for a small manufacturing unit:
The financial ratios used in a small size business are as follows: cash flow to debt ratio, the net profit margin, gross margin, and sales per employee ratio. Cash flow issues are the reason for the failure of small-size businesses. The cash flow to debt ratio gives the picture of the ability to pay the existing bills. The net profit margin explains the efficiency of converting revenue into profit. If this figure is low, it says that the business has issues with costs, overheads, and poor sales. The gross margin rate shows the operating expenses of a business.
The different types of cost ratios used to stabilise businesses are as follows: liquidity ratios, leverage ratios, profitability ratios, turnover ratios, and market value ratios. Out of these ratios, the two ratios that help small businesses are the liquidity ratio and profitability ratios.
Liquidity ratios deal with the cash flows for the short term. Solvency ratios deal with long-term operations. The liquidity ratio explains the time taken to change the assets into the currency. The short-term debts are paid using the cash flow. If the liquidity ratio is good, the current liabilities, assets and cash flow are fair in the business. The different types of liquidity ratios are current ratio, quick ratio, cash ratio, networking capital ratio, cash coverage ratio, and operating cash flow ratio. The importance of the liquidity ratio in a small business is as follows:
- In times of economic slowdown, there is a necessity to check liquidity. The healthy liquidity ratio refrains the layoff of employees and the selling of assets.
- Small business requires cash for growing the business.
- Inventory management is an essential part of small size business. The inventory turnover ratio shows the financial health of the company. It promotes business values.
- Liquidity ratios help business owners with the following management decisions: review debt obligations, structure the payment cycle, control overheads, sell assets that are not used, and change the line of credit.
The profitability ratios used by small-size businesses return on assets and return on equity. These two ratios reveal the fact about the assets and stockholders. It is the comparison of profit and assets, net income and equity. The profitability ratio shows that the business can generate profit regularly. The comparison of profit along with operation cost, shareholders’ equity and revenue gives a better understanding to the cost accountant.
Cost accountants working in small businesses show high-level results. The financial responsibility of a company deals with the goal of the company. Cost accountants understand the goal and show the results that go a long way.