Management accounting, also known as managerial accounting, helps business owners, CEOs, managers and other stakeholders understand the financial progress of the organization. It also helps offer strategic insight for future decisions by analyzing business performance.
What can management accounting do for your business?
Management accounting provides financial and statistical information to internal business leaders, allowing them to make day-to-day managerial decisions. Reports typically include
- the business’s available cash,
- sales revenue, and
- accounts payable and receivable.
While the reports can include very specific, granular details to help an organization improve, they are typically formatted for informal, internal use (i.e., not held to any strict accounting standards). This means they can be presented in a way that’s less technical and more user-friendly.
Here are a few key things managerial accounting can help your business accomplish:
- Understand business costs. It’s important for all departments to understand the costs associated with their specific activities. Interpreting information from your management accounting reports can inspire adjustments that lower costs and boost profitability.
- Monitor and project cash flow. Being able to project future cash flow based on prior trends can help you plan to have secure financing for any times there may be a shortage. You can also time big expenditures for periods when you predict a cash flow surplus.
- Prepare for tax season. Management accounting allows you to make strategic investments and spending decisions to reduce your tax liability.
Management accounting looks for inefficiencies within the operation and offers solutions to resolve any issues.
Managerial accounting vs. financial accounting
In general, financial accounting is the practice of recording financial transactions into financial statements, which are then distributed to outside stakeholders, such as investors, creditors and lenders.
With managerial accounting, an accountant monitors unusual spikes or declines in revenue and expenses and reports them to internal management to help identify inefficiencies.
Here are a few differences between management and financial accounting:
- Efficiency: Financial accounting reports on the profitability of a business, whereas management accounting identifies specific problems that affect the business’s overall efficiency and offers solutions on how to fix them.
- Standards: Financial accounting produces financial statements for external stakeholders, so these reports must comply with various accounting standards. Management accounting is intended for internal use only and does not have to comply with such standards.
- Time period: Financial accounting concerns itself with historical data, or the financial status the company has already achieved. Management accounting, on the other hand, often includes budget and forecasting reports, which are specifically concerned with future results.
- Operations: Financial accounting ignores the operations that contribute to a company’s profit and focuses solely on the outcome. Management accounting looks for inefficiencies within the operation and offers solutions to resolve any issues.
- Accuracy: Financial accounting must include flawless information to prove the financial statements are correct. Management accounting, conversely, works with estimates to produce forecasts, trendlines and budget information.
- Frequency: Financial accounting produces financial statements at the end of the accounting period, whereas management accounting can issue reports much more frequently depending on the needs of the business.
What data is included on a management accounting report?
There are several items included in a management accounting report that help inform business leaders on ways to improve the organization.
The most common types of data you will find in a management accounting report are as follows:
- Budget report: This includes an estimated budget based off prior periods to help determine where to invest more resources and where to trim expenses. Budget reports can also include departmental analyses to help managers judge performance and identify where to control costs.
- Margin analysis: A margin analysis helps determine price points for products and services by assessing the profits weighed against varying costs of production. With this information, managers can adjust prices accordingly to meet their financial goals.
- Constraint analysis: This analysis identifies bottlenecks or constraints within a given sales process or production line. A managerial accountant will calculate the cost of these constraints and identify how it affects a company’s revenue, profit and cash flow.
- Trend analysis: By reviewing the trend line for different costs, a management accountant can detect unusual deviations and investigate further to identify the cause. Accountants will also typically include a forecasting report, which draws upon financial data from previous periods to predict the company’s success in the future.
- Job cost report: A job cost report breaks down and compares the total cost accrued against the expected revenue generated from a given project. If one type of job is not as profitable as expected, you can optimize the operation, adjust your pricing or remove it from your list of services altogether.
- Inventory and manufacturing analysis: If your business produces products or maintains a physical inventory, an inventory and manufacturing analysis can identify inventory waste, labor costs and per-unit overhead costs. If you manage different assembly lines, you can compare one against the others to identify top-performing lines and employees.
- Accounts receivable aging report: If your business extends credit to your customers, an accounts receivable aging report is critical. This report helps managers identify problems within the company’s collections process, as the report typically identifies invoices that are 30, 60 and 90 days late. If you discover a significant number of customers pay their balances late, you may need to revisit your credit policies. Additionally, the collections department can use this report to follow-up on old debts and make their process more efficient.
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