What is management accounting?
Firstly, before we look at why your should use Management Accounting for your Business, let’s understand what it is. Most importantly financial issues impact our working and personal lives. Knowing your numbers is important for all business, business owners private, not for profit, small or large. The main purpose behind management accounting is help your and your team make well-informed business decisions.
In addition, the main uses and objectives behind using your business numbers is to:
- Measure profit
- Provide financial information
- Improve your performance; strength & viability
- Plan, control and monitor
- Decision making
What can good management information tell us?
Below is by no means an exhaustive list, but represents the types of issues that businesses may encounter. The information needed to help answer these questions comes from the financial records and accounts
- How you measure and calculate profit
- What is an adequate level of profit/surplus
- Which is more important, cash or profit?
- Costs of providing a service or producing a product?
- Should you outsource?
- How to measure and manage performance?
- What is the financial impact of inefficiency and wastage?
- How to prepare and use a budget?
- Knowing your break-even point?
The benefits of accounting control panel
So in business today you and your team need a broad understanding of the disciplines of finance, and business planning. You need to be able to apply that in running your business, Management accounting fits the bill.
Certainly at the heart of any good financial system you need to effectively and efficiently accuracy record your financial transactions. In addition, you must be able to effectively and efficiently turn your data into quality information. So using an accounting system properly can be compared to the control panel on an aircraft. The pilot (manager) relies upon her instruments to measure and control the performance of the aircraft. Likewise it shows her how the aircraft is doing, what outside conditions are like and so on. The instrument panel is not flying the aircraft; it is helping the pilot to do her job properly.
What is the difference between financial and management accounting?
In short financial accounting focuses on produces three key financial statements for the ‘outside’ world. Which is made up of the owners, statutory and regulatory authorities, banks and lenders. Subsequently these financial statements are the income statement (UK: profit and loss); position statement (UK: balance sheet) and cash flow statement. Most importantly management accounting focuses on presenting information in a manner that supports managers in planning and the organisation. Management Accounting for your Business is about running and growing your business, financial accounting is about compliance.
Likewise the objective of financial accounting is to provide financial information about your business. Similarly management accounting is about providing (financial) information. Certainly being involved in running an organisation, at whatever level will involve a range of actions, of which finance will be an element.
The differences between Financial and Management Accounting
| Financial Accounting | Management Accounting | |
|---|---|---|
| Users and audience | Main audience is those outside your business, For example, regulators, banks and lenders | You and your management team who plan for and control your business |
| Time frame and focus | Looking backwards, a Historical perspective | The here and now, and looking forwards |
| Verifiability versus relevance | The emphasis is verifying financial transactions | The emphasis is on relevance for planning for, and controlling your business, |
| Accuracy and precision versus timeliness | The emphasis is on accuracy and precision | The emphasis is on getting information on time |
| What your numbers look at | Primary focus is on the whole business | Look at parts of your business, as well as the whole. For example, your business segments, customer and product groups. |
| Format and requirements | You follow statutory formats and rules. | There are no statutory formats or rules. Do whatever is useful for your business |
Accounting today
In conclusion accounting has come a long way over the years. Using Management Accounting for your Business is must. Above all, relying on your annual financial statements to make decisions, to evaluate and see what’s going on is your business is useless .
In addition, good accounting systems help your manage and grow your business. As a result, as a business owner you can make more powerful and useful decisions. For example, knowing your costs and profits by customer and product, planning and controlling your business gives you a more successful business.
Get in touch with us to see how we can help you with all your accounting, business and tax needs. For more business and finance , news, advice and tips, don’t forget to watch our weekly broadcasts, listen to our weekly podcast I Hate Numbers.