What Is Management Accounting?
Management accounting is the identification, analysis, and communication of financial information for the purposes of giving business managers the information they need to help their organizations reach their goals. Although this practice relies on a lot of the same data as financial accounting, it differentiates itself with its purpose.
Management accounting is an internal process with the aim of helping company leadership make smart business choices. Financial accounting is used to create financial statements, which may also be shared externally.If you own a small business (or are thinking of starting one), it's important to understand the basic principles of management accounting. You can use the information this gives you to figure out how to best run your business and how to make short-term and long-term decisions (like whether you have the money needed to hire a new employee or whether a consistently late-paying client needs to be cut loose).
The basis of informative and useful managerial accounting is accurate record-keeping when it comes to your company's invoices, expenses, and accounts. Skynova's accounting software can help you stay on top of this financial data, making for faster and easier management accounting. In this article, we provide greater detail about the basics of management accounting, explaining how it can contribute to your business success.
What Are the Objectives of Management Accounting?
You may also see management accounting referred to as cost accounting. Technically, cost accounting is a subcategory of management accounting. It focuses specifically on reporting a company's overall production costs. This involves assessing the variable and fixed costs needed at every production stage, allowing businesses to cut unnecessary expenses at the various stages (therefore increasing profitability).
This is just one example of how management accounting can boost your bottom line and contribute to greater business success. Below, we outline some of the other objectives and uses of managerial accounting.
A big part of business success lies in being able to see the future — and make smart management decisions accordingly. That doesn't mean you need a crystal ball. Management accounting helps give you a glimpse at your business's future based on foreseeable market trends and past financial data. Forecasting can then help you answer questions like whether you should diversify into other markets, invest in more equipment so you can scale up operations, or invest in another company.
Estimating Cash Flow
Cash flow refers to the net amount of cash or cash-equivalent assets you have going in and out of your business. Cash flow statements allow you to prepare for ongoing and upcoming business expenses, ensuring you have the liquidity to support everyday operations. With cash flow forecasts, you can also decide how to allocate money and resources to generate revenue.
Management accounting also provides important information about production resources and costs. You can use these details to make purchasing decisions, both operational and strategic. Take the mention of cost accounting above, for example. If you determine that you are losing a lot of money in the production process to a specific supplier, you might try to find an alternative supplier to minimize costs.
Ideally, your business will run like a well-oiled machine — consistently and without hiccups. You also want to see your business grow over time. In reality, most businesses see performance variation over time. Understanding the highs and lows — and what's behind them — can help inform overall business and specific operational decisions. You can figure out how to leverage positive variances and run risk mitigation on the negative variances.
Knowing the Rate of Return (ROR)
If you make an investment (for example, in property, equipment, or people) for your business, you want to know if it paid off — and thus if this is an investment worth continuing, expanding, or cutting back on. The rate of return (ROR) refers to the net gain or loss resulting from an investment over a defined time period. Knowing ROR can also be useful before making investments, providing valuable information before you start a project that might require a lot of investment.
What Is the Difference Between Management Accounting and Financial Accounting?
As mentioned, managerial and financial accounting practices use a lot of the same data but differ in how that data is used and for whom it's intended.
Managerial accounting is exclusively for internal use. It gives managers valuable information needed to make smart business decisions that will help their organization reach its goals. Financial accounting has an external focus, creating financial documentation that can be presented to individuals outside of the organization, such as creditors or potential investors.
Financial accounting in the United States must adhere to generally accepted accounting principles (GAAP). This is because financial accounting documentation may be shared externally — for example, with a company's shareholders, so they can see how other investments are doing, or with financial institutions, so they can determine whether to issue a company credit. Managerial accounting doesn't have to adhere to GAAP and can be modified to suit the company's needs.
What Are the Types of Managerial Accounting?
As you can see, managerial accounting can achieve various objectives. Different types of managerial accounting provide the information needed to meet those objectives. Below, we highlight the main types.
Product Costing and Valuation
Product costing and valuation determine the funds needed to produce a good or service. Costs may be categorized by type, such as direct versus indirect or fixed versus variable. By identifying and measuring these costs, product costing and valuation can determine the overhead a business needs to create its goods or services.
Cash Flow Analysis
As mentioned, cash flow records a business's cash inflow and outflow in a set period. A cash flow analysis is especially useful for businesses that use the accrual accounting system. With this method, revenue is recorded as soon as it's earned but not necessarily paid. So, if you invoice a client, you'd count that invoice as earned revenue (even if the client hasn't actually paid).
Inventory Turnover Analysis
Inventory turnover analysis tells business managers how frequently a company has replaced or sold inventory in a set period. The "carrying cost of inventory" is a key measure. This refers to the cost a company bears for storing unsold inventory. Such data can inform decisions about how often to purchase new inventory, as well as decisions about pricing, manufacturing, and marketing.
Production or sales bottlenecks can impede business operations and negatively impact profits. Constraint analysis involves identifying such limitations. This information can be used to make changes supporting a more efficient production or sales process.
Financial Leverage Metrics
Financial leverage is a term that describes a business's ability to utilize borrowed capital to obtain new assets, with the aim of increasing return on investment (ROI). Managerial accounting can determine how best to use financial leverage using data about a company's equity and debt.
Accounts Receivable Management
Accounts receivable directly impact a company's bottom line. Accounts receivable invoices can be categorized according to how long they've been outstanding in order to identify clients who are possible credit risks. Routine late payments may call for risk management measures, like ending the business relationship.
Budgeting, Trend Analysis, and Forecasting
Your business will likely use diverse budgets to guide its operations, such as budgets for staffing and material supplies. Managerial financial accountants can track budgets and identify performance issues that may result in a budget being over or under its target. This can inform cost-saving measures.
What Does a Management Accountant Do?
A managerial accounting professional will have the expertise to handle the various types of financial management accounting described above. Contact a professional with the needed competencies to crunch numbers and provide you with formal feedback on cash flow, inventory turnover, financial leverage, and the other points described above.
All you need to do is give your accounting information (e.g., income statements, invoice records, and receipts detailing the cost of goods) to your managerial accountant so they can take care of the analysis. Accurately tracking your day-to-day finances will simplify this process, making it easier to give your certified management accountant (CMA) the information they need to get the job done. Skynova's accounting software makes it easy to record and track such information.
Let Skynova Help You Manage Your Small Business Bookkeeping
Skynova is dedicated to demystifying small business accounting for business owners, giving them the knowledge and software they need to accurately track their finances. From accounting software to business templates, our products will help you get a handle on your business's finances. Find out how we can help today.
Notice to the Reader
The content within this article is meant to serve as general information about management accounting and may not apply to your specific situation. Always consult a professional accountant to ensure you're meeting accounting standards.