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Running a business

Understanding Management Accounting

Owners wanting to maximise the profitability of their business, and reduce the chances of it getting into financial difficulty, must embrace a business technical term that by itself does not mean a lot. That term is management accounting.

What is Management Accounting?


Management accounting is a branch of accounting that focuses on giving information and reporting to internal stakeholders in an organisation to help them make more informed decisions about the business. 


The information given by the accountants is usually financial in nature and it can include things such as: budgeting, forecasting or cost analysis.

Examples of Management Accounting Techniques


Some examples of management accounting techniques can include: 

  • Budgeting: This involves creating a plan for the future financial performance of the organisation and allocating resources accordingly. 
  • Forecasting: Forecasting involves using historical data, seasonal information, or data specific to certain events, to predict and create estimates about the future financial performance of the business.
  • Cost-benefit analysis: Involves evaluating the costs and benefits of a proposed project or investment to determine whether it makes sense from a financial perspective. This often includes elements like ROI calculations, depreciation analysis, or calculations on the lifetime value of a prospective client.
  • Variance Analysis: This involves comparing actual performance versus the budgeted or forecasted performance. It helps identify the difference between the values and the reasons behind them. 

Financial Accounting Versus Management Accounting


From a technical point of view, there are two types of accounting. The first is financial accounting, which relates to the production of financial statements mainly on an annual basis. These statements include the balance sheet on the profit and loss statement that shows what the historical performance of a business has been.


Management accounting is more of an ongoing process because it involves measuring a business’s performance on a regular basis. Instead of just producing historical results, management accounting statements include other financial data to assess the performance of a business.

Management Accounting

Financial Accounting

Users

Internal managers/stakeholders

External Stakeholders

Certifications

CMA is preferred but not required

CPA is preferred but not required

Regulation/guidelines

GAAP, IFRS, IAS

None

Type of report

Sales reports


Departmental reports


Inventory reports

Cash flow statement


Balance sheet


Income statement

Common Job Titles

Accounting Manager


Budget Analyst


Cost Accountant

Auditor


Financial Analyst


Financial Accountant

The Role of Management Accounting


The best analogy for management accounting is the process that coaches for a sporting team go through when monitoring, and improving the performance of their team and making decisions that will affect the future. The coaches will break down the performance of their team into components and measure each of these separately. For example, in soccer, the coaches not only measure how many goals are scored but also how many shots, assists, tackles and passes a player makes.


These results are then compared with what the coach’s expectations are for each player, how the performance compares with previous games and how the performance compares to the opposition or competitors.


This measuring of performance by the coach is not limited to the grand final but is carried out for every match played during the season. Key accounting system skill sets including standard costing, and product costing.


Management accounting for your accounting firm should be no different – the measuring should be carried out throughout the financial year on at least a monthly basis.


The role of management accounting performs a number of functions to meet its objectives. These are measuring performance and benchmarking your results.

Measuring Performance


When it comes to measuring the performance of your accounting firm, one of the most important things to consider is what the firm is expected to achieve. This requires the preparation of a cash-flow budget that shows how your business is expected to perform over the next 12 months.


You need to look at each item in the profit and loss statement and estimate how your firm will perform on at least a monthly basis over the next financial year.


The monthly cash-flow budget results for each income and expense item is then entered into the budget field of a profit and loss statement. This means that when looking at how your accounting firm has performed at the end of each month, you can compare the results against the expected results, and how the business performed in the previous year.

Benchmarking Your Results


For a management accountant, the next important step in management accounting is to benchmark these results against that of similar businesses.


Finding out the results of your competitors may seem impossible, but in actual fact it’s not that hard. One of the first places to get this information is from a professional or industry body that you belong to.


If the benchmarking results cannot be obtained from this source, your accountant could be subscribing to a benchmarking service and will be able to supply you with the required information.


If all else fails, the Australian Taxation Office (ATO) can be a great source of benchmarking information. The ATO produces benchmarking results for virtually all industries that lodge tax returns.


The ATO benchmarking results can be used to compare the performance of your business. This means that if your profitability is below what is expected by the ATO, it can provide insight into the areas of your business that need improving.


There is another benefit of using ATO benchmarks. If you receive a ‘please explain’ letter from them, asking why your business is underperforming against industry benchmarks, it can help you explain why this is happening and remove any suspicion that some form of tax avoidance is occurring.

Streamline Your Management Accounting With QuickBooks


As a business owner, it is essential to understand the value of management accounting in maximising profitability and reducing financial risk for your clients or your own business. 


Using techniques such as budgeting, forecasting, and variance analysis, you can provide your clients with the tools and knowledge needed to make informed decisions and measure business performance on a regular basis. 


QuickBooks Online is a software designed to assist small businesses in their accounting activities


With features that can help streamline your management accounting processes and make them more efficient, QuickBooks also offers a range of tools for financial accounting, taxes management, and payroll, making it an all-in-one solution for all your accounting needs. 


Improve your management accounting processes today!


Sign up for free today if you are an accounting professional looking to improve the management accounting for your clients. Or try 30 days free if you are a small business looking to take your accounting to the next level.

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