Management accounting (also known as cost accounting) refers to the production of non-financial accounting data for a company's management - internal stakeholders. Unlike financial accounting, there is no legal requirement for a company to prepare management accounts and there is no pre-determined format. They can be as detailed or brief as company management wishes, and can be prepared and presented for any period - weekly, monthly or quarterly. This provides managers with fresh and current insight into business performance.
This page will look into management accounts in more detail, exploring their purpose and composition and how a management accountant can provide a valuable means of business advice and support to managers.
Why are management accounts needed?
Management accounts are essentially current financial information and key data that enable company managers to make meaningful, day-to-day decisions that drive a business forward in the right direction. Management account records provide an in-depth anaylsis of a company’s performance in different business areas (departments, products, separate business locations etc.), in relation to forecasts and budgets produced at the same period last year. Management accounts can bring to light the need to branch out into other services, products or locations. They can also provide insight into a particular site or product that needs to be discontinued because it is not performing well.
Management accounts are also very important for helping business managers to conduct strategic planning to ensure their company stays competitive. Specific records serve as forecasts, which, through the process of trend analysis, help managers to predict the outcome of future operations. Once forecast models are built, the managers can then start anticipating figures of future revenue. This budgeting process allots capital money for future operations, which are intended to help expand the business.
Another key purpose of management accounts is to identify risks. They can provide far-reaching insight into areas such as:
- How sensitive the business is to a price increase or any potential 'what if?' scenarios.
- How dependent the business has become on a particular supplier or consumer.
- A competitive market.
- A future cash flow shortage.
What do management accounts consist of?
Management accounts consist of both financial and non-financial data, which is computed by reference to the specific business needs of the management. Each business will have different management accounting needs, depending on the business areas that are of importance. Some of the most common are listed below:
- The purchasing process, such as stock records and creditors.
- A fixed asset register, which includes details of all fixed assets (including identification numbers, cost and date of purchase etc.).
- Employee records.
- The sales process, such as pricing, debtors and distribution.
In order to provide deep insights into these areas of business, generally management accounts will consist of the following:
- A summary highlighting the main issues, which will usually contain Key Performance Indicators (KPIs). These are performance measurements used to analyse the success of a particular activity in which the company is engaged.
- An action plan that outlines any remedial measures which need to be taken.
- A profit and loss account for the period. The comparatives will typically be the cumulative position against the budget or the equivalent period a year ago.
- Balance sheet indicating the position of the working capital.
- Historical information and forward-looking data, such as cash flow forecasts.
- Information on the costs of a company's products and services.
What is the difference between management accounting and financial accounting?
As aforementioned, the key difference between management accounts and financial accounts is that the former is presented on a more regular basis and is confidential - provided for internal use only. Management accounts are also calculated differently to financial accounts, and are devised to assist in the analysis of component parts of a business. This allows managers to focus on specific business activities and establish any weaknesses and strengths.
In comparison, financial accounts are publicly reported financial records of a company used to analyse a business as a whole over a specific period - usually a year. External users of a business, including the authorities, banks and employees, view these records, and by law they should be prepared and presented according to a pre-determined format. This means financial accounts must consist of several core elements.
Find out more about financial accounts.
What does a management accountant do?
Management accountants - also known as cost accountants and managerial accountants - prepare and collate data for public companies, private businesses and government agencies. Their responsibilities are varied, and they bring a combination of skills to their role - acting as risk managers, budgeters, planners, decision makers and strategists. This makes management accountants very valuable to managers wanting to expand and develop their business.
Generally, a management accountant will be in charge of:
- Analysis - Helping to make business decisions by analysing the management accounts.
- Strategy - Formulating a business strategy designed to create wealth to shareholder value.
- Planning - Applying their accounting techniques to plan and budget.
- Risk assessment - Identifying and managing risks.
- Communication - Relaying to managers the necessary information and explaining numbers to non-financial managers.
Within these roles, management accountants will provide essential business support and advice such as:
- Advising the manager(s) on the financial implications of projects.
- Explaining the financial consequences of business decisions.
- Formulating business strategy.
- Identifying trends and opportunities for improvement.
- Explaining the impact of the competitive landscape.
- Conducting internal business audits.
- Monitoring spending and financial control.
- Bringing a high level of professionalism and integrity to the business.
In addition, many management accountants will be in charge of supervising lower-level accountants who handle a company's basic accounting needs (i.e. recording income and expenses, and tracking tax liabilities). They might also take on responsibility of maintaining a company's financial system - supervising its bookkeepers and data processors. Although it is not a requirement by law for companies to prepare management accounts or hire a management accountant, it is unlikely that many well-run businesses would survive without them.
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