What Is the Role of Management Accounting?

When is a number not a number? When you're looking at the different types of accounting. Financial accounting is mostly for people outside the company, such as investors, lenders and government watchdogs. It shows them how well you're doing and whether your current liabilities are more than you can cover. Managerial accounting is for you and your management team. It's the same information, but reorganized to help you make good business decisions.

Tip

The purpose of management accounting is to provide timely and accurate financial information to managers so they can make sound business decisions.

Financial accounting is somewhat technical. The first time you see an income statement you have to read through terms such as net income, contingent liability, accounts receivable and accounts payable. There's no way around this; the rules for how you keep the books are strict. Managerial accounting, on the other hand, doesn't have to follow standard financial accounting principles. It still needs to be accurate, but your accountants can present the information so that a non-accountant can easily grasp what's going on. That helps you take the financial information and use it to make future plans for operating the company.

Financial accounting can make projections about the future, but the primary focus is how your company has performed in the past year or quarter. Managerial accounting focuses more on what's to come. Suppose you're trying to figure out your budget for the coming fiscal year. Your management accountant can go over the past year's financials, then present you with predictions of next year's revenue or a list of anticipated expenses. You can use that information to work out the budget or make other decisions for the future.

Managerial accounting looks at your company's current finances, too. As a manager, you need that data to know if the company's performing at the level you want or if it's time for a course correction. The difference from financial accounting is, again, that financial accounting must fit a rigid format. Individual entries are concise and not heavily detailed. Managerial accounting highlights whatever specific entries or issues you're most concerned about, such as staffing expenses or the risk of losing a lawsuit. The format is flexible; a managerial report can go into much more detail if that's what you need.

Accountants prepare company financial statements on a regular basis – every month, every quarter or every year. Managerial accounting statements can come out whenever you need them. If midway through the quarter you want an update on the company's cash flow, your managerial accountant is ready to provide it. It won't be an official financial statement, but it will give you the information you need.