Financial accounting focuses on preparing information for external parties, such as stockholders, public regulators and lenders, in accordance with generally accepted accounting principles. Managerial accounting, on the other hand, takes a company's financial information and develops reports for confidential internal use by managers. The reports aid in decision-making and identifying ways to run the company more efficiently. They are based on management's informational needs and include budgeting, breakeven charts, product cost analysis, trend charts and forecasting.
An effective management accounting system reaches into all departments of a business: finance, IT, marketing, human resources, operations and sales. In addition to using typical financial data, managerial accounting can also include non-financial information such as cash on hand, current sales reports, number of sales calls per day, order backlog, delivery deadline dates, aging status of accounts receivables and payables, and current inventory levels of raw materials and finished products. All of this information forms the basis for identifying the key performance indicators of the various parts of a business.
Trend Analysis and Forecasting
Management accountants are forward-looking and use reports to help make decisions that will affect the future of the organization, rather than the historical recording and compliance aspects of financial accounting. They use trend lines to forecast future sales and prepare budgets for general and administrative expenses, capital expenditures, profit planning, operational costs and research and development. With this information, management can evaluate the expected return on capital expenditure projects and determine the best method for financing.
Managerial accounting identifies the actual direct costs, profits and cash flow of products and services. This type of analysis could be done on individual products, customers, stores or geographical regions. This information becomes the basis for allocating overhead expenses to arrive at the true cost of a product or service. With this data, management can determine if a product or service is profitable and what price and volume of sales is needed to break even.
Executives use performance reports, known as variance analysis, from managerial accounting to identify deviations of actual results from projected costs. This gives management the ability to identify non-performing areas and make corrective actions on a timely basis.
A unique benefit of managerial accounting is the ability to analyze workflow in a production process or activities in the sales process. The objective is to find any obstacles or constraints in these processes that slow down or prevent them from functioning effectively.
Managerial accountants design information systems to provide executives with the data they need to run their businesses effectively and reach their goals. These reports are internal and are constructed to meet the specific needs of each company and their managers.
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for National Funding, PocketSense, Bizfluent.com, FastCapital360, Kapitus, Smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.