Many small business owners dread the accounting process, when they sit down with piles of receipts and try to compile the information to their accountant's satisfaction. However, bookkeeping is more than just a tedious chore required for filling out tax forms. Users of management accounting also glean information from their books and reports that save them time and money by making their businesses run more efficiently.
The difference between financial accounting and management accounting is that financial accounting tends to focus on external requirements such as tax reporting and loan applications, while management accounting is geared toward gleaning information about operations and using that data for internal purposes.
The users of managerial accounting are managers, engaged employees, lenders and investors.
Managerial accounting is the process of gathering, analyzing and integrating accounting information to improve work flow and profitability. It includes:
- Financial reports. Standard and traditional accounting reports provide easily accessible information that is useful for management accounting. Your profit and loss statement shows how much you earned and how much you spent, how the income and expenses are broadly categorized and whether you've earned or lost money during the time period it covers. Your balance sheet and cash-flow statement show how your business and financial activity is playing out as far as your overall financial situation and whether you have sufficient cash on hand to meet current expenses.
- Cost accounting. Each of your company's products and processes accrue different costs depending on the amount of materials, labor and infrastructure involved. The users of cost accounting track these expenses to understand profitability and make strategic changes to improve a company's bottom line. Products that reap especially fortuitous margins should be promoted, and products that are unsustainably expensive can be identified and then either improved or discontinued.
- Efficiency accounting. You can gather some data about how well your production processes are working by observing where bottlenecks occur and whether you're getting things done in an appropriate amount of time. You can collect even better information by tracking hours or payroll expenses relative to productivity and then adjusting variables such as number of people on the floor or batch size to see what makes your operations most efficient.
Obviously, managers use management accounting to make day-to-day and longer-term strategic decisions. The information provided in managerial accounting reports takes extra work and expense to compile and review, but they save considerable time by providing managers with information that can be difficult to gather empirically.
In a business that practices open-book management, employees also use managerial accounting. By giving staff training in understanding financial statements and access to relevant reports, a business can get workers engaged and interested at the front lines. Employees can track ongoing information about everything from regional sales to materials waste and can monitor changes and improvements in areas where they contribute.
Bankers and investors can also be users of managerial accounting, especially when these reports are provided as background information in a business plan or loan package. Standard financial reports such as income statements and balance sheets are required for most financing applications, and other reports such as store-by-store sales figures and cost-accounting figures can add context, showing where there is the most potential for growth and profitability.
Management accounting reports shouldn't necessarily be the sole determinants in managerial decisions, although they do provide valuable information for making changes and upgrading infrastructure.
There are intangible factors that enter into managerial decisions as well, such as the strength of relationships or a passion for a certain product. Although they may not provide the strict basis for important decisions, they should never be ignored, and managers learn with experience when to defer to data and when to trust intuition.