Updated: Sep 27
What is “Management Accounting”?
Management accounting is the providing of data-driven advice to those who run a company for the purpose of making better business decisions. It differs from regular or “Financial Accounting” as outlined in the chart below.
Your month-to-month bookkeeping & accounting produces the financial data used for Management Accounting. An accounting professional able to combine the financial data with business acumen, expertise & experience, can perform management accounting, and help you use your data to contribute to the success of your business.
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Management accounting utilizes baselines (previous period information). It recognizes trends, cost drivers & KPI’s (key performance indicators), and outlines the implications of various decisions with predictive financial modeling.
Common themes of management accounting include:
Cost accounting (understanding the cost of production using variable costs & overhead allocation)
Cash flow management
Planning, budgeting & forecasting are also key themes in management accounting. They can be combined in a strategic practice for
Managing a company’s (and its stakeholders’) goals
Tracking performance (plan vs. actual)
Facilitating timely adjustments and good business decisions
Planning, budgeting & forecasting utilizes “what if” & “if-then” scenarios, and sensitivity analysis. It encourages (and is facilitated by) cross-functional involvement and cooperation (i.e., between sales & marketing, operations, and accounting).
The left-hand section of the chart below shows a baseline Profit and Loss report by month for the period from January to July. These are numbers that occurred and can be used to help predict what may be possible moving forward.
The right-hand section of the chart shows a forecast / budget that can be used by an organization as a foundation for planning. These numbers can all be treated as “plug & play”. That is, they can be changed to reflect the implications of different decisions and the likely outcomes associated with them.
For example, if more product sales are forecasted, an associated increase in the cost of goods sold should be expected – and properly planned & prepared for. For example, if the product isn’t already in inventory, it may make sense to order it in advance so that it will be available in time for when it will be needed.
Planning should be aligned with the goals of the organization. Consider the following goal setting analysis of the management team of a company:
Do we want to grow?
By how much? What do we think is possible? Consider best-case, worst-case, and most-likely scenarios…
By when? Consider different timeframes (e.g., short-term, mid-term, and long-term).
What are the ways we may be able to do that?
Keep in mind that different decisions will have different implications. Planning, budgeting, and forecasting allows a company to get a solid understanding of what the implications may be – in advance. For example:
Does growth like that mean we’ll be needing significant amounts of overtime over the next few months?
Should we begin the process of hiring employees or searching for subcontractors?
If we hire employees, we’ll need to acquire a delivery vehicle; if we subcontract, the subcontractor will have their own vehicle...
If we buy a vehicle, should we buy it outright, get a loan to purchase it, or lease it?
And so on…
Once plans, budgets and forecasts have been made, the company can track its actual performance vs. the planned performance. It can then make course corrections and required adjustments in a timely manner, since it will be able to recognize early when it isn’t on track (and then do something to help get things back on track). Proactively doing this on a regular basis will help a company learn, adapt, and improve over time – and make better business decisions.
Are you looking for management accounting to help you and your business? Contact us for a complimentary discovery call: https://www.masterybookkeeping.com/contactus
Mastery Bookkeeping and Business Consulting Inc. (MBBC)