Management accounting: knowledge is power

Management accounting: knowledge is power

I’m a big believer in the importance of management accounting in giving people who operate businesses the information they need to make strategic decisions.

There are very few sure things in business and at a certain point, you just have to make a call. Still, decisions based on all the available information are, in my opinion, always better than ones based on gut feeling or guesswork.

Before we get into what exactly management accounting can do for your business, though, because I’ve promised always to make sense of accounting jargon for my clients, here’s a bit on (a) exactly what the term management accounting means and (b) how it’s different from other types of accounting.

Management accounts vs financial accounts

The easiest way to think of management accounts is as a scaled down, almost real-time version of your year-end financial accounts.

Unlike financial accounts, they’re issued within the accounting period, not after year-end – usually quarterly or monthly, depending on how big and complex your business is.

The purpose is different, too.

People sometimes say that management accounting is about looking forward while financial accounting is the business of looking backward, which sounds about right to me.

Management accounts aren’t for providing a ‘true and fair view’ of the state of your business to people outside.

Instead, they’re designed to give people inside the company a live read-out to support intelligent decision making, focused on clear business goals.

To put it another way, financial accounting is a statutory obligation – management accounts are a sensible choice. You don’t have to keep them but ambitious businesses with a strategic approach tend to.

How management accounts help

Management accounts support performance measurement, planning, pricing decisions, cost control, budget reviews and all other kinds of vital business decisions.

They take into account payroll, sales, margins, stock levels and almost every other number you can think of.

Management decisions always need someone to take a judgement and make a choice – it’s art, not science – but the more information you have, especially financial information, the more likely it is that those decisions will prove to be correct in the long run.

A management accounting technique called variance analysis also makes it possible to spot trends and problems and act to address them.

For example, if you budget on the basis of signing up client projects to the value of £25,000 but actually only bring in £18,000 of work, variance analysis can highlight staff underperformance, drops in demand for particular products, or from specific customer groups, and so on.

It’s definitely better to know about this stuff in-year rather than at the end, when it’s too late to do much about it.

Management accounts are often used to support cost-benefit analysis, too. This is where you tot up the likely benefits of a course of action and then take away the cost of doing it.

The number you end up with will tell you whether you’d be better off doing or not doing something that might seem from the gut as if it makes sense.

The chance to test different scenarios – to move the sliders and see the likely outcomes – can be really eye-opening.

More generally, taking the time at management level to look at the numbers and interrogate them can help identify ways to be more efficient.

If things feel a bit squeezed, management accounts can highlight where your business is spending the most money and give you the opportunity to question it, or set challenging targets for reductions.

How it works in practice

Here’s how management accounting ought to work if it’s done properly.

First, at the end of each month or quarter, you’ll want to finalise the books, coding every transaction to an appropriate account.

Next, perform a reconciliation against banking records to make sure the management accounts represent the reality of your business’s finances.

Then, account for prepayment and accruals, and make any adjustments for depreciation, payroll and tax.

This kind of tidying up of loose ends can be equally frustrating and satisfying but, again, it’s better to keep on top of it than find yourself scrambling to fix a twelve month’s worth of issues at the end of the year.

Finally, pull everything together into a set of management accounts with commentary explaining any variance.

In my experience, the commentary is often the part non-accountants such as board members find most useful. It’s there to head off questions before they get asked.

You can also include sales, cashflow and profit forecasts.

Depending on the size of your business, you might also want to break the management accounts down so that the performance of individual divisions is measurable.

It might also be helpful to include a breakdown by product or service.

Exactly how your management accounts are configured is something you’ll want to talk about with us if you take up our management accounting service.

Although I’m committed to the idea of clear, repeatable processes, this, more than most other accounting disciplines, requires room for customisation and tailoring.

Whatever setup you end up with, having up-to-date, accurate financial records always at hand you’ll be well placed for discussions with stakeholders and investors or to make big plans for growth or change.

Get in touch for management accounts advice.

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