What is Management Accounting?

The work of a management accountant goes far beyond the scope of recording and updating the financial information of a business so that it complies with HMRC’s quality standards.

Managerial accountants build their career on working with leadership teams and senior managers within ambitious companies. They provide directors with detailed financial and non-financial performance information, with data-based accounting and cash flow reports, and with the insights they need to achieve corporate goals quicker and with less risk.

In this article, we’ll explain what management accounting is, details on the types of financial and non-financial information management accountants provide you with and why they’re important, and what it’s like to have a management accountant on your leadership team.

Black and White Accounting offers clients access to managerial accountants on a part-time basis to clients across the UK. To find out more, please call us on 0800 140 464 or click here to email us.

Professional management accounting is the process of analysing the financial and operational performance data of a business with a view to producing key reports and uncovering insights which help a company’s leaders and management team understand the short-term and long term threats and opportunities before them.

The key responsibilities and role of a management accountant are:

analysing and advising on the potential financial implications of management decision-making;
analysing risk and advising management teams on how to deal with risk;
cost reduction strategy recommendations;
explaining relevant accounting and financial data, its meaning, and its importance to non-financial managers within an organisation;
finding funders and funding for major projects and negotiation of the terms for that funding;
forecasting required income and expenditure and ongoing control and oversight thereof;
generation of added shareholder value through business strategy formulation;
identifying opportunities for improved financial systems, policies, and control of costs;
making sure that business expenditure is within the budget set overall and for each department;
preparation of monthly management accounts, budgets, forecasts, and reports to aid business planning;
professional input and advice on a business’ financial issues;
identifying and suggesting ways of improving business performance, operations, and organisation; and
the development of financial systems and policies and the management of their implementation and running.

Black & White note – management accounting is sometimes referred to as cost accounting.

Management accounting versus financial accounting

Financial accounting is the process of preparing accounting data and reports on the financial health of a company for its external investors. Financial accounting differs from management accounting in that respect as management accounting is intended for an internal audience – a company’s leadership team.

Financial accounting needs to be much more exact than management accounting because it must adhere to, for example, the Generally Accepted Accounting Principles (GAAP). In comparison, the insights provided by management accounting are often educated estimates based upon deep knowledge of a fluid situation – fluid in the sense that this is day-to-day, short-term, and long-term management of trading business in an uncertain world.

All listed companies need financial accounting. Financial accounting is a requirement for most external investors in private limited companies too – investors want monthly financial statements, general accounting information, and performance management information to check on how well a business they’ve invested in is doing.

Types of managerial accounting performance metrics

Management accounting/cost accounting data provides multiple insights into a business’ financial performance. Below, we describe some of the most important work carried out by managerial accountants:

Budgeting, Trend Analysis, and Forecasting

Budgeting – the setting of a budget for the entire company and budgets for each individual department – allows corporate leaders to analyse the financial performance and each department’s abilities to control costs. It also allows leaders to alter spending priorities depending on how well the company is doing, For example, a management accountant may suggest an increase in available budget for the marketing and sales department if revenues are declining.

Budgeting is also used in decision-making when planning expansion or for capital expenditure spending. Potential gains can be forecast from an expansion or from investment in capital equipment to decide whether a project under consideration is worthwhile and in determining the payback period required to protect cash flow if the expansion or investment requires external funding.

Accounts Receivables Management

Accounts receivables management accounting involves analysing the length of time it takes individual clients to settle their invoices. Managerial accounting analysis can help a sales department or a credit control department determine the amount of short-term credit given to individual clients or whether credit terms should continue to be offered to persistent late payers.

Financial Leverage Metrics

Leverage refers to how a company uses borrowed money to increase its return on the investments its made and for the acquisition of assets. Management accounting data allows a company’s leadership team to determine how it can best balance debt and equity so that it extracts the maximum value at the lowest risk in its borrowing activities.

Management accountants provide information on return on invested capital, debt to equity ratios, and return on equity to company leaders when they’re making decisions on future strategy. The insights provided by a managerial accountant are then often used by leaders to explain their decision-making processes to board members, creditors, and investors.

Constraint analysis

Managerial accounting gives companies the operational insight and information they need to improve efficiency in the production and sales processes.

Management accountants, for example, can help manufacturing companies determine where production and sales bottlenecks occur to:

provide analysis on their effects of cash flow, profile, control of costs, and company revenue and
provide justification for expenditure to reduce or eliminate these issues by comparing the cost involved with the likely gains from that expenditure.

Stock turnover analysis

Management accountants use stock turnover analysis to determine the number of times a business has sold and replaced internal stock during a given time-period.

Managerial accounting data can determine how much carrying unsold stock is costing a company as well as providing management with accounting reports showing how much could be saved by stocking with a “just in time” approach.

These savings may then be used to aid decision-making in stock purchasing policy and cycles, marketing, manufacturing, and pricing.

Cash flow analysis

Cash flow analysis accounting involves providing reports to management on the impact decisions being made have on available cash within the business.

Cash flow analysis allows companies to determine whether they can invest in new assets outright or whether they should borrow money to acquire them as well as ensuring that the company has enough liquid assets and cash to cover their short-term obligations.

Product costing and valuation

For manufacturers, product costing and evaluation clearly shows all of the costs involved in the production or assembly of goods including indirect costs, direct costs, variable costs, and fixed costs.

This is then often used to determine whether the optimal desired level of profit is being made and whether certain production processes should be brought in-house or outsourced for greater efficiency.

What’s it like to work with a management accountant?

Becoming a management accountant is a career choice which appeals particularly to the more business-minded professionals within our sector.

Managerial accountants share many of the best characteristics, skills, and traits of entrepreneurs.

They are highly motivated to hit the goals they have set for themselves and they want the companies they work for to thrive and to soundly beat their competitors.

Numbers and figures are important to managerial accountants but, for them, this is just the starting point.

Contained within your current and past accounting records is valuable financial and non-financial information about your company’s ongoing strategic performance, ways to generate greater shareholder value, your exposure to risk, and your ability to stick within the budgets you set for the company.

Managerial accountants can see this whereas most professional accountants and entrepreneurs can’t – that’s why they are so valuable to so many boards.

When you first start working with management accountants, they’ll quickly develop a knowledge of your corporate operations and systems with a view on how to streamline them for greater efficiency and profitability.

More than likely, they’ll also uncover unnecessary costs you might not know about which have affected your bottom line for years.

They’ll predict the potential positive and negative consequences of business decisions you make (or don’t make). Using their skills of analysis, they’ll prepare for you and your management team alternative approaches to the problems and opportunities your company faces.

Over time, they’ll help you negotiate and obtain any finance you need for growth or for major projects and they’ll develop and manage your company’s financial policies and systems.

Working with Black & White’s experienced management accountants

Many business leaders pin much of the success they’ve enjoyed on the strategic business insights and planning provided to them by their professional management accountants. In a world of powerful cloud based tools, such as Xero, QuickBooks and FreeAgent, Management Accounting and key insights on a timely basis to drive your business have never been easier to gleam. However, these need setting up, potentially together with a AppStack to ensure you have the tools you need (AutoEntry, A2X, Capsule, Dext, Expensify, Fultrli, GoCardless, Link My Books, Reducer, Spotlight, Stripe, Syft, etc). Whether you need someone to help you set this up, support you in the background, or to run your internal management accounting function, please get in touch with us today, by contacting Black and White Chartered Certified Accountants, populating the “Got a Question” form on the right, or calling us on 0800 140 464.

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What is Management Accounting?