Last editedNov 20202 min read
Management accounting, also referred to as managerial accounting, is a type of accounting often juxtaposed with financial accounting. While financial accounting is primarily focused on managing and recording your company's transactions, managerial accounting is used for a much broader range of reasons. Find out everything you need to know about managerial accounting with our simple guide.
How does managerial accounting work?
For example, managerial accounting can be used to drive decisions on products and business processes by focusing on the financial implications and evidence at hand. Although managerial accounting comes in a variety of different forms, ultimately, it's an analytic tool. But how exactly does managerial accounting work in an enterprise setting? Put simply, firms employing managerial accounting can use a range of different approaches to achieve their goals:
In terms of analysis, it's important to understand your margins and break-even point to ascertain which products and departments make you the most money and racking up the most expenses.
Similarly, constraint analysis can help you identify issues with your production processes that may be slowing your organisation down and limiting your ability to progress and profit.
It's also important to understand where your money is going, which requires capital budgeting and asset valuation. This gives you more insight into the assets your company holds, where it should be investing, and what kind of return on investment you can realistically expect to see.
Management accounting is also forward-facing and attempts to make predictions about the future. This involves an analysis of emerging trends as well as forecasting in relation to the organisation itself and the wider market.
How does managerial accounting compare to other accounting methods?
Both financial accounting and managerial accounting are essential for business development and bookkeeping. You must keep accurate records to demonstrate your incomings and outgoings to external agencies, stakeholders, and auditors. It's also important that you make the most of the information you have to hand and make sound financial decisions about your company's future. Financial accounting can help to inform managerial accounting as it shows a history of the company's books and can be the starting point in identifying trends, potential risks, and opportunities.
How does managerial accounting help managers?
Managerial accounting can help turn raw data into clear, tangible information and actionable ideas. It allows managers and company owners to recognise cash inflows and outflows while also highlighting areas of weakness or aspects of your business that have high growth potential. It also provides quantifiable evidence for any changes the company chooses to undertake by setting out the possible financial ramifications.
List of management accounting techniques
We've already identified some managerial accounting techniques above, such as constraint analysis, capital budgeting, and forecasting. There are many other essential techniques that should be explored by any accountant employing this method, including:
Financial planning (making decisions for the company's economic future)
Standard costing (working out your best-case-scenario costs)
Funds Flow Statement Creation (understanding where your money comes from and where it goes)
It's also vital to communicate your findings effectively to make the most of the information you've gathered and ensure it's dispersed amongst the members of your team that need it most.
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