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What is Managerial Accounting and How Does it Differ from Financial Accounting?

What is Managerial Accounting and How Does it Differ from Financial Accounting?

When starting a business, all the paperwork and accounting may seem daunting. You have to analyze every step and decision you’ve made to plan where you want to be in the future and what you need to do right now. To achieve your goals, you’ll need to prepare numerous reports, establish, evaluate, and strengthen external partnerships that generate new growth, create a strategic mapping to increase confidence in your actions, and the list goes on!

No matter how large or small your business is, managerial accounting will help you gain profit. This type of accounting aims mainly at forecasting and long-term business decisions and is used to ensure your company’s financial health.

It focuses not only on the P&L statements but also helps build connections across business units and design systems, enhance business performance, and implement innovative strategic measures. So what’s managerial accounting, and why is it crucial for small business owners?

Contents:

1. Managerial accounting is…

2. Major tasks of managerial accounting

3. Financial accounting vs. managerial accounting

4. Analysis and reports

5. Bottom line


What is managerial accounting?

Managerial accounting, also known as management accounting, involves identifying, measuring, interpreting, and communicating information to management to assist them in planning, decision-making, and risk management. 

As the company establishes a strategy or objective, it needs well thought through approaches to achieve the results. Management accountants can design specific systems so that actions lead towards achieving the goal of that strategy or intent. 

Small business owners need a straightforward and critical opinion and accurate information about their business to grow it successfully. Managerial accountants use raw data to take relevant, cost-effective, and accurate information and put it into a context where they can effectively analyze it and make quick decisions.

How managerial accounting looks at data

Usually, management accountants analyze three types of information:

  1. Strategic. It’s used for long-term planning (beyond one year) and belongs to the data of the highest management level. 
  2. Tactical. It’s middle-level management data that is used for monthly up to annual planning and control. 
  3. Operational. This one controls information in the short-term period (from a day to a week, up to a month) and stands on a junior level of management.

With such a division, managerial accounting separates the business into smaller units to better manage each of them according to the following scheme:

It separates cost and revenue centers into departments to control everything better and calculate the profit center out of the two previous centers. Then it’s time to analyze the investment center to decide whether or not to invest money in the business. It’s a so-called strategic insight for future decisions.

What managerial accounting focuses on

Managerial accounting also investigates three main topics in running a small business:

  1. Reviewing products. This one is mostly about providing financial and business-crucial statistics about all business processes. 
  1. Launching new products. A managerial accountant plays a support role in investigating all the necessary information about new products.
  1. Staffing. These are the decisions around hiring new employees and setting wages.

It’s also essential to investigate the information relevant to your type of small business to produce a 100% profit out of all the decisions that have been made and create the most accurate reports. 

There are three major types of companies: service, merchandising, and manufacturing services. The main difference between them is in the integral parts of the inventory accounts. They’re raw materials, products in progress, and finished goods. For example, raw materials are not always iron or plastic as the spheres can be different, starting with IT service firms and ending with health care organizations. 

Major tasks of managerial accounting

Previously we’ve discussed management accounting from a broader perspective, but what are the main tasks of this type of accounting? Let’s look at the top four:

  1. Planning. Mostly it’s connected to the business budget, money flow, how much money the company spends in general on manufacturing, and which part of the money goes to either marketing or the cost of products. There are two main types of planning for your business growth: long-run and short-run. As was mentioned before, the long-run planning is strategic and it looks at/considers the possibilities for the future in three to five years. Whereas, short-run planning is primarily concerned with production orienting and process prioritizing, taking into account operational budgeting or profit planning. 
  1. Controlling. This one allows small business owners to compare the actual results to the originally expected ones. The data is then used in the evaluating process to compare against the budgets and deviations from the standards. These deviations are called variances, so it’s kind of a variance analysis that helps you analyze why, for example, the actual results are higher than expected. 
  1. Decision making. This task is not permanent and is only relevant when necessary. But still, it’s a crucial point at times when a decision needs to be made as quickly as possible. It answers questions such as whether the business owner should or should not perform a particular action. Also, the task is to make sure that the revenue won’t be too different from the costs spent on manufacturing the products. 
  1. Performance evaluation. As everyone knows, any firm has a bunch of different divisions. Each of them is responsible for particular tasks within the company. For example, Sales Teams are responsible for the sales rates, Marketing Teams — for the advertising of the product, etc. Performance evaluation helps to find out the profit of every division and increases the company’s income statements. 

Wrapping up the information above, planning involves looking into the future and controlling through managing the present situation in the company. Simultaneously, evaluation relates to looking at and learning from the past

Financial accounting vs. managerial accounting

 Despite reading the previous paragraphs dedicated to the definition of management accounting, differentiating between financial and managerial accounting may still be challenging, so let’s look at the differences between the concrete examples. 

While managerial accounting has already been explained, financial accounting hasn’t received enough attention. 

Financial accounting is the process of recording, summarizing, and analyzing an entity’s financial transactions and reporting them in financial statements to its existing and potential investors, lenders, and creditors. 

There are several points in this definition that allow us to differentiate managerial accounting from financial. Let’s take a more detailed look.

Difference #1. Target audience

It becomes pretty evident that financial and managerial accounting define the process of collecting financial information and presenting it to the target audience in the form of financial reports. The target audience for managerial accounting is small business owners themselves who help to establish a more profitable environment within a company. In contrast, financial accounting orientates itself toward potential investors and lenders

Financial accounting is used in the external arena to compare one company to another, while managerial accounting is a more internal process that impacts performance and profitability. 

Difference #2. Outlook

Financial accounting focuses more on the previous transactions and events that happened in the company. It puts together the reports (income statements and balance sheet) to sum up all the money transferred over a period of time. Managerial accounting concentrates on information in the reports which can be useful for the future. They usually include money forecasts or lists of alternatives. 

Difference #3.  Scope 

Financial accounting is used to understand and observe the big picture of the whole business and see what else can be done compared to other companies. The task of a financial accountant is to find the unique features and establish them within their own company to take advantage of competitors. So it has a broader scope

Managerial accounting, on the other hand, analyzes the work within the company. It splits the big picture from financial accounting into different segments to provide them with individual reports. It’s not about how competitive the company is, but how profitable each division is. 

The significance of this difference is that the information gathered in financial accounting must be only financial, while management accounting also provides non-financial reports. 

Difference #4. Priority

In financial accounting, information needs to be objective and precise. Every calculation needs to be made with 100% accuracy so that the statistics on the global arena will be useful. 

Managerial accounting is more about being relevant and timely. This information is valuable at a particular time. 

Difference #5. Necessity 

As previously mentioned, financial accounting is a must at all times, especially when you have a small growing business. But does that mean managerial accounting is not required? You may think so, but once you get hit with unexpected troubles that need to be solved quickly, you’ll understand the importance of management accounting. 

When it comes to the decision-making strategy, this type of accounting becomes your main priority. 

Difference #6. Rules 

In financial accounting, the rules are set by the Financial Accounting Standards Board (FASB) or by the International Accounting Standards Board (IASB). The standards set by FASB are collectively called Generally Accepted Accounting Principles (GAAP) and IASB standards – International Financial Reporting Standards (IFRS). These rules must be followed when companies are filing reports for external users. 

It’s essential to strictly follow all the regulations and rules to avoid any misinformation. 

In the case of managerial accounting, there are no such heavily regulated rules. Unlike financial accounting, managerial accounting focuses on both the summary and details.

Let’s sum up all the differences in a table:

Financial AccountingManagerial Accounting
#1. Target Audience
ExternalInternal
#2. Outlook
PastFuture
#3. Scope
BroadNarrow
#4. Priority
Objective and preciseRelevant and timely
#5. Necessity
Essential when business growsValuable when coming to the decision-making strategies
#6. Rules
Heavily regulatedLess regulated

It must be concluded that neither financial nor managerial accounting is less essential than the other one. They both play a significant role in growing a small business, and the owners need to pay attention to both of them to increase the company’s operational efficiency. 

Analysis and reports

Managerial accounting is a data-driven look at how to grow a small business and which actions should be taken. It often involves various financial metrics that are used to create a detailed report, including revenue, sales, operating expenses, and cost controls. 

Types of managerial accounting analysis

As already said, managerial accounting splits the whole company into different divisions, analyzes, and produces reports about each sector. Let’s take a look at the most significant types of managerial accounting analysis:

  1. Margin analysis. It analyzes the incremental benefit of increased production. Here we can also mention the break-even analysis, which involves contribution margin calculation and examines cost volume profit relationships in the management planning process. Knowing the break-even point can help to assess the risk of selling a new product, setting sales goals and commission rates, deciding on marketing and advertising strategies, and making other similar operating decisions. 
  1. Constraint analysis. It indicates the limitations within a sales processor or production line. It helps to find out where the constraints occur and calculate the impact on cash flow, profit, and revenue. 
  1. Capital budgeting. Managerial accounting uses  budgets to quantify the business’ plan of operations and to make decisions quickly. Capital budgeting helps a company decide when, where and how much money to spend based on financial data. The goal is to use the budget to help make short-term operational decisions that will help to increase the company’s performance. The process involves calculating the net present value (NPV) and internal rate of return (IRR).
  1. Trend analysis and forecasting. The decisions are made on the basis of the previous information like historical pricing, sales volumes, geographical location, customer trends, etc. Thus, managerial accounting helps to calculate and project future financial situations. 

It’s worth mentioning activity-based costing techniques that help in deciding which customers are more profitable. These allow the business owners to target customers with their advertisements.

  1. Product costing and valuation. Here, managerial accounting takes a look at the actual costs of products and services. Often a relevant cost analysis is used, that focuses on examining the costs that differ between advertising alternatives for each product, ignoring standard costs to develop the most profitable one.

Types of managerial accounting reports

After examining and accumulating all the information needed, managerial accounting proceeds to sum everything up in reports. These reports may be about order information, project, or competitors, but let’s define the three major types:

  1. Accounts receivable aging reports. This report breaks down the remaining balances of the clients into specific periods, which allows managers to identify the debtors and indicate issues in the company collection process.
  1. Performance reports. They consist of performance recordings of a whole company, each department, and each employee. Usually, this type of report is made at the end of each term. It can show flaws in workflow setups if a whole department is somehow not performing to a specific capacity.
  1. Cost reports. These managerial accounting reports include all raw material costs, overhead, labor, and any added costs that need to be considered. These totals are divided by the amounts of products produced and summarized. These reports help to estimate and manage profit margins.

Bottom line

Managerial accounting helps to implement day-to-day information and analyze the workflow within the company. This allows the owner to set up the most profitable plan to follow during a specified period.

The one thing that no owner should forget about is that reports can’t make the decision for you. It’s up to a person to analyze the results, and come to a conclusion about the next steps. 

Since the decision-making process requires lots of effort and concentration, it’s important that the amount of time spent on gathering the information connected to the sales, costs, and transactions is minimized. 

As a small business owner, you might be interested in how accounting software can help you and your business. Synder can save you time and stress, so that you can focus on the more important aspects of management. You can start a free trial with 10 transaction synchronizations into your accounting platform.  On the website, you also have the opportunity to register for a demo so that you can see how the software works and ask our experts any questions.

Are you ready to give it a try? 

Volha Belakurskaja

Volha Belakurskaja

Volha is an experienced copywriter with 10+ years experience writing for the information technology and services industry and a 5+ years sole proprietorship background. Passionate about all things tech, she is especially interested in topics lying at the confluence of business and technology.

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