Managerial accounting, or management accounting, is a way to present and analyze financial data to help management teams make decisions that improve the company’s performance and achieve its goals.
There are no set standards or guidelines dictating how companies must perform managerial accounting. As we will discuss in further detail below, there are some general functions and reports that companies will create for managerial accounting. However, it’s at the discretion of each manager to determine how they want to present and format this data.
Managerial accounting should provide internal managers with the specific information they need to make informed decisions, in their preferred format. This may even vary from department to department within one company.
Managerial accounting supports essential management functions like planning, organizing, and controlling.
It allows management to measure, visualize, and analyze current and historical performance data in their desired format. In turn, they have relevant data on operations to make better decisions going forward that enhance efficiency, reduce costs, or improve productivity.
Managerial accounting is unique in that it is meant for internal analysis only. This is unlike financial accounting, which consists of financial reporting and statement generation for external stakeholders.
Thus, the main difference between the two is who the information is intended for and the types of decisions it aims to support. Managerial accounting should help internal managers make informed financial decisions for the business. On the other hand, financial accounting data should help investors and creditors understand the financial standing of the company and make investment or lending decisions accordingly.
Another important distinction between the two is that financial accounting must align with generally accepted accounting principles (GAAP), which is not the case for managerial accounting, as we mentioned above.
To give you a better idea of the purpose of managerial accounting, here are some examples of the reports and functions that it consists of:
One of the primary functions of managerial accounting is cash flow analysis. Business leaders can assess the current funds flowing in and out of the business and then determine the impact certain decisions would have on these levels.
For instance, let’s say an e-commerce company wants to expand its product line, and they’re deciding which of two new products to add to its store. Management can perform a cash flow analysis to help make the decision, estimating the initial costs like production and marketing with the anticipated sales for each.
Then, they can find the net present value of each product by discounting future cash flows. The product with the higher net present value indicates that it would be more profitable and, thus, a better option for the company.
Another focus of managerial accounting is on inventory valuation and product costing. This function helps managers get a better idea of the total cost of producing a good or service, helping to support future production decisions and cost reduction strategies. Accountants will break down the cost by:
The idea is to clearly understand and measure the various costs that go into production. Then, managers can see the available levers to reduce costs and improve profitability.
Additional types of analysis in this category include cost-volume-profit analysis, which shows the incremental costs incurred from producing one extra unit. There is also break-even analysis, which shows managers the exact units they’d need to produce and sell for revenues to equal expenses.
Constraint analysis is a valuable tool for managerial accountants to determine the possible constraints on cash flows and production. The main focus of constraint analysis is on bottlenecks and their impact on sales and profits.
Let’s say a floral company is concerned about its ability to fulfill orders during the peak summer wedding season. If the florist had inquiries for 40 weddings but could only source the flowers to fulfill 30 orders, the constraint is flower supply.
Going one step further, the shop manager can determine the exact cost of this constraint. If each wedding order generates $1,000 in profit for the shop, then their inability to fulfill ten additional wedding orders costs the business $10,000 in potential profits.
Using this data, the business owner can make different pricing and sourcing decisions to capture this lost profit in future summer wedding seasons.
Managerial accounting is also concerned with forecasting and budgeting, helping the company estimate future performance to inform current decisions.
This includes the creation of budgets, analyzing actual performance against budgeted values, and using these measured variances to make adjustments to operations.
Let’s use an example of a fashion retailer that budgeted sales for Q2 of $100,000. If, at the end of the quarter, they only brought in $85,000 in sales, they had a negative sales variance of $15,000.
Diving deeper into budget variances can help the retailer understand where performance fell short of expectations and what they might do differently going forward. For instance, if they notice a positive marketing variance of $5,000 for the same period, they might determine that they need to spend more of their allotted budget on marketing to deliver better sales results.
Managerial accounting provides companies with important data and analysis to drive better decision-making, support organizational goals, and improve efficiency and profitability.
Each company can adapt its managerial accounting functions to suit its specific needs. However, these analysis tasks can be overwhelming for smaller businesses or startups that don’t have large internal accounting teams. Even though managerial accounting reports are not required, they can still provide invaluable insights and data to businesses of all sizes and should not be overlooked.
If you need professional support preparing strategic reports and analysis, consult with the experts at Bob’s Bookkeepers. Contact us today to see how we can help you better manage your finances and drive sustainable growth.
