As a business owner, you need to make wise decisions about spending so your company can stay afloat. But, if you’re like many who own a business, you’re so busy juggling all your roles that you don’t take the time to prepare financial updates more than once a year, at tax time.
The difference between financial accounting, or preparing your financial statements once a year, and management accounting which far more frequent. All successful business relies heavily on their monthly management accounting to track how they are performing. One of the key things that small businesses did well on the way to becoming BIG businesses was having reliable reporting systems to give management the information they need to make good decisions.
What Exactly is Management Accounting?
The work your Accountant does is known as financial accounting. Also known as ‘compliance’ accounting, it is all about preparing the information our beloved ATO requires so they know how much income tax you owe. The format of this ‘compliance’ reporting is not at all helpful for you to understand what is going on in your business. Even worse, you don’t receive it until long after the financial year has ended when it is far too late for you to do anything about it.
Management accounting has nothing to do with calculating how much tax you owe. It is all about helping you understand what is really going on in your business.
There are several major differences between the two. Management accounting reports are prepared far more frequently. This means you have up to date information about how your business is performing and you can act quickly if you need to fix something. The other difference is that management accounting reports are more than just a profit and loss or balance sheet. You can, and should, have the information you need to know what is really going on in your business. What is driving your income? How are your costs performing compared to your budget? How is your current sales promotion affecting your margins? What is your break-even sales level? With this type of information, you can make informed decisions. Let proCFO help you with management package service.
By tracking your expenses, both current and estimated, you’ll be able to see small problems before they balloon into crises. You can track what your sales numbers need to be to break even. And by looking carefully at your sales, you’ll be able to be more efficient in your use of marketing tactics and have a better handle on what’s bringing in customers.
How Can You Use Managerial Accounting?
Let’s say you own a retail business. You set up your management accounting system to track inventory and inventory costs. That helps you estimate your future inventory needs as well as making sure you’re making the profits you had planned for. If you find that costs are rising, you can address that quickly by finding a different vendor or taking steps to increase sales.
If you make a product, even if it’s on a small scale, you can use cost allocation methods to figure out how much each item costs you. There are different ways to do this – by the job, by the process, by the activity. But the results of this type of accounting help you know exactly what is going into each product and quickly adjust your pricing if raw materials or labour increase.
Even service companies and independent professionals can successfully use management accounting techniques. By tracking how much time and materials you use for the different types of services you provide you can estimate future costs and set your sales targets. You can also analyse the amount of time you can spend on each client or customer to optimise your profits.
Why Don’t More Small Businesses Use Management Accounting reports?
Many small business owners don’t incorporate managerial accounting for two reasons: time and money. These owners are putting a lot of their time into their companies, and they are not looking at the big picture. Even though setting up managerial accounting systems can take a little effort, the results will pay off in making your business run more efficiently and proactively.
Another reason why small business owners eschew management accounting is that they believe it’s too costly. This is where a virtual CFO is invaluable. The virtual CFO’s at proCFO are experts at understanding what management reporting systems your business will need. They will help you decide what you need and help get it set up and running perfectly. Once you have this information at your fingertips you will wonder how you ever managed without it. You will have the information you need to make better business decisions, thus growing your company and increasing profits.
About David Officen
David is the Founder and Managing Director of proCFO. David combines an accounting and consulting background with commercial experience both as a manager for large commercial businesses and as the owner of private and family businesses.