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A Guide to Management Accounting for Businesses
Management accounting is specific to strategic decision-making based on company finances. Here's how to use it for your business.
Table of Contents
The three main types of accounting for businesses are tax accounting, financial accounting and management accounting. Many new businesses perform only tax accounting so they can file their tax returns. As the company grows, however, financial and management accounting become increasingly important.
This guide explains the types of management accounting, how it differs from financial accounting and how the best accounting software can generate the reports you’ll need.
>> Read next: What Is a Profit and Loss Statement?
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What is management accounting?
Management accounting, also known as managerial accounting, is the process of analyzing information about a company’s finances, interpreting it and using it to make decisions about the business. Managers of various teams and departments create reports such as budgets, financial forecasts and schedules and present them to senior management for decision-making. This information plays a critical role in business decisions based on the company’s financial circumstances, forecasts and trends.
The analysis and reports in management accounting statements are based on internal information and the statements and reports prepared in financial accounting. Management accounting reports are used to draw conclusions about a specific business and the direction it should take.
What are the types of management accounting?
The chart below outlines the components of management accounting.
Type | What it does |
|---|---|
Margin analysis | Measures the benefit of each additional unit of production over the cost of that unit |
Constraint analysis | Identifies bottlenecks and limitations in a company’s operations |
Trends and forecasting | Indicates directional movements in a firm’s business and projects them into the future |
Accounts receivable | Categorizes outstanding accounts receivable by length of time they have been outstanding |
Budgeting | Helps set spending levels for teams, departments and organizations and determines if they have been met |
Inventory valuation and costing | Ascribes value to items held in inventory, as well as the cost of acquiring or producing that inventory |
Inventory turnover | Measures how many times a business has sold and replaced inventory in a given time period [see tips for effective inventory management] |
Financial leverage metrics | Analyzes the company’s use of borrowed capital in order to optimize its use |
You can set up most of the analyses needed for management accounting fairly easily with business accounting software, which often includes many of the accounting formulas you’ll need. Most companies don’t need every formula, but all small businesses can benefit from at least some management accounting reports. See our picks for the best accounting software later in this article.
What is the difference between management accounting and financial accounting?
The primary difference between management accounting and financial accounting is their primary audience: Management accounting is created for managers within the company, whereas financial accounting is intended for decision-makers at banks, creditors, investors and regulators.
Managerial accounting uses financial and other information to create in-depth analyses to plan, direct and control business operations. In contrast, financial accounting is the practice of tracking a company’s financial transactions and building statements that summarize that company’s financial activities and standing. They measure revenue and expenses; calculate total company assets, liabilities and equity; and track cash flow. [Read related article: What Is an Expense Report?]
In other words, management accounting involves more specialized analysis than financial accounting does. Business owners and managers use it to help make important business decisions, such as whether to invest in various assets, buy or sell a business, start a new operation or spin off a new line of products.
Here’s how the three main types of accounting compare.
Type | Primary audience | Governing rules |
|---|---|---|
Tax accounting | Tax authorities | IRS and state codes |
Financial accounting | Investors and regulators | Generally accepted accounting principles (GAAP) |
Management accounting | Internal management | Management needs |
What are the functions of management accounting?
There are many uses for management accounting. The benefits for your company will depend on its size and industry and individual managers’ practices and preferences.
Here are some of the purposes of management accounting:
- Determining the cost of inventory or a job
- Calculating the break-even point, or how much business a company must do before it starts making a profit
- Determining bottlenecks and limitations (constraints)
- Optimizing costs of products or jobs
- Analyzing trends in revenue and expenses
- Setting company and department budgets
- Analyzing transaction costs and efficiency
- Setting prices and sales targets or quotas
- Budgeting expenses
- Forecasting sales and variable expenses
- Setting goals for the business, individual teams and departments, and even specific employees
- Tracking key performance indicators (KPIs) to measure progress
- Determining value for buying or selling a business or specific asset
What are the challenges of management accounting?
While management accounting can help businesses in many ways, it still presents challenges. For starters, the usefulness of management accounting depends on the quality of the information used to create the analyses. You must generate accurate, up-to-date reports for this accounting method to be helpful, though most accounting software makes this relatively easy.
Managerial accounting doesn’t make decisions for you. It may bring clarity to simple yes-or-no decisions (such as whether to buy an asset or sell a division), but you or your management team must still call on your experience and knowledge to interpret the accounting information and make the best decisions for your business.
Lastly, decisions that you or your managers make after reviewing accounting reports should be based not only on executive insight but also your business’s risk tolerance, industry norms, where the company is in the growth cycle and your specific growth objectives. You can make data-driven decisions based on your finances, but this data shouldn’t be the only factor you consider.
Best accounting software for management accounting
Like financial accounting, management accounting is often aided by accounting software. Just as most small business accounting software makes it easy to generate financial accounting reports, these programs can generate custom reports and forecasts based on this data.
It’s essential to choose the best accounting software for your management accounting needs. Here are a few of our recommendations to compare.
- Sage 50: If you want to be sure you can get virtually any business report quickly and easily, Sage 50 is our top pick. It’s not the cheapest accounting solution, but if you can use valuable insights to make better business decisions, it may be right for you. See pricing in our Sage 50 review.
- Intuit QuickBooks Online: For small businesses looking for an affordable accounting solution, QuickBooks Online may be the answer. It’s easy to set up and use, and many of your finance employees will already be familiar with it. The program helps track expenses and profitability and provides prebuilt and custom reports, depending on your selected plan. Check out the available packages in our QuickBooks Online review.
- Oracle NetSuite: This software can handle organizations with various departments, systems and budgets while keeping every manager in the company up to date. Its management accounting functions can help you manage warehouse operations and supply chain processes. The platform may be too complicated if your business is very small, but as your company grows, this solution can help you keep pace. Learn more in our review of Oracle NetSuite.
Management accounting helps you run your business
Owners and managers at businesses of all sizes can make better decisions with improved information and analysis. Some businesses benefit from regular management accounting, while others may perform management accounting analysis on an as-needed basis. [Learn more about managing your startup’s financial health.]
For example, a midsize manufacturing company needs to constantly track trends, unit costs and other information to succeed. A small service business, on the other hand, may benefit from simple targeted information, such as overhead costs and break-even points. By learning about management accounting, you can determine what accounting level, types and functions can help your business succeed.
Dock Treece contributed to this article.
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