Management accounting provides valuable insights into the beating heart of your business and its performance. You can use management accounting to determine where your business is doing great, where it’s struggling, and where you might find your next opportunity.

But what is management accounting exactly?

This guide will cover:

  • What management accounting is, and how it works
  • Why it’s important, and when you might use it
  • If you can outsource management accounting
  • How Countingup can help with your management accounting

What is management accounting?

Management accounting (also known as managerial or cost accounting) is the process of creating company goals by identifying, measuring, analysing, interpreting, and communicating information to managers.

This form of accounting focuses on informing a company’s management about operational business metrics, using information related to costs of products or services purchased by the company. Management accountants use performance reports pulled from this information to note variations in the results.

While financial accounting involves collecting data to create financial statements for external parties like HMRC, management accounting produces reports for internal purposes.

Why is management accounting important?

Data is always key in business to help you make informed decisions to drive your company forward. Robust and well-communicated data can be the difference between success and failure when it comes to business strategy and decision making. 

Without management accounting, you essentially steer the business blindfolded. You need management accounting to understand how the market looks, when to expand your product or service offering, calculate if you need to increase your prices, and so on. 

Management accounts empower you to make the right calls from top to bottom that will impact the entire company.

What can I find on management accounting reports?

Management accounting reports include information that differs from financial accounting reports in a number of ways. For example, financial reports are typically based on historical data (what has already happened), and management reports tend to focus on the future.

Unlike financial accounting reports, which you create to share with external entities, management accounting reports are usually confidential and only meant to be seen by people in your business. 

Financial reports are also usually based on generally accepted accounting practices to ensure they are of a certain standard. In contrast, management accounting reports are based on the management’s (or yours) informational needs. In other words, you create management reports based on what you need to know about your business, not what others expect to see.

What is management accounting used for? 

To give you a better idea of when to use management accounting, we’ve listed its main functions below:

Forecasting the future

Forecasting (predict how your business will evolve over a specific time) is important to ensure your business is equipped to harness opportunities and deal with any obstacles that may arise. Management accounts can help you answer key questions to help with your forecasting, such as:

  • Should I invest in new equipment?
  • Do I need to update my product or service offering to make more sales?
  • Will I need to put extra money away to tide me over any slow periods?
  • Do I need to re-stock any inventory?

Cash flow forecasting

Your cash flow is the money coming in (your inflows) and going out (your outflows) of your business. In other words, how much money you’re earning and spending. Cash flow forecasting predicts how money will move in and out of your business during a set time. Management accounting helps you estimate your future cash flows and how they’ll impact your business.

Understanding performance 

As can be expected, your forecasting won’t always be spot on. More often than not, there will be at least some variances between your predictions and what you actually achieved. These variances are called ‘performance discrepancies’. 

Management accounting uses analytical techniques that help you (the management) spot where your business performed better than predicted and where you need to improve. You can then build on this information to perform better in the future.

Analysing return on investment 

Before embarking on a project that requires a lot of time and effort (and money), it’s essential to know the likely return on investment (ROI). In other words, how much will you get back if you make the investment? 

You can use management accounting to determine if the investment is worth it or if you should look for another option.

Can I outsource management accounting?

Management accounts are time-consuming and require working accounting knowledge to get right. Unless you’re an expert yourself, you may want to outsource your management accounting to someone who knows exactly how to create these accounts. 

A management accountant can ensure your accounts are done correctly to include all the crucial information. That said, hiring an in-house management accountant can be expensive and may not be a cost you can afford in the early days of your business venture.

The cheaper option is to outsource your management accounting on a freelance or contract basis. Doing this means you’ll only need to pay for the work carried out rather than a full-time or part-time salary. Since you might only need to update your management account once per month or quarter, you could save a lot of money outsourcing instead of hiring.

The third option is to take Management Accountancy courses and learn how to do it yourself. Systems like Countingup are very handy since they can help you pull out key financial information you need for your management accounts. 

Save time on accounting admin with a simple app

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for self-employed people across the UK. Thousands of business owners are using the Countingup app to save time on their financial admin and focus on growing their business. 

With automatic expense categorisation, receipt capture tools, cash flow insights, and tax estimates, you can confidently keep on top of your business finances and save yourself hours of accounting admin, so you can focus on doing what you do best. Find out more here.