Whatever be the nature of a business, accounting plays an important role. Every business needs to manage their transactions and perform other activities like recording, classifying, summarizing and communicating financial information; information that will be helpful for decision-makers inside and outside the organization. And accounting takes care of all such activities.

Market competition, organisational structures and regulations, and multiple stakeholders would factor in the decisions made in a company. So, small businesses have to focus more on the quality of decision making.

Such circumstances result in the urge to undertake some key decisions that will help run the day-to-day operations smoother. Some of which include decisions in accordance with resource allocation, sources of capital, budget allocation, cost control, policy formulation etc.

But, the quality of the information provided to the management plays a key role in making these decisions. Better decisions will be taken by the management if the financial information provided is more reasonable.

Hence management accounting is called in for action. It is a branch of accounting that helps the management in framing policies, planning and controlling the operations of small businesses. Unlike financial and cost accounting, management accounting is called internal accounting. This is because it collects the information from financial and cost accounting systems and processes the data and lets that data help the management in making decisions.

Now let’s get into the concept of management accounting, its functions and techniques used in management accounting.

What is Management Accounting?

The use of suitable techniques and concepts in processing historical data is called management accounting, says American Accounting Association. It projects the economic data of a business entity to assist the management in reasonable economic objectives by generating plans and also to make rational decisions in the journey of achieving those objectives.

Likewise, according to the Chartered Institute of Management Accountants (CIMA), London, management accounting is an integral part of management that is concerned with identifying, presenting and interpreting information that is used to:

·         develop strategies

·         provide information to shareholders and other stakeholders of the business entity

·         give information to employees

·         plan and control activities

·        make decisions

·         make the most out of resources and

·         ensure that assets of the business entity are protected

Hence, management accounting is known for its specific usage of tools and techniques to create accounting information that is helpful for the management. In addition to the past economic data, it also makes use of projected economic data and non – accounting information to help you with effective decision making.

How management accounting is different from financial accounting

When viewed from a technical perspective, there are two types of accounting. One is financial accounting, which relates to the production of financial statements, particularly on an annual basis. These statements comprise the balance sheet on the profit and loss statement that tells what the historical performance of a business has been.

The other is management accounting which is an ongoing process as it involves keeping track of a business’s performance on a regular basis. Management accounting statements not only produce historical results but also include other financial data to analyze the performance of a business.

A good example of management accounting is the strategy that the coaches use for a sporting team in monitoring and improving the performance of their team. At first, the coaches will notice the performance of their team, split it into components and analyze each of these components separately. For instance, in football, the coaches monitor the number of shots, assists, tackles and passes that a player makes instead of counting the goals alone.

This gives the coaches a clear idea and statistics to compare the performance with the previous games and they can generate an overall result on whether the game is improved or worsened.

The coaches make this kind of analysis not only during the finals but throughout the season.

The process should be the same for Management accounting in small businesses, which is the measuring should be carried out throughout the financial year on a regular basis, at least once a month.

#1 Management accounts can save you time

The idea of doing accounts on a monthly basis would feel like an additional burden if you find preparing your year-end accounts consumes a lot of your time.

But that shouldn’t stop someone from seeing the merits of monthly analysis. Instead of getting the bad news at the end of the year, Management accounts can assist you in identifying problems in your figures as early as possible and help you tackle them immediately.

In the end, you will have collectively saved more time by doing a little each month instead of trying to figure out everything at the last minute.

#2 Management accounts can help you reduce costs

Identifying the problems in the early stages will bring significant savings by keeping the situation under control.

Rising costs are one such problem that affects all small businesses. The common ones are operations, inventory, technology and staff.

The knowledge of where the company’s money is spent is very important for a small business owner. Management accounts and complete cost analysis can help you find irregularities beyond just total costs so you can immediately address them.

#3 Management accounts can help prevent fraud

One of the most common business frauds in the UK is invoice fraud. As per a recent survey by UK Finance, more than 4 in 10 businesses don't even have a clue of the risks and it is evident that all sizes of firms are affected.

The scam takes place when fraudsters are disguised as regular suppliers and cheat the firms into transferring their money.

A regular review of your financial performance will unveil malpractices and sense fraud early on because you won’t be waiting until the end of the year to review your accounts.

#4 Management accounts can improve your cash flow

The health of your business depends on whether you have enough capital available or not. It also depends on the knowledge you have about your future expenses and where you spend your money.

You can know your current cash position if you observe your cash flow report as part of your management accounts. This helps you to plan ahead and avoid cash flow problems in the near future.

A good strategy is to save up to three to six months’ worth of funds available to cover immediate expenses like rent, inventory, supplier bills and short-term debts.

#5 Management accounts can support financing

Now you might have acquired a clear idea of how important it is to have sufficient capital and if you want to expand your business even more so.

If you’re looking for financing to fund your growth, banks and potential investors will need reassurance that you can cover your obligations and provide adequate returns.

They might want to look beyond just your year-end results. Letting them know that you have your business under control on a daily basis is an added benefit. Having management accounts for each month will demonstrate that you have a firm grasp on your business and that their money is in good hands.

#6 Management accounts can help plan for growth

Management accounts will provide you with key information to plan your growth and expansion thereby being an important asset to your business. If you missed your sales target, it will be helpful if you know it before the mid-year and not by the end of the year.

Management accounts can help you identify quickly sales trends so that you can have better information and make the necessary changes to your strategy.

if you carry a lot of inventory you would want to break down your sales by service, product or category so you can find out what’s working and what’s not.

As a small business owner, it’s almost impossible to make informed decisions without objective data.

#7 Management accounts help you stay informed and in control

Ultimately management accounts act as a staple in your small business arsenal because it gives you information about your company which would surely be a game-changer.

Having the right information is important because it gives you the control needed to dissolve indecisiveness in bad times and march forward in good times.

Whether it’s cost control, time management, cash flow, growth, financing, planning and beyond. Management accounts can play a very vital role by giving you the edge needed in managing your business day-to-day.

But you need to have proper records for management accounting to make effective decisions. Making decisions with erroneous records would cause misled decisions. Using an automated bookkeeping system will keep your numbers precise and accounting accurate.

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