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A Guide to Management Accounting for Business Owners

Posted on 17th August 2017 in The Forecast

Written by Freya Hughes

Hailing from Brighton, UK, we know a thing or two about taking things up a notch. This April (2017), our humble football team, Brighton & Hove Albion, were promoted to the premier league in a landmark match against rival team Wigan. Now they’re playing in the major leagues, you need to ask yourself why your business isn’t too. We’re going to get you up to speed with the importance of management accounting, after this blog, you’ll be able to really score some business goals.

As far back as the Industrial Revolution in the 1800s, management accounting has had a key role in business. Back then, many businesses were controlled by a select few owners who traded and borrowed based on personal relationships and their own assets. No external shareholders meant there was no need for financial reporting. Some industries such as textiles and manufacturing needed to monitor their own assets and support in their decision making, therefore management accounting boomed. In more recent times, the late 1980s saw criticism of the industry about its depleting relevance, as development of the role ground to a halt. It’s said that this critique is what encouraged management accountants to up their game and develop knowledge across myriad industries. Finally, in the last few years, the cloud has been introduced, and management accounting has evolved to what we know it as today.

An outline of the role of management accountants

So knowing the history of the role, we can begin to understand what it is that management accountants do today. They’re also known as Virtual Chief Financial Officers (VCFOs), and act as an outsourced accountant for multiple businesses at one time.

The outline of a corner on a Football Pitch

It’s important to understand the outline of what management accountants do so you know which services you want to invest in

Management accountants are like a hybrid of a business coach, financial advisor, friend and drill sergeant. You can think of them as a personal trainer for your business, as they’ll set out strategies with you and be there every step of the way as you implement them. And this doesn’t just mean the big things like growth, it’s about making sure you’re on the right track and not missing opportunities. There’s so much value in working with a specialist that’s done similar for other businesses comparable to yours.

So what do they ‘manage’?

  • Risk – management accountants work on improving the internal control program of an organisation in an effort to manage and reduce risk. By training staff and then implementing the standards, accountants will assist leaders in considering the risks before key decisions are made.
  • Reports – management accounting reports help business owners and managers to monitor the company’s performance periodically. These include budget reports (to analyse your company’s performance), accounts receivable aging (a critical tool for managing cash flow for companies that extend credit to their customers), and job cost reports (show expenses for a specific project).
  • Strategy – strategic techniques are implemented to support the overall competitive strategy of the organisation by using the cloud to develop more refined product and service costs.
  • Forecasting – management accountants use forecasting to plan for your business’ future. It plots a path for the future, instead of looking back at where you have been, so you can make informed decisions which will eventually put you in a position to grow.
  • Scenario planning – this element of accounting makes business owners broaden their minds and ask ‘what if this happens?’. It’s a process designed to make you consider the myriad things that could go wrong, leading to you coming together and creating a back up strategy for different eventualities.

The difference between financial and management accounting

A player on the sidelines

Be careful not to sideline yourself by just looking at one kind of accountant. Choose wisely and keep yourself in the game

It can get confusing working out what the difference between financial and management accounting. The former prepare historical reports, based on past performance, producing the required financial information used across the business. It’s focused on financial statements and is a distinctly different career path. Management accountants delve deeper into the figures in said reports, collating information on revenue, cash flow and debts to produce real-time trends and statistics within the business. They’re future-focused, almost always relying on forecasts to give clients a good understanding of where they currently stand, and where their business is heading.

How management accountants can help your business

Running your business, you’ll encounter decisions on a daily basis. Some small, some potentially life changing. Your management accountant is the person to trust when it comes to anything strategic or financial in your business. Their data-driven approach to decision-making means more often than not you’ll improve the trajectory of your business. An example of this, as Small Business Chron continues, is where to focus your marketing efforts. The accountant would analyse the costs of each option for each product, therefore can be used to determine whether you should add or discontinue products or operations. They’ll save you time and effort falling down the wrong path, preventing arduous efforts of recovery.

As mentioned, management accountants often work for multiple businesses at a time. This means they’re going to save you money. Depending on the size of your company, you might have looked into employing a CFO and realised it’s a huge investment. For smaller businesses, this outgoing is simply unaffordable and a bookkeeper is all you can afford. Management accountants are an almost middle ground to this: as they’re comparable to freelance staff, you’ll only pay for what you use. It’s like the difference between a contract and pay-as-you-go phone – choose the one that fits your business best as you can always upgrade.

A ball waiting to be kicked

Another part of management accountants’ role is to save you money in the other areas of your company. They’ll study your budget and use it as a springboard to produce a real-time forecast of your figures. Using actual figures, they’ll put together a prediction of the ups and downs you’re set to experience financially throughout the next set period. Having this knowledge before these events occur means you’ll be able to save cash to cover quieter times, and similar. So if you think about it, forecasting is going to provide insight to a lot of things. If you’re looking to expand eventually, it’ll allow you to plan for it responsibly and sustainably.

Forecasting is a key area management accountants excel at. It will save you time and energy after a long week to get your management accountant to set you up and teach you how to check the variables within it.

“Working a 70-hour week means you’ll often put off your finances. When you finally get round to it at 10pm on a Sunday, your brain is fried and the numbers stop making sense. So you could be making decisions based on errors. As a management accountant, I use FUTRLI to automate tasks for people, based on solid infrastructure built to not let errors creep in. That’s why FUTRLI and management accountants are the most solid investments you can make as a business owner.” – Daniel Killoran, FUTRLI Management Accountant

Present and future

A footballer from the past

Forget the past, look at the present and the future and become a champion

“Key techniques that are used in strategy formulation include benchmarking, customer profitability analysis (at contribution margin level) and investment appraisal,” writes the CIMA report Management Accounting in Support of the Strategic Management Process. So this essentially means your management accountant will be able to compare your standing against others in your industry using benchmarking. This will show you the difference in revenue and cash entering your business, so you can identify how many more sales, for example, you’ll need to make to catch up. Because these accountants are strategy obsessed, you can use the benchmark as an identifier, and then discuss tactics as to how you’ll compete with your management accountant.

“Strategic management accounting initiatives can be critical for any organisation(s) aiming to leverage their current financial performance while targeting their future strategic objectives. That’s why management accountants spend a lot of time scenario planning the future and developing contingency plans based on the business’s current attainments.” – Ankur Gomes, FUTRLI Management Accountant

Because management accountants analyse each part of your business, they’ll know it like the back of their hand. Another massive benefit is they’ve likely worked with a business similar to yours, be it in industry or size, so they’ll know which strategies work, which don’t and how to implement both long and short term plans.

Their key goal is to add value to your business, via your products and services, without you having to adjust the way you operate too much. They exist to teach you how your company makes its money and how to capitalise on it.

Here’s an example to help it sink in?

Mark P Holtzman, writing for Managerial Accounting For Dummies, (read chapter one here) uses a really nice analogy for management accountants, which I’ll briefly summarise here:

You’re setting off in the car with surfboards strapped on the roof to enjoy a beach holiday. Your goal is to have a nice week away, but you need a strategy to get there: packing the car, securing the boards to the roof, setting off. You need to take care of road signs, directions and diversions to ensure you reach your destination safely. “Managerial accounting is the collecting and monitoring of information about a venture to make sure that it’s on its way to successfully meeting its goals.”

Management accountants are there to help you realise your goals and achieve them with a strategy, veering you away from any other disasters that could derail your trajectory.


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