The Rules of Thumb blog from MoneyThumb wants our readers who are small business owners to understand exactly what management accounting is and what it can do for your business. Management accounting allows decision-makers to get data-driven reports that reveal significant trends, strengths, and weaknesses of the enterprise.
For many small business owners who don’t have an accounting department, however, it can seem as if the information provided by setting up a management accounting system is not time well spent. After all, the odds are that management and the chief accountant at a small firm are one and the same. Is it worth it to generate a separate set of reports if only one person is looking at them? It might be if an easy way to organize and sort data makes decisions a lot easier.
In conventional accounting, every incoming check and expenditure are recorded so that they can be reconciled. Using management accounting, however, it becomes easy to spot major trends that may affect the business. For a business owner who can quickly get bogged down with the minutiae of the day-to-day, being able to take a step back and see the overall health of a company is essential.
It is critical to start with very accurate financial data. While most accounting software programs can produce reports that use management accounting techniques, these reports are only as good as the data that is provided to the program. That data, viewed in management reports, can pinpoint areas for analysis and review.
With management accounting techniques, a small business owner can get a clear picture of how his or her business is doing as a whole. Instead of focusing on every individual expense associated with a client, a management accounting approach would look at the total amount spent and earned from a client in order to determine if the work being done is truly profitable. Reviewing detailed data on overhead costs might be necessary in order to pay all the bills, but considering the total cost of office space over a period of several months is the report that a business owner needs in order to make a decision about renewing a lease. It is this analysis of relevant costs that can steer a small business owner toward sound decisions.
It is important to realize that management accounting is designed to provide the big picture. From that, it is possible to see if areas of a company are not profitable, which ones are making money, which ones are growing, and which are shrinking. For example, these techniques can identify which specific clients are most profitable, which areas of the operation need to be streamlined or improved, and which capital expenditures might be most useful.
Similarly, management accounting tools can be used to make decisions about the future of a company. While financial accounting will tell a business owner how much he or she spends on personnel costs, management accounting will compare the theoretical cost of a new employee to the expected benefit gained from his or her work. Future budgeting, financial statement projections, and identification of productive areas on which to focus improvements are all activities that can be assisted by management accounting techniques.