Demystifying Management Accounting

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You could be forgiven for thinking that “accounting is just accounting” – but as Damian Evans explains, monthly management reporting can add real value to small business owners.

What is Financial Reporting?

Financial reporting is compliance oriented and is used for external purposes – these are the reports that banks use to approve loans and lines of credits, that investors use when making investment decisions, and that regulators such as Companies House and HMRC use to ensure you are fulfilling your statutory obligations. The reports are always prepared according to GAAP  (Generally Accepted Accounting Principles) and include a Cash Flow Statement, Profit and Loss Statement and Balance Sheet. These financial statements reflect the financial standing of your business at a specific point in time and show a picture of how your company is performing – although it is important to note that they are they don’t offer real insight into the specifics of your operations because they are backwards focussed and therefore cannot inform you on how the business might perform in the future.

What is Management Reporting? 

Management accounting is for internal use, and allows a business to dive deeper into it’s own performance. The reports that are created are completely tailored to the needs of that individual company, which then enable an owner/manager to make better business decisions, backed by solid data. Instead of an overall general snapshot of the company, management reporting focusses on specific elements, meaning that you can really get into the detail and analyse the drivers of your business – for example, reviewing how a particular marketing campaign is performing, or comparing how much sales revenue certain employees are generating, understanding what the cost of a new client acquisition really or creating budgets for projects that are accurate and reliable. Management accounting is not mandatory, and there is an additional cost to preparation, but the information can be invaluable to a small business, with benefits including:

✓ Accurate Analysis – understanding the story behind the “numbers” and using it to make better business decisions

✓ Informed Strategy – using the insight from analysis to help formulate business strategy which adds value to your business

✓ Managed Risk – looking at business processes to identify opportunities for improvement and manage risk

✓ Better Planning – using accounting techniques to plan and budget more effectively

✓ Improved Communication  – knowing what information owners/managers really need to run the business and presenting it to non-finance people in an easy to understand format

To read more about the differences between financial reporting and management reporting, download the latest issue of our iNsight magazine.

Evans Entwistle is a Chartered Management Accountancy practice, regulated by CIMA, the Chartered Institute of Management Accountants. Our monthly management accounts service includes a monthly performance review meeting – please contact us to discuss