As a business owner, you need to make wise decisions. This, of course, applies to every area of your business but is particularly important when it comes to finances.
Like so many who own a small business, you are so busy juggling your many roles, that you don’t take the time to prepare financial updates, other than once a year at dreaded tax time.
Preparing your financial records once a year is what we call financial accounting. Management accounting on the other hand, is far more frequent.
What is the difference between financial and management accounting? Can the use of management accounting improve your small business? Let’s find out!
Management & Financial Accounting – what’s the difference?
Unlike financial accounting, which is preparing information for our beloved Australian Taxation Office (ATO), management accounting helps you gain a real understanding of what is going on in your business.
Management accounting reports are prepared far more frequently (often monthly). This enables you easy access to up to date business performance information ensuring you can act quickly, should an issue require rectification.
The other difference is that management accounting reports are more than just a profit and loss statement or balance sheet.
With management accounting, you have all the information required to know what is really going on in your business, such as;
- What is driving your income?
- How are your costs performing compared to your budget?
- How is your current sales promotion affecting your margins?
- What is your break-even sales level?
With this type of information, you gain the ability to make informed business decisions.
By tracking your expenses, both current and estimated, you will be in a position to identify small problems before they balloon into crises. You can track your sales numbers and by looking at them carefully, you will become more efficient in your use of marketing tactics and have a better handle on what’s bringing in customers.
How can you use Management Accounting?
Let’s say you own a retail business. Management accounting will enable you to track inventory costs, which helps you estimate your future inventory needs as well as making sure you’re making enough profits. Should you find that costs are rising, you can address it quickly by finding a different vendor or taking steps to increase sales.
If you manufacture a product (even if on a small scale), you can use cost allocation methods to figure out how much each item costs your business. There are different ways to do this; by the job, by the process or by the activity. The results of management accounting help you determine what is going into each product. They also allow you to quickly adjust your pricing, in line with any increase in the cost of raw materials or labour.
Even service companies and independent professionals can successfully use management accounting techniques. By tracking how much time and materials you use for the different types of services you provide, you can estimate future costs and set your sales targets. You can also analyse the amount of time you can spend on each client or customer to optimise your profits.
Why don’t more small businesses use Management Accounting?
You may be wondering why many small business owners don’t incorporate management accounting into their business.
There are two reasons for this and they are unlikely to surprise you: Time and money!
Business owners often lack time to look at the bigger picture which would allow them to consider an alternative form of accounting, let alone find extra time to implement such a system and run the regular reports required.
Another reason small business owners often avoid management accounting is that they believe it’s too costly. Like anything, there are costs involved in setting up new systems and processes. However, it will save you time and money and is likely to pay off overall, by enabling your business to run more efficiently and proactively. There are highly skilled people such as Virtual CFO’s who can set up and manage systems like this for you.