Managerial Accounting: Back To The Future

Managerial Accounting is generally recognised as the "sexy" side of accountancy (hard to believe that we could use such a word in our accountants world!).

But here's some of the questions we're going to try and answer for you:

  • What is it? It's also known as management accounting in most places outside of the USA
  • Why is it different from financial accounting? Which is better?
  • Why it's not just about the future. It has a very welcome past

And have a watch of the video below from the key institute - the IMA - where you can obtain the highly sought after CMA (Certified Management Accountant) certification.

What is Managerial Accounting?

So, exactly what is it? Business executives have to make decisions about how they run their companies. Some of those decisions impact the day to day running of their organisation (operational) whilst others affect the whole direction of their company (strategic).

In both cases they need financial information to help them make their decisions. And it's the accountants that supply this information. Functionally, this is known as decision support i.e. the accountants support the business to make their decisions.

Breaking it down further, many people would say that the job is to (a) gather data (b) analyse/interpret it and (c) present it to the business to allow them to make their decisions. Presentations could be PowerPoint slides, face-to-face discussions and/or a completed excel/word document - it will depend on the specific situation.

But that description misses a key ingredient. you have to first of all ask the business leaders what information they actually want. There's no point in producing a hefty fifty slide presentation full of fantastic analysis if your bosses turn round and tell that they never wanted it in the first place. You would be utterly amazed just how often this happens.

However, don't forget that it's also your role to be creative and resourceful in working with the business to determine what information they need.

Let's go deeper: What kind of financial information do you think the business heads are looking for? Broadly speaking, it falls into two camps: Historical Performance and the "Future"

Historical Performance

Each month, the accountants beaver away to make sure that the results are correctly recorded in the general ledger. These results have to follow the relevant accounting standards. Once the general ledger is "shut" (i.e. you can't amend it any further for that month) then the management reporting begins.

The managerial accountants will produce various packs of information that analyse the performance which includes:

- Variance Analysis (comparing actual performance vs. budget, forecast or a prior period)

- Documents that explain other aspects of the business performance (not necessarily financial - headcount statistics for example) which will include narrative, graphs, tables etc. 

Future Performance

This is where things get "sexy". The business needs to know where it's been (the historical performance) but it needs to know where it's going. And the three most important areas are Budgeting, Forecasting & Strategy:

  • Budgeting: Prior to the beginning of a company's financial year the accountants and management will work together to determine how they think the business will perform over the coming year. This is known as "setting the budget" and there's many views about the worthiness of them which we won't discuss here. Generally speaking the business will compare it's actual performance against budget on a monthly basis
  • Forecasting: The best businesses don't sit back once the budget is completed. Things constantly change. And so, once the financial year gets underway, the management accountant's job is to start forecasting out what they expect the actual results to be taking into account circumstances that may not have been present during the original budget. In may cases the budget becomes useless after a few months and the business only wants to see reporting on how they are going against the forecast. And the forecast will be getting updated all the time. Unfortuantely, no rest for those wicked accountants.
  • Strategy: This is a personal favourite. When the business leaders get together to work out where they want to take the business over the next few years, this is where managerial accounting goes into overdrive. They need you to help them work out the financial impact of their ideas. And they need your contribution based on what you know about business performance. Think about it - from above, you'll see that certified management accountants are hugely involved in the numbers - analysing and presenting them. It's not easy, your business heads know that and that's why accountants get paid well. It's such an important function.

Managerial vs. Financial Accounting

We cover Financial Accounting here so won't go into any more details - however, in the accountancy world would you believe there's an eternal debate about which area is better? At the severe risk of generalisation:

- Management accountants look at the financial accountants as a bunch of bean counters with their noses buried in accounting standards all day long. Yawn... 

- Financial accountants (especially the CPA's and Chartered Accountants) look at the management accountants, reckon they have a second rate accounting qualification and make up numbers all day long (that will be the forecasting)

Of course both positions are nonsense - we think both managerial and financial accounting are fantastic and vital disciplines. They do require different skill sets and will suit different personalities. For example, some people enjoy working with business heads and sales people to help them drive the business forward - they make ideal managerial accountants.

But others hate the thought of that.

They're more comfortable preparing financial statements and tax returns and having less contact with the business. They love financial accounting and that's great - the world needs good ones. Lots of them.

Back To The Future

Were you wondering why we put that in the tile? We loved the films but you'd be quite right to ask what they've got to do with accounting. Well, it's do with something that annoys us just a tad. 

Let's dispel the nonsense that managerial accounting is all future looking and is far more vital for decision making. This statement is consistently put forward by managerial accountants (and many of their institutes) as justification for their discipline being a whole lot better than the boring financial accounting historical stuff.

Whilst there are never any absolutes in life we've no problem in coming off the fence and saying that it's utter rubbish. Why? Let's use an example.

As you'll have noted above we mentioned the historical performance element of management accountancy - Month-End Reporting. This is classic managerial accounting. Management need to know how their business performed over the last month, quarter or whatever period they've determined is relevant for how they run their business.

It's not future looking but invaluable to the business - you need to know if the decisions you've made in the past were successful.

Yet - bizarrely - the managerial accounting bodies actively choose to deride financial accounting by saying it's historical based. Say what? One of the best parts of managerial accounting roles is presenting the historical results to the business heads and numerous other interested parties. Just ask someone who currently does this as part of their job.

Or put another way, who gets to the end of a soccer match and says.."OK, I've no interest in knowing the result of the game I just watched, let's not even discuss how our team performed and let's just think about what's going to happen in the next game"

Management Accounting reports are NOT For public use?

And while we're on the topic of myths, another beauty is that managerial accounting information is only for internal use. Really? Another load of junk we have to tell you.

When larger companies report their results publicly at those big fancy meetings with journalist and financial analysts, the CEO/CFO are forced into answering questions about how their business has performed. Of course, they'd just as soon not answer questions just in case they're difficult and it forces them into admitting mistakes - god forbid.

We digress. 

As you'll see in the financial accounting section, financial statements tend to be a bit tricky to read. Admittedly, they can be impossible to decipher for most people but, broadly, they will tell you if the company made money and if their balance sheet is strong, weak or just plain messed up. As long as you believe the auditors did their job well enough.

We've digressed again.

So, the CEO and CFO have to present the results in a way that the average punters can understand. And guess what. It's the managerial accountants who will provide that analysis.

They have access to all the in depth data, graphs, tables and explanations that get used. It's all historical information. Woops. Better not tell the management accounting institutes that their members are daring to look into the past.

And if the data is used and presented properly and ethically then it provides a tremendous of source of information for investors, creditors, analysts and anyone else who interested in the company (collectively referred to as stakeholders).