Management Accounting vs Financial Accounting

Management Accounting vs Financial Accounting

Management accounting is not the same thing as financial accounting. When you use the services of a management accountant, you should expect something different.

Sound financial accounting is fundamental to a business, focusing on specific tasks and outcomes. It is, in many ways, a behind-the-scenes function that helps a business run smoothly.

A management accountant, on the other hand, takes a more strategic, advisory role. Management accounting looks beyond the figures and adds value through expert advice and support.

Management accounting is no less essential than financial accounting, but it is not the same thing.

 

What’s the difference?

One way to see the difference between financial accounting and management accounting is in terms of direction.

  • A financial accountant will generally focus on compliance work, bookkeeping, and on annual accounts. Much of this is about looking back at a business’s financial performance and its historic numbers.
  • A management accountant looks forward, with a focus on the future. At the same time, they will keep a close eye on ongoing performance to spot critical changes and trends.

Management accounting tends to be tailored to the businesses it serves, and it covers these core tasks:

  • Preparing and analysing financial information for the business’s management and liaising with them
  • Establishing and maintaining financial policies and management information systems

However, the management accountant also plays an important strategic and advisory role. They may still be involved in some standard financial accounting processes, such as number-crunching and compliance monitoring, but these aren’t their main areas of focus.

They will support business planning by analysing performance and preparing regular financial statements. They help with forecasting and budget-setting and can explain the financial implications of business decisions.

A management accountant will give their professional opinion on financial matters but also get involved in key aspects of a business’s infrastructure such as corporate governance and financial systems.

Differences in presentation

How a management accountant presents information is different from a financial accountant. Whereas financial accounting has the basic format of financial statements covering profit and loss, balance sheets and statements, management accounting information can be far more varied.

This is due to the bespoke nature of management accounting. The management accountant mainly deals with a business’s in-house management. The analysis and documentation they produce aren’t for HMRC, but to meet specific business needs.

Where there are common elements in most management accounting, these will include analysis of the following:

  • Profit and loss
  • Cash flow position
  • Balance sheet
  • Key performance indicators (KPIs)

However, you would expect further information and focus on other areas, depending on planning, forecasting and analysis.

Different Accounting Approaches

Financial accounting is based on Generally Accepted Accounting Principles (GAAP), where the preparation of financial statements follows approved GAAP structure and guidelines.

In contrast, management accounting is generally for management use only, rather than external presentation. Consequently, the formulation of figures in management accounting should reflect what the management wants to get out of them. They may therefore focus on specific areas or trends, rather than present a fully comprehensive overview.

However, management accounts can also be a useful tool for attracting investment. They can provide the sort of supporting information and forecasts that companies can use to demonstrate their current productivity and projected profitability to gain additional funding.

Statutory Requirements

The other significant difference between financial accounting and management accounting is in meeting statutory requirements. These requirements apply to the statements and records prepared by a financial accountant but not to those of a management accountant.

The law makes no statutory requirements for management accounts.

Financial Accounting and Management Accounting

For businesses and organisations, it’s not a case of a binary choice between either management or financial accounting.

These two aspects of accounting serve different objectives and functions.

Management accounts are non-generic and quite specialised. They’re not for the benefit of HMRC or to ensure compliance. But, obviously, businesses that do use management accounting must also ensure they are meeting legal accounting requirements.

Financial accounting carries out the essential financial record-keeping and reporting that businesses must comply with, but management accounting offers added value to run alongside these core accounting services.

What are the Advantages of Using a Management Accountant?

A management accountant can give business owners and managers clarity about their current financial position and offer valuable insight and analysis for planning ahead.

Using management accounting, management can gain useful information about performance, profitability, margins and trends.

This regular, reliable information and analysis supports informed decision-making and aids these vital activities:

  • Monitoring growth
  • Optimising processes
  • Attracting investment
  • Planning ahead.

Management accounting isn’t something a business has to have for reasons of compliance and reporting to HMRC, but it offers the kind of support that can help companies improve their business position.

Essentially, it boils down to how a business views accounting services. It can use them for just the fundamentals. Or, it can draw on additional professional expertise for ongoing strategic guidance and advice.

 

For more details about management accounting, please contact Venn Accounts on 020 8088 2590, email enquiries@vennaccounts.com