Finance and management accounting is a set of processes that help businesses analyze their finances and make informed decisions. This type of accounting is necessary for all types of businesses, whether they sell tangible goods or services, produce intangible assets, or operate as non-profit organizations. Financial and managerial accounting is a key tool for any business to manage its money effectively. It helps businesses understand their operating capital (the money they have on hand) and where their cash needs to be spent. However, many small businesses may not know what financial and managerial accounting is or why it is necessary for their company. This article explores the answers to those questions and some other benefits of maintaining an accounting system in your small business.
What is financial and managerial accounting?
Financial accounting is the process of tracking and analyzing a company’s financial activities so that it can make informed decisions about the future. In managerial accounting, you analyze a company’s financial activities to optimize its resources. Financial accounting is an accounting method that focuses on the resources (e.g., cash, accounts receivable, inventory, etc.) that a company has and what it does with those resources (e.g., selling, paying bills, etc.). In comparison, managerial accounting is an accounting method focusing on managing a company’s resources to get the most out of them.
Why is it important to have financial and managerial accounting?
Financial and managerial accounting help businesses efficiently manage their finances and resources and detect any issues in the books of account. Managing your company’s finances ensures that your business has the resources to keep growing and managing its operations. This can help you avoid unforeseen financial problems (e.g., running out of cash) and stimulate investment in your company. You will also be better equipped to attract new customers, get loans, or pursue mergers or acquisitions.
As you can probably tell, having an accounting system and tracking your finances have a lot of benefits. But there are others that you may not have considered.
- When you have a system in place, it becomes easier to keep track of your expenses and stay on top of your budget.
- Having a system in place can make it easier to take advantage of government grants and programs that are available to businesses.
- You can easily see how much profit your business is making, which can be helpful for making sales and determining your pricing.
- You can easily see your company’s assets, which can help you decide if it is worth pursuing a merger or acquisition.
Differences Between Financial and Managerial Accounting
The biggest difference between financial and managerial accounting is that financial management deals with collecting data for the preparation of financial statements. On the other hand, managerial accounting focuses on internal processing to account for a business’s transactions. Financial accountants are required to have Certified Public Accountant (CPA) certification, while management accountants must have Certified Management Accountant (CMA) certification to manage the process.
Some other points of difference between financial and managerial accounting include:
Aggregation:
Managerial accounting provides a more in-depth look at the firm than financial accounting by itemizing things like profits by product, product line, customer, and geographical location.
Systems:
It is the job of managerial accounting to pinpoint bottlenecks in the company’s operations and devises ways to maximize profits by addressing them. Financial accounting, on the other hand, is concerned exclusively with earning a profit and doesn’t care about how the company operates as a whole.
Reporting focus:
Financial accounting aims to produce financial statements for internal and external users. Managerial accounting, on the other hand, produces operational reporting for use exclusively within the company.
Timing:
The financial statements are issued at the end of an accounting period. Meanwhile, managerial reports may be issued more frequently to provide managers with the up-to-date information they can put to immediate use.
Efficiency:
Managerial accounting provides information on the causes of problems and how to resolve them, while financial accounting provides information on the firm’s profitability and efficiency.
Time period:
Financial accounting is historically focused because it looks back at financial results that have already been achieved. Managerial accounting, on the other hand, looks forward with forecasting.
Standards:
When managerial accounting is used for internal purposes, there is no set of standards to follow. In financial accounting, on the other hand, accounting standards must be adhered to.
Proven information:
It is imperative to get the numbers right in accounting if financial records are to be verified. Accounting for financial reporting relies on this correct data, whereas managerial accounting frequently employs estimates rather than proven facts.
Valuation:
Financial accounting services determines the value of a company’s assets and liabilities. Managerial accounting focuses on how these items can impact a company’s productivity.
How do you keep your small business finances in order?
The first step in keeping your small business finances in order is to create an accounting system. Once you have a system in place, you will have access to your company’s financial data to better understand its financial situation. This data can then be used to make informed decisions about your cash flows, budgeting, and investments. In order to keep your finances in order, you will also want to ensure that your accounting system is accurate. This means double-checking your numbers and making sure that they are correct. Whether it is financial accounting services or management accounting, both depend on KPI reports to determine how the business is performing and what changes are required.
How does an accounting system help with financial and managerial accounting?
As stated above, an accounting system is a key to managing your company’s finances. An accounting system will allow you to track your company’s financial activities, such as how much cash you have on hand, how much you owe to vendors, and how much inventory you have. You will also want to keep track of expenses, such as the cost of inventory, rent, and salaries. Because an accounting system allows you to keep track of financial and managerial activities, you can optimize your resources and make sure you are using your money and assets as efficiently as possible. A good accounting system ensures you have all the necessary data for reporting and also helps prepare accurate KPI reports, allowing financial and management accountants to make better business decisions.
Should you hire an accountant for your small business’s finances?
While an accounting system is a solution for your company’s financial management, you don’t necessarily have to hire an accountant to have an accounting system. If you don’t currently have an accounting system in place, you can get started with a few different options. You can use a spreadsheet-based system to keep track of your expenses and cash flow. However, this may be difficult to keep up-to-date and may not be accurate. Another option is to use a cloud-based accounting software solution. These types of programs offer many of the same functions as traditional on-premise solutions, but they also come with the added benefit of being accessible from any device. You can also use accounting software for financial and managerial accounting purposes with the help of professional outsourcing services providers.
Final Words
As you can see, financial and managerial accounting are important to ensure accurate financial management. However, it is important to have an accounting system to manage your small business’s accounting and finances efficiently. Whether you hire an in-house accountant or outsource the processes to an expert third-party service provider, you will want to ensure that you keep track of your company’s finances. Now that you know why businesses need financial and managerial accounting, you can start creating an efficient system for keeping your books.
