Management accounting takes the financial data in your business and interprets it to help you stay agile, scale sustainably, and make better decisions. For an SME, an accountant’s expertise can increase revenue by 11.5%, translating to £553,009 per year for businesses with 100-250 employees.
If you visualise basic accounting as a dashboard, then management accounting is like lifting the hood, going deeper into the workings of your business. In this way, management accounting can help you make smarter decisions based on your business’ financial health, performance and path to long-term success.
Read on to learn five ways management accounting can help in decision-making.
1. Offering You Real-Time Data
You know your business better than anyone, but more data makes for better decisions. Management accounting helps to paint a picture of your business now and in the future with reports that are tailored to your needs.
Businesses that use management accounting gain vital data either monthly or quarterly on their performance, covering profitability, cash flow and operational efficiency. Helpfully, your accountant can interpret the data for you and provide graphs and charts to help you visualise it.
For growing businesses, having access to real-time data can also help your external stakeholders make decisions. For example, detailed reports are helpful for investors and banks, as well as giving external partners confidence in working with you.
If your business is ready for board-level financial support, without the hefty price tag, find out more about our Evolve package for growing businesses and management accounts service.
Management accountants analyse and interpret your business’ financial data to support strategic decisions with real-time insight.
2. Controlling Costs
Profit on paper doesn’t always mean real-world liquidity. Management accounts will generally include a cash flow analysis to help you reduce expenses and maximise profitability in your business.
For example, if your business holds inventory, a turnover analysis can help you identify slow-moving stock and take action to free up space and cash. Economic order quantity calculations will give you the information you need to make decisions around how much inventory to order and when to avoid overstock or understock.
By making proactive decisions around cost control and optimising your ability to quickly convert inventory and receivables into cash, your business will also be in a stronger position to manage outgoing supplier payments, helping you maintain relationships.
3. Budgeting and Forecasting
Budgeting enables you to set financial goals for your business and to predict your income, expenses and cash flow for the upcoming period. In contrast, forecasting is about predicting future cash flow, seasonal demand and financial outcomes based on past performance.
Together, budgeting and forecasting in your management accounts give you the tools to make informed decisions so you can confidently meet the financial needs of your business, while investing in future growth.
Strategic Approaches to Budgeting
Your management accountant can support you in strategic approaches to budgeting that work for your business. For example, you might choose zero-based budgeting as a methodology that challenges your managers to justify all business costs from scratch at the start of a given period, encouraging efficiency.
Or, you may opt for flexible budgeting, which adjusts your financial plans in real-time based on your business’ performance. This can help you ensure you’re neither overspending nor underspending, especially during periods of fast growth or where the economic outlook is volatile.
While budgeting allows you to set goals and predict your income in the upcoming period, forecasting focuses on the future financial outlook of your business.
4. Performance Monitoring
Setting clear and measurable targets can help leaders learn from past decisions and make better ones in future. Management accounting enables this, helping you track data against your key performance indicators (KPIs).
When you understand what’s working in your business and what isn’t, you can make proactive decisions to refine your strategies and adjust operations early on. Having clear performance monitoring also empowers your teams, allowing them to understand their contributions within the bigger financial picture of the business.
Responsibility Accounting
You may also choose to go further with responsibility accounting. This breaks your business into key areas, including:
- Cost centres: Areas where the goal is efficiency and reducing costs, such as in production or administration.
- Profit centres: Areas that generate profit, like sales and product teams.
- Investment centres: Areas that make decisions on revenues, costs and capital investments, typically senior management.
By using responsibility accounting, end managers become accountable for their areas of influence within a business, allowing for greater ownership and precise performance tracking.
Accurate performance monitoring enables leaders and teams to understand their contributions to the business and be accountable for meeting KPIs.
5. Managing Risks
Finally, management accounting can help you identify financial risks early on and make proactive decisions to mitigate any issues in your business.
For example, scenario planning is a strategic extension of cash flow analysis that allows your leaders to model ‘what if’ situations in your business. While it’s often impossible to predict the future, understanding the potential effects of changes in customer demand or an economic downturn can help you plan ahead to maintain liquidity and financial flexibility.
Capital expenditure analysis can also help you evaluate and minimise risks when making major investments in your business. Whether you’re investing in new facilities or state-of-the-art equipment, understanding the payback period or the internal rate of return (IRR) enables strategic decision-making with a clear view of cost versus potential value.
Support Your Strategic Decisions With Management Accounting
If you’re committed to making better decisions for your business, we hope this post has helped you understand how management accounting is an invaluable tool for decision-making.
When you’re ready to see the bigger financial picture of your business, we can help with tailored profit and loss reports, cashflow statements, balance sheets and more to support your growth.Find out more about our management accounts service here and learn about our Evolve package for growing businesses. Contact our team to discuss how we can help you meet your financial potential.
