Management Accounting for Growing Startups

Accounting processes involve obtaining and organizing many different pieces of information. The types of documents that are part of accounting include everything from financial statements to balance sheets. To make sure this data is actionable, it needs to be analyzed, which is possible with managerial accounting. In this guide, you’ll learn the answer to “What is managerial accounting?” and discover how it can benefit your growing startup.

What is Management Accounting?

Management accounting involves preparing various reports to assist managers in making decisions that benefit the company. These reports focus on short-term and long-term improvements to business operations. By performing management accounting, you can more effectively identify, interpret, analyze, measure, and communicate data to managers. If implemented correctly, your startup should be able to envision and pursue its current goals.

Proper accounting plays a critical role in business decision-making. For example, analyzing this data can help your forecast financial performance, set budgets, and plan for the future. This data can tell you whether you should pursue aggressive expansion plans or maintain cash reserves. The more accurate your estimates are, the less likely you are to make a major operational error. 

 

Managerial Accounting vs. Financial Accounting

Managerial accounting and financial accounting are two similar processes that differ in several major ways. The primary differences between the two techniques are:

Audience

Managerial accounting helps managers make the correct business decisions. Financial accounting involves delivering data to entities outside the organization.

Reporting Standards

Financial accounting conforms to strict standards. For example, all publicly held businesses must adhere to generally accepted accounting principles (GAAP) when completing their financial statements. Managerial accounting can be modified in any way the business sees fit.

Purpose & Objective

Both forms of accounting provide predictive analytics. However, business decisions are informed in different ways. Financial accounting shows profitability by focusing on key performance indicators. Managerial accounting finds problem areas via internal analysis.

How Can Management Accounting Help My Business?

The information derived from accounting reports can inform strategic planning, operational adjustments, and long-term . For example, marginal analysis measures profits against numerous types of costs. This technique allows you to identify the advantages associated with increasing production. It can also help you set product price points.

Consider the benefits of product costing and inventory valuation. When you perform product costing, you’ll need to compute overhead charges and identify the costs that are incurred when goods are sold. Trend forecasting and analysis should make it easier for your startup to identify strange patterns in product costs and correct the underlying problems. The many insights you gather through managerial accounting can help you expand to an additional market or more competitively price your products.

Key Functions of Managerial Accounting

There are many responsibilities and functions that make up managerial accounting, which include everything from forecasting and budgeting to variance analysis. For example, a cost behavior analysis focuses on recording the expenses that occur at every stage during the production process. When production volumes change, this technique will identify the impact on profits that occurs. 

Managerial accounting is highly effective at helping businesses develop comprehensive budgets and forecast financial performance. By accurately forecasting financial performance, your startup can properly time expansions, product releases, and acquisitions. Budgeting involves analyzing historical sales to predict operating expenses as your business grows. These functions support strategic business decisions.

Who Handles Management Accounting in a Company?

Managerial accounting can be complex and time-consuming, which is why this process is performed by many types of employees. The primary roles include the following:

  • Financial analyst – These professionals usually report to directors or managers and are responsible for helping with budgeting and financial modeling. They can also perform variance analyses.
  • Staff accountant – A staff accountant can perform tasks like reconciliation, account review, and financial report preparation.
  • Manager/director – Managers/directors tend to report to the CEO or CFO. They are tasked with identifying trends from raw financial data. A manager/director can also create comprehensive growth strategies based on the analyses that take place during managerial accounting.
  • Accounting manager – This type of manager often reports to a controller and is directly responsible for general ledger accounting.
  • Treasurer – A treasurer is tasked with leading staff and managers in creating cash forecasts and fostering strong lender relationships.
  • Controller – A controller usually reports to the CEO or CFO. They must manage all accounting and reporting operations, which include creating internal financial statements.
  • CFO – If your startup is large enough to have a chief financial officer, this role is responsible for communicating the results of management accounting to lenders, investors, and other external parties.

The Best Tools and Techniques for Managerial Accounting

You can use many different tools and techniques to perform managerial accounting. For example, activity-based costing (ABC) focuses on the costs of various business activities, which can include developing a new piece of software or putting a product together. When using this technique, managers will find the main cost drivers and identify ways that expenses can be reduced. The data gathered with this tool allows you to more accurately determine if a specific activity is justifiable based on the profit it earns. 

You can also use a balanced scorecard to display how your company’s current performance is strong enough to reach future goals. This management tool is highly useful when speaking with stakeholder groups, which include customers, employees, business partners, shareholders, and suppliers. These tools help you analyze your company’s performance and make knowledgeable decisions.

Common Pitfalls and How to Avoid Them

When implementing effective managerial accounting practices, your business might encounter some hurdles along the way. For example, the data gathered from accounting processes has a certain level of complexity to it. You need to have people in your company who know how to accurately interpret and analyze this data. 

Keep in mind that the quality of the decisions your company makes depends on the status of your records. If the quality of your financial records is poor, this will be reflected in the data you gather. 

It can also be challenging to integrate management accounting with other business systems. There’s a cost that comes with installing the necessary components and hiring professionals who can interpret the data. You may be able to overcome these challenges by maintaining accurate and timely data. 

Closing Thoughts on Management Accounting

When performed correctly, management accounting should help your startup grow and become more efficient. You can use techniques like budgeting, forecasting, and trend analysis to make business decisions that are based on solid data. Since you also know how to avoid the most common pitfalls associated with management accounting, the managers in your business should be able to use the information correctly. 

Before you start implementing managerial accounting, keep in mind that it differs significantly from financial accounting. While the data you gather as part of managerial accounting goes directly to your company’s managers, financial accounting reports are distributed to third parties outside your company. Connect with one of our tax pros for a one-on-one strategy session now to see how we can help your business.

About the Author

Miguel Alexander Centeno

Miguel Alexander Centeno is an author, speaker, and tax leader at Tax Hack Accounting Group. A former Big 4 tax manager, he represents taxpayers in all matters before the IRS, including the U.S. Tax Court. He has been quoted in the Wall Street Journal, Fox Business, and MSNBC on tax related articles and has testified before the U.S. House of Representatives as a part of hearings for the Tax Cuts and Jobs Act. A father of three, Miguel is an avid acoustic guitar player, gravel cyclist and once-a-week yogi.
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