Accounting is all about collecting and organizing information. You use balance sheets, expense tracking, and financial statements to keep your business running smoothly.
However, data is useless if you don't know how to use it to your advantage. To turn this data into something valuable for your startup, a more detailed form of financial management is required. This is where managerial accounting comes into play.
Read on to learn about the basics of managerial accounting, including the ways it can improve business operations and help you make better decisions for your company.
What Is Managerial Accounting?
Financial accountants gather data to communicate financial information to outside investors or stakeholders. In contrast, a managerial accountant works directly for a company.
Their job is to generate financial reports, conduct trend analysis, boost productivity, and increase profits. Managerial accounting relies on several techniques to do this.
The Importance of Managerial Accounting in Startups
Startups usually have access to less working capital and fewer resources than big brands. This makes keeping up with key financial metrics essential to controlling costs or avoiding risky business decisions.
While big companies can weather a few quarters of poor performance or high costs, these problems can devastate startups. Investing in managerial accounting will ensure your business is built upon a strong foundation.
Distinctions Between Managerial and Financial Accounting
There are several differences between managerial vs financial accounting. Financial accounting is about creating financial reports for third parties like investment firms. This is done by comparing current performance metrics to previous months or years. This is why financial accounting must follow guidelines known as Generally Accepted Accounting Principles, or GAAP.
Managerial accounting or management accounting is only intended for internal use. Managerial accounting is focused on the future and aims to inform a company's decision-making. Since this information is only used in-house, it's not necessary to follow GAAP accounting standards.
Key Concepts and Techniques
Several methods are used in managerial accounting to evaluate a company's financial situation. To leverage managerial accounting at your business, you'll need to be familiar with these components.
Cost Behavior Analysis: Fixed, Variable, and Mixed Costs
A lot of managerial accounting deals with cost accounting. This is all about accurately recording the total expenses of each stage in a production process. In the world of SaaS, this production could mean creating a product or selling a service.
As production volumes change, marginal costing and financial analysis reveal the impact on profits. Evaluating fixed, mixed, and variable costs helps to determine the costs of goods sold (COGS). You can also find the profit margin for each product or service.
Meanwhile, cost behavior analysis looks at how to reduce costs that can harm long-term profitability.
Cost-Volume-Profit (CVP) Analysis
Another technique used in managerial accounting is the Cost-Volume-Profit or CVP analysis. This method focuses on how profits can change depending on the volume of goods sold and the price point of various offerings.
You can use CVP analysis to find the breakeven point or the amount of goods that need to be sold to cover production expenses.
A cost-volume-profit analysis can also reveal if your latest service is profitable enough to sell.
Budgeting and Forecasting
Managerial accounting is great for creating budget breakdowns and forecasting financial performance.
Looking at historical sales through ratio analysis helps to predict operating expenses as things scale up. This makes it easier to adjust budget allocations. Financial forecasting also helps in properly timing acquisitions, expansions, or new product releases.
Relevant Costs and Decision-Making
A managerial accountant helps estimate the actual costs of various business decisions. For example, if you're thinking of shutting down an office, you'll need to consider if closing it will cost more than the profit it generates. By recognizing relevant and irrelevant costs, you can avoid making risky business decisions.
Activity-Based Costing (ABC)
Activity-based costing (ABC) looks at the cost of specific business activities. This may include assembling a product or engineering a new software program. Managers can quickly identify key cost drivers and at which stage activity could be adjusted to reduce expenses. Activity-based costing can also help you see if an activity is profitable enough to be justified.
The Benefits of Using Managerial Accounting in Startups
Managerial accounting offers numerous advantages to both startups and long-established companies. The ideas used in this form of accounting can help improve the profitability and efficiency of your organization. Here are some of the most impactful benefits of managerial accounting:
Informed Decision-Making and Strategic Planning
Managerial accounting can be used to support decision-making processes. You'll gain deeper insights into your company's financial processes so you can move forward confidently.
As the business grows, ongoing managerial accounting will provide the most current data to help you make plans, margin analysis and forecasts.
Efficient Resource Allocation
The direct and indirect costs of your business are examined more closely with managerial accounting. This data can reveal inefficiencies, redundancies, or lackluster resource management. This lets you stay on top of your resources and pivot quickly when adjustments are needed.
Evaluation of Product and Service
Managerial accounting will give your company a better idea of each step in the conception, production, and delivery cycle. You'll see deeper into labor costs, material procurement expenses, and the labor devoted to customer service. From here, you can identify which products or services could be improved or eliminated.
Another major benefit of managerial accounting is its ability to improve your company’s financial outlook.
Managerial accounting helps to correlate a product or service's revenue to the amount of money you need to bring it to market. This includes figuring out the potential internal rate of return on a given investment. With this data, you can find exactly how profitable an offering is and what volumes should be maintained. With constraint analysis, you can also see where any operational bottlenecks are located.
Identification of Cost Reduction Opportunities
Two ways to increase profits are increasing sales or lowering overhead costs.
Managerial accounting is integral in locating exactly where the lion’s share of expenses are going in the production chain and why.
This data will help you hone in on areas to minimize costs, reduce waste, or trim labor resources without hurting efficiency.
Enhanced Performance Evaluation and Accountability
Managerial accounting examines every facet of a product or service, making it easy to track down where issues lie. These performance reports help give more accurate performance evaluations while also enhancing accountability. You can identify which team or department is responsible when things go well or when they go wrong.
Get the Most Out of Your Startup Finances With the Right Partner
Working with a trusted managerial accountant is essential. With their help, you'll have a much easier time protecting your company's financial health.
Adhering to the techniques used in this form of accounting will give you deeper insights into how your business works and its costs.
To learn more about management accounting and its benefits, speak with a financial professional today.