A well-organized accounting and financial system can help you understand what's happening at your company and provide you with the best way and time to drive your business forward. That's management accounting.
As a small business grows, it should move from simple bookkeeping to more comprehensive accounting methods that support the company's strategic development. Bookkeeping records your numbers, while accounting helps you understand what they mean.
The following are the key roles of accounting and finance in business management.
1. Help set a budget
A comprehensive overall budget starts with income and expense forecasts, then generates various reports to help you operate. A cash flow statement tells you when your income arrives, rather than when it's generated. This helps you avoid running out of money when bills come in. A flexible budget ties your spending to income, rather than using forecasts. This helps you spend only what you have, rather than what you expect to have.
2. Cost analysis
Effective management accounting helps you understand the cost of producing and selling your products in a way that allows you to see how different sales volumes will affect your profit margins. The first step is to break down your costs into overhead and manufacturing costs. Your manufacturing costs may remain constant if you sell the same product repeatedly. Your overhead, which includes expenses such as insurance, marketing, utilities, and office rent, will decrease per unit as you sell more units, allowing you to lower prices to increase volume and market share.
3. Identifying trends
If you only look at your total revenue and see that your sales are increasing, you might not realize that you're not actually maximizing your revenue. Your finance department or manager will break down your sales by profit margin to help you determine whether you should reduce one or more products that aren't contributing much profit, or if you can increase prices and boost your profit. If your accountant sees sales stagnating or growing but profit margins narrowing, they'll consider whether production costs or overheads are the problem.
4. Managing debts
Your management accounting department should monitor your debt to ensure you don't unnecessarily increase interest rates by only making minimum payments when you have excess cash that can help you avoid this. Your finance department should also monitor your credit reports and scores to ensure you don't jeopardize your ability to obtain loans and the best possible credit interest rates.
5. Set credit terms
When you sell to wholesalers, retailers, or other intermediaries, you may need to offer credit terms to allow your partners to sell your products before they pay you. Offering a 90-day credit term when your suppliers offer you 30 days can cost you extra interest and create cash flow problems that could halt your production. Your finance department will analyze what credit terms you can reasonably offer, determine the age of accounts receivable to help you avoid perpetually floating dead customers, or determine that you will have to cut one or more late-paying customers because the profits they generate outweigh the cost of their delayed payments.
6. Meeting compliance requirements
Your finance department is responsible for maintaining accurate records and preparing year-end finances for tax filing. In the event of an Internal Revenue Service (IRS) audit, your finance team will assist in providing and verifying your figures, and answering any questions from the auditor.