If you run a small business, you know there’s no one-size-fits-all accounting solution. Your default accounting strategy often has to wear whichever hat is required at the moment. The two core accounting strategies are financial accounting or management accounting. Which one is your business currently using? There could be untapped benefits of both strategies that your business is missing if you don’t have the whole picture. At Bookkeeping & CFO Solutions 5280, LLC, we continuously hear from business owners concerned that they’re allowing a lack of a full-time accounting staff to create gaps in accounting and reporting. Let’s talk about the difference between financial accounting and management accounting.

What Is Financial Accounting?

When we talk about financial accounting, the focus is on using accounting to measure the current financial health of a company. This is the accounting category that helps outsiders to make an assessment. The numbers revealed through financial accounting influence growth and lending decisions made by the following stakeholders:

  • Current investors and stockholders.
  • Potential investors.
  • A board of directors.
  • Banks, creditors, and lending institutions.

Financial accounting reports should be generated annually. These are “big picture” reports that provide an overview of a company’s health and solvency. Business owners can easily become overwhelmed by financial accounting. Generating a report is a huge undertaking that requires an understanding of how different figures are used to convey growth, losses, profits, and more.

What Items Are Including in Financial Accounting?

Financial accounting covers a wide breadth of business activities. A single report might cover summaries and recordings of all business transactions and economic activity during a specific period of time. The one thing that financial accounting doesn’t include is information from the future. Financial accounting does not include financial forecasting. As we’ll cover in just a minute, that’s a job for management accounting. With financial accounting, all numbers are strictly historical numbers that are reported in a neutral, well-documented way. Of course, good financial accounting can create a strong base for forecasting down the line due to the fact that it provides wide, holistic summaries of a company’s financial statements.

What Is Management Accounting?

The cousin of financial accounting, management accounting can be looked at as inward-facing financial reporting. Unlike financial accounting, management accounting doesn’t prepare reports that are intended to be viewed by outsiders. However, these reports are sometimes useful when pitching ideas to investors and other stakeholders. This form of accounting is instead used by business owners and directors to make decisions regarding investments, daily operations, growth, and more. What makes management accounting stand apart from financial accounting is that it’s focused on the future instead of merely reporting on past activity.

Management accounting is often used when a business owner is considering introducing a new product or service to a lineup. Using forecasting tools, accountants specializing in management accounting will help the business to determine if a new product can be profitable. They will drill down on how much a business will need to charge, how much revenue can be generated, potential issues that could turn a new product unprofitable, and more.

The Core Differences Between Financial Accounting and Management Accounting

As touched on earlier, comparing these two accounting methods comes down to outward-facing reporting versus inward-facing reporting. However, that’s just the beginning. One important detail for business owners to remember is that financial accounting is highly regulated. In addition to being mandatory in many cases, financial accounting must also be accurate and ethical. Financial accounting reports must produce accurate statements regarding balance sheets and cash flow. They must also represent figures clearly and accurately.

Management accounting is optional. In fact, companies are free to prepare and share these internal documents using any system they choose. There is no centralized system for auditing or monitoring reports. That’s not to say that management accounting should be “sloppy.” Creating highly detailed, technical reports that use the best reporting software and practices allows a business to get the competitive edge.

How Is Your Business Handling Financial Accounting and Management Accounting?

If you’re running a small business, accounting needs could be falling through the gaps due to not having a dedicated accounting team. Which method is your small business currently using? If you’re only using financial accounting, you could be missing out on the insights and forecasting needed to make growth-minded, profit-minded decisions using real-world data. If you’re only using management accounting, you may be falling out of compliance with reporting standards. The bottom line is that there isn’t a thriving business on Wall Street, Main Street, or any street in between that isn’t using both financial accounting and management accounting.

Don’t leave any gaps in your accounting strategy! Bookkeeping & CFO Solutions 5280, LLC is a Denver-based accounting firm offering outsourced accounting services. We offer high-level accounting services in accordance with all Generally Accepted Accounting Principles (GAAP). Our outsourced virtual bookkeeping services can be scaled to meet your needs. Contact us today to learn more!