With accountancy, it’s very easy to fall into the habit of bracketing all aspects of the field together, simply viewing it as a record of what’s going in and coming out of your business. This is important in ensuring that financial obligations and tax deadlines are met, but a more savvy approach to accountancy can allow you to do much more than this.
Taking this into consideration, let’s look at two major and commonly confused aspects of accounting, and view how each of them steers your business:
Financial accounting
The first thing to point out is that financial accounting is a legal requirement, and needs to be made viewable to those on the outside looking in, with shareholders and HMRC being a prime example. It gives a record of how a company has performed financially over a set period of time.
Financial accounts need to be accessible to people inside and outside of the company, and will be of particular importance if you are looking to borrow from banks and other sources, as they will use the information presented in order to make a lending decision.
Management accounting
Unlike financial, management accounting is optional, but strongly advised. It’s much more focused on forecasting and providing a basis on which to make day-to-day decisions.
As you’ll be aware if you run a business, environments can change drastically within a short period of time, so management accounting is vital to smart directors who are looking to make informed choices on such matters as target audiences, costs to spend on supplies, and other short-term trends. Due to the nature of forecasting, management accounting is always less precise than financial, with figures based on estimates rather than completed transactions.
In summary, a good way to think of the two is that financial accounting caters for people external to the business, such as potential investors and shareholders, while management accounting keeps employees and decision-makers informed. You could also view the former as being focused on the past and present, whereas the latter is more geared towards future strategies.
Of course, if you are looking to alleviate some time for yourself to formulate decisions and put more hours into your business, outsourced financial and management accountants can help you with either or both of these aspects, and the new year offers the perfect time to take a fresh and innovative approach to accounting for the benefit of your company.