8 min read
August 7th, 2024
When thinking about the back office and how it serves a business, most business owners think about compliance, audits, and taxes.
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Key Takeaways
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While tax and compliance accounting are important reasons for a back office to function, they are not the only purpose your back office should be serving. Your business's bookkeeping and accounting department should also be helping you run and improve your business with management accounting.
What Is Management Accounting?
While tax and compliance accounting serves an external purpose in your business (producing required financial reports and records), management accounting (also called managerial accounting) is used internally for the development and improvement of a business.
Management accounting processes collect your business's financial data (and other data) to generate management reports, track key metrics, inform decisions, and present information to the business's management, board members, investors, and key stakeholders. Management accounting uses the analysis of the business's operational data, the industry, and the market to strengthen a company's financial health, improve operating strategies, and make the right decisions to help the business grow.
Read More: The Pros & Cons of Outsourced Accounting Services
What Do Management Accounting Services for SMBs Include?
Basic bookkeeping and accounting (i.e. transaction processing, accounts payable, accounts receivable, account reconciliation, etc.) are necessary for management accounting processes to take place. For this reason, management accounting services are typically available in addition to basic bookkeeping and accounting services (i.e. services focused on daily bookkeeping and accounting processes).
Management accounting services tend to be bundled into different packages or levels of services, and they can include:
- Management reports (trailing, twelve-month charts, metrics, and trends)
- Cost accounting and unit economics
- Project-based accounting
- Cash flow analysis and forecasting
- Budgeting and planning
- Financial strategy
- Performance evaluation
- Data evaluation
- Virtual CFO
- Enterprise resource planning (ERP) software, tools, and implementation
Management accounting services are designed to provide business leaders with the tools, team, and technology they need to operate a high-functioning back office, supporting the business's goals and strategies with financial health and operational clarity. Management accounting services deliver a battery of financial insights and transparency that business leaders can use to make better leadership decisions.
Top 10 Benefits of Management Accounting: How Management Accounting Helps Your Business
1. Better Decision-Making
Leading with your gut or by reacting to challenges or opportunities after they occur are two of the biggest mistakes business leaders can make. While instincts are important in business, relying on them entirely can quickly lead your business into trouble. Successful business leaders know they must make decisions based on their business acumen, which is a combination of intuition and information gleaned from data-based facts.
Management accounting provides business leaders with the data they need to make smart decisions. With management accounting, business leaders can identify the profit drivers in their businesses, eliminate unnecessary costs, and maximize their profit potential.
2. Improved Strategy
Business strategy is based on a series of short-term benchmarks and long-term goals that are designed to lead to an ideal future vision of your business. Management accounting helps to facilitate the implementation of business strategy with a financial strategy designed to support the operating framework that will guide your business to success.
With management accounting, business leaders can set SMART goals and have the processes in place to gather data and track the relevant metrics to evaluate the progress they make toward their goals. Management accounting enables business leaders to test strategies and make data-driven changes to improve operations and accelerate success.
“Our cash flow improved on the very first day GrowthForce took over billing and collections. They took the time to understand our processes and built best practices based on our unique needs. Our cash flow is so much better after we hired GrowthForce."
- Art Saxby, CEO Chief Outsiders™
3. Avoid Reactionary Leadership
It's worth pointing out, again, that reactionary leadership is harmful to businesses. Management accounting aims to help business leaders identify trends and improve their financial forecasts so that they can better anticipate problems before they occur and opportunities before they present themselves. With better foresight, business leaders can take action in the present to situate their businesses in the most favorable position for the future.
4. Increased Efficiency and Productivity
Management accounting uses unit economics to evaluate every aspect of a business's operations (jobs, clients, services, departments, individual employees, locations, etc.). This practice helps business leaders identify inefficiencies and eliminate places where productivity lags. Additionally, by analyzing profit and loss statements by class, management accounting can help leaders identify their most profitable revenue streams and those that might actually cost the business money.
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5. Reduce Employee Turnover
Employee turnover is enormously expensive for businesses. Management accounting can also provide strategies for reducing employee turnover. While human capital management might not seem like an obvious benefit of a high-performing bookkeeping and accounting department, businesses can actually use their back offices to evaluate their human resources strategies and expenses to improve employee engagement, happiness, and satisfaction to reduce turnover and increase productivity.
6. Perfectly Timed Hires
Whether you hire too soon or too late, poorly timed hires can result in productivity lags, wasted money, and damaged employee morale. In addition to improving employee retention, the forecasting and trends provided by management accounting processes can help you better anticipate staffing needs so that you can hire new employees with enough time to have them fully trained and up to speed by the time you truly need them to hit the ground running.
7. Better Budgeting and Cash Flow Management
When you use the right budgeting strategy in your business, your whole year will go much more smoothly and induce way less stress. Management accounting improves business planning with better budgeting, careful budget variance analysis, budget revisions, and improved cash flow management.
Read More: Financial Reports Vs. Management Reports: What’s The Difference
8. Improved AR and AP
Management accounting also improves cash flow by strengthening your business's management of its accounts receivable and accounts payable. You can use your financial data to analyze your days sales outstanding (i.e. the gap of time that occurs between recording revenue and actually receiving revenue). Minimizing this gap will immensely improve cash flow. Plus, management accounting can help you implement better AR strategies, such as rewarding early payment from clients, charging upfront fees or retainer fees, and accepting electronic payments.
Additionally, better accounts payable management can help your business hold onto its free cash for as long as possible while taking advantage of early payment discounts whenever feasible.
9. Optimized Pricing and Maximized Profits
Management accounting ensures you know your true costs with thorough cost allocations and time tracking. Understanding how much it costs your business to provide a service or produce a product will provide clarity with regard to how much you should be charging for your services or products. When you optimize your prices, you will always be charging enough to account for the value you provide while covering your direct and indirect costs and still turning a profit. Plus, optimized pricing won't put you at risk of pricing your business out of the market.
10. Spot Trends, Avoid Challenges, and Anticipate Opportunities
With a good management accounting system in place, business leaders are always in touch with their business's numbers and financial health. They can easily spot trends (upward, downward, or flat) and make data-driven decisions to address these trends. With management accounting, you can better leverage future opportunities, avoid problems like cash flow shortages or market shifts, and put your business in the best position for a financially healthy future.
Establish Management Accounting Best Practices With Outsourced Accounting Services for Businesses
The efficacy of management accounting depends entirely on the soundness, accuracy, and reliability of a business's back office and bookkeeping and accounting practices because these functions are necessary for the accurate collection of data throughout the organization. Without a smoothly operating back office, management accounting simply cannot be reliable. Business owners must establish best practices in their back office policies and procedures to ensure the reliable and timely collection of data and facilitate accurate report generation.
Management accounting relies heavily on the automation of back-office processes and data collection facilitated by accounting software and organization-wide integrations. Along with their vast marketplaces of third-party integrations, both Quickbooks Online and Sage Intacct are cloud-based accounting software solutions that can help businesses automate back-office processes and the collection of non-financial data throughout their organizations. Fully centralized on a single platform, these tools provide business leaders with easy access to the data and dynamic reports they need.
If manual processes, a lack of staff, or a lack of expertise are holding back your business's back office, then outsourced accounting services for SMBs could accelerate your business's efficiency, productivity, and profitability. A reputable outsourced accounting provider can help you establish better policies, procedures, and processes in your back office and throughout your company to automate data collection, ensure compliance, and boost your profits to help you take your business to the next level.
