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What is Management Accounting?

Aug 22, 2023 | Business, UK Accounting, USA Accounting

As an entrepreneur, you must want to know what happens to the money coming out of your pocket. Is your business thriving? Should you invest more?

Management accounting can help you answer these questions. It uses your business’s financial data to drive growth, boost profits, and achieve strategic objectives. Keep reading and learn more about management accounting!

Management Accounting: Definition, Purpose, and Techniques

Do you want to gain a competitive edge in today’s rapidly evolving business industry? Or simply curious about how successful business owners effectively manage their finances and seem sure about their decisions?

If so, keep reading this blog about management accounting, and get ready to replicate what other established organisations do.

Unlike financial accounting, which focuses on reporting historical financial data, management accounting takes a forward-looking approach by providing critical insights and analysis to guide decision-making.

Let’s further define management accounting, its purpose, and the tools and techniques to use for your business.

What is Management Accounting?

Management accounting is the process of collecting, analysing, interpreting, and presenting financial information to support internal decision-making, planning, and control within an organisation.

It involves using accounting techniques and tools to provide accurate and timely information to management, enabling them to make sound decisions about the organisation’s operations, performance, and strategic direction.

Purpose of Management Accounting

Management accounting serves various purposes within an organisation, including:

Decision-making support

Management accounting provides relevant financial information and analysis to support decision-making processes.

This includes tools and techniques such as cost-volume-profit (CVP) analysis, budgeting, variance analysis, and other financial metrics that aid in evaluating different decision alternatives.

Strategic planning

Management accounting helps organisations in setting financial targets, establishing budgets, and aligning strategies with overall goals and objectives.

This allows organisations to formulate effective strategies, allocate resources efficiently, and monitor progress toward achieving strategic objectives.

Performance evaluation

Management accounting develops performance metrics and key performance indicators (KPIs) to assess the organisation’s performance against predetermined goals and benchmarks.

This allows management to identify areas of improvement, take corrective actions, and evaluate the effectiveness of their strategies and operational decisions.

Resource allocation

Management accounting provides insights into the cost and benefit of different resources and helps organisations allocate resources effectively.

This includes determining the optimal utilisation of resources, identifying cost-saving opportunities, and evaluating the return on investment (ROI) for various resources.

Monitoring and control

Management accounting provides mechanisms to monitor and control the financial performance of an organisation.

This includes regular financial reporting, variance analysis, and performance tracking against targets and budgets, allowing organisations to take corrective actions when needed.

Tools and Techniques of Management Accounting

Management accountants use a wide range of tools and techniques to collect, analyze, and interpret financial information. Some of these are listed below, which also coincide with the purpose of management accounting as discussed earlier:

Cost-volume-profit (CVP) analysisEvaluates the relationship between costs, volume, and profitHelps understand how changes in sales volume, costs, and prices impact profitability
BudgetingDeveloping and monitoring budgets for planning and controlGuides resource allocation, sets financial targets and helps monitor performance
Variance analysisComparing actual results with budgeted or standard resultsIdentifies variances, investigates reasons, and takes corrective actions
Activity-based costing (ABC)Allocates costs to specific activities or products based on their resource consumptionProvides more accurate cost information for decision-making and product pricing
Break-even analysisDetermines the level of sales needed to cover costs and achieve zero profitHelps determine the minimum sales volume required to avoid losses
Financial ratio analysisAnalysing financial ratios to assess financial performance and stabilityProvides insights into liquidity, solvency, profitability, and efficiency of an organisation
Capital budgetingEvaluating investment opportunities and making investment decisionsHelps assess the financial viability of long-term investment projects
Performance measurementDeveloping performance metrics and key performance indicators (KPIs)Evaluates performance against predetermined goals and benchmarks
Decision treesAnalysing decisions involving uncertainty and risksHelps assess different decision alternatives and their potential outcomes

Management Accounting vs Financial Accounting

The key differences between managerial accounting and financial accounting can be summarised as follows:

AspectManagement AccountingFinancial Accounting
FocusInternal usersExternal users
PurposeDecision-making, planning, controlReporting financial information
Time frameFuture-orientedHistorical-oriented
UsersManagement and internal stakeholdersInvestors, creditors, regulatory bodies, external stakeholders
ScopeDetailed and specificBroad and general
Reporting frequencyFlexible and as neededStandardised and periodic
InformationDetailed and relevantGeneral and compliant with accounting standards
Legal RequirementsNot mandatoryMandatory
Format of reportsCustomised and tailored to internal needsStandardised formats
Examples of reportsBudgets, performance reports, cost reportsFinancial statements: balance sheet, income statement, cash flow statement

Note: The table above provides a general comparison between management accounting and financial accounting. The actual scope and usage of these accounting practices may vary depending on the organisation’s specific needs, industry, and regulatory requirements.


Through management accounting, you can make decisions with a plausible basis, optimise costs, evaluate performance, and align your strategies with business goals. Let management accounting drive your organisation toward new heights of success. Good luck!

Consult Sterlinx Global for further management accounting advice for your business.

Frequently Asked Questions

What are the three pillars of management accounting?

The three pillars of management accounting are planning, controlling, and decision-making.

Planning involves setting financial targets and creating budgets, while controlling involves monitoring and managing financial performance.

Decision-making relies on financial analysis and insights provided by management accountants to aid in informed decision-making.

These pillars form the basis for management accounting practices and assist organisations in achieving their financial goals.

Can management accounting help small businesses? 

Yes, management accounting can be highly beneficial for small businesses as they often face unique challenges, such as limited resources, tight budgets, and fierce competition.

Management accounting can help them navigate these challenges by providing financial insights, budgeting and forecasting support, performance evaluation, and strategic planning. It aids in decision-making, saving costs, and monitoring financial performance.

What does a management accountant do in business?

Management accountants provide crucial financial support to businesses through tasks such as financial analysis, budgeting, cost management, performance evaluation, and strategic planning.

They provide valuable insights into decision-making, aid in resource allocation, and monitor financial performance, aligning financial goals with overall business objectives to drive success.

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