Recently, we have been receiving a variety of requests on management accounting: starting with the audit, outsourcing, and even requests in assisting with defining the scope of work for programmers, generating recommendations for accounting automatization, developing the scheme for business processes.
We would like to share our experience, answer numerous questions, draw attention to important points, in order to save your employees some time and prevent certain mistakes.
What is management accounting?
Management accounting is a system of accounting for financial transactions that responds to specific requests from owners, financial analysts, group management, namely:
i. Obtaining analytical data on sales, expenses, planning, budgeting, capital turnover, other analytical information;
ii. Transformation of financial statements in compliance to other rules and standards (accounting policy of the company-owner, IFRS, reporting requirements of other jurisdictions, etc.)
iii. Consolidated statements of several companies
iv. Combined reporting pack of several companies
Management accounting vs. financial accounting - two sides of the same coin or the opposites?
Usually, the companies start their management accounting with Excel spreadsheets, where data is entered manually, there could be typicalforms such as :
i. Budget or financial plan
ii. Cash flow
iii Forecasts and sales breakdown
iv. Profit and loss statement
Management accounting may take a significant amount of time depending on business turnover, the number of legal entities within the group, and the number of transactions. Furthermore, manual data entry always means the risk of errors, typing errors and inaccuracies of mathematical calculations. Also, the most significant threat is the human factor, since the data falls into the hands of a financial specialist and is given to the individual judgment of such a person.
Following the increase in turnover, businesses start implementing software for management accounting, for example, Aura, UTP, BitFinance, UNF, and other software solutions.
At this stage, it is very important to understand that management accounting is the same as financial accounting, with more detailed information. When companies implementmanagement accounting software separately from financial accounting, it can be almost clearly stated that:
i. The resources of the accounting and financial staff are inefficiently used
ii. Similar operations are conducted repeatedly in different systems
iii. There is a high risk of typing errors, data duplication, and information omission.
iv. There is no precise control system for accuracy, completeness, and accuracy of data
As a result, the management receives inaccurate or misstated information for analytics which could lead to incorrect decisions.
The first question to answer is:
Is there a consolidated accounting policy or all legal entities of a group of companies? Therefore, all the information should conform to the same rules to be combined and used in the future.
Secondly, it is necessary to select the information that is already used in accounting and eliminaterepeated entries in order to minimize the possibility of mistakes, save the employees’ time, and consequently, save the company's expenses for this time.
For example, such records as bank statements, documents for the purchase of goods, services, capital investments, sales, and salaries are already in the accounting records.
It is necessary to understand the priority (either financial or management accounting) where more detailed information is requested. Any data specification may be added as additional fields in the accounting database to export to management accounting. Thus, it is important to enter documents in the at the primary entry with the required details requested to reach analytical objectives.
Here is an example:
An amount from a client was received to the bank account, which was booked as sales from services in the statutory books For the purpose of management accounting such revenue should be classified as two types of services and comission. There are two options here:
1) The bank statement is booked as three separate entries in the accounting database using additional fields for classification and subsequently exported to management accounting.
2) otherwise bank statements are carried out initially in management accounting with all the details and then exported to the accounting database.
Thirdly, it is necessary to organize the export/synchronization of data between the management and accounting databases following definition of the primary importance of the databases.
And the last, but the most important it is critical to understand the differences between the accounting systems. Meaning, which kinds of adjusting to entries shall be booked in management accounting, which should be clearly traced and explained.
For example, these may be provision for aging goods, or transactions between inter companies could be offset against each other, or the exchange differences in management accounting may be calculated for contracts that are accounted in hryvnas and so on.
Such adjustments should be described in the accounting policy so that each financial specialist could gain clear understanding of such records, and the financial controller could reconcile all information.
We highly advise you to customize all the report forms in the program and ensure automatic generation of such. Get rid of reporting forms in Excel - this will make controlling and analytical processes easier for you, and remove the human factor. However, if you cannot avoidExcel, we suggestdeveloping a fixed form and block the formulas from changes.
Each action taken by you and your personnel should lead to a quick and effective result and achievement of your business objectives, so building quality accounting rules and analytics shall be one of your most valuable investments in terms of time and resources.
Conclusions
1. Management accounting must be directly related to financial and primary accounting.
It is important to ensure the transparency of data and the possibility of controlling by financial managers and management. Complicated systems which are only understandable to one person raise a million questions.. Complications create the opportunity for misstatements, manipulations or fraud.
2. Invest in automatization and adjusting accounting databases according to your needs
It is necessary to reach such level of automatization wherethe primary input by the accountant, includes all the essential classification to provide detailed information for the reports.
It is also important to set up reporting in a relevant and convenient format in accounting (management) databases automatically. Otherwise, if you achieve complete data input into the management system, and then you upload all the information in order to create reports in Excel, it’s a waste of time of your programmers, employees, controllers, and management. All the manually filled data (whether in Excel table, Word, or another format used by the management) is the risk of erros, arithmetic or any other misstatements as it is directly related to the human factor and may not be avoided.
3. Involve qualified specialists
We fairly understand that sometimes involving experienced, and qualified specialists may be expensive. And at other times, it's a real quest, because as you know, finding such a specialist may become somewhat of a thriller .
However this would definitely be a reasonable choice, since qualified specialist or company shall spend much less time than the employee without relevant experience or expertise.
At the time of development of management system the experienced professional may acknowledge all specific requirements of the business and implement them at the time of primary technical assignment to the programmers.
You should not exclude the possibility, for example, to outsource this task to the auditing company– in order to set up,, organize and implement management accounting either for for a limited amount of time or on a regular basis.
To tell you the truth, auditors like creative tasks and enjoy solving complicated issues and finding new solutions and technologies.
Hopefully, your management accounting becomes pleasant and positive experience for you and your financial specialists. , And for the management we wish for full access to required information and may your business growth indicators exceed your expectations!
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