Managerial Accounting: Definition, Types, and How It Works

Managerial accounting, also known as management accounting, is a field that comprises analyzing operational costs and devising operational metrics to help businesses in their planning and decision-making processes. Managerial accountants use quantitative analysis to scrutinize resource allocation and relative efficiency to recommend ways to cut costs and become more profitable.

Managerial accountants collect financial information from various parts of a business to issue financial statements that lay out problem areas and areas of improvement, using accounting principles as a lens to view the business as a whole. The decision-makers within the organization then use this accounting data to adjust strategy and structure as needed.

There are many potential ways to decrease a business’s total costs and increase its overall revenue or valuation. Here are some approaches a managerial accountant can take in their task:

1. 1. Accounts receivable management: If a given client has too many past-due invoices, it’s the managerial accountant’s job to flag them as a potential credit risk. After all, a business that doesn’t regularly collect from its clients may have trouble staying afloat. Learn more about accounts receivable.
2. 2. Capital budgeting: Every business has capital expenditures—like factories, land, or equipment—it relies on to maintain its productive capacity. Quantifying the relative value of capital expenditures helps management make capital budgeting decisions regarding what to repair and maintain and what to replace or sell. Since capital budgeting deals with a business’s overall cost structure, it is a form of cost accounting.
3. 3. Cash flow analysis: Cash flow analysis looks at a business’s liquid assets to ensure that it has enough on hand to cover immediate needs and emergencies. Learn more about cash flow and how to calculate it.
4. 4. Constraint analysis: Constraint analysis focuses on bottlenecks within a business that slow down the workflow or prevent a product from making its way out the door. This type of analysis may involve identifying overhead costs that a company can eliminate or better use within the product pipeline and examining ways process improvements can produce positive cost behavior.
5. 5. Financial leverage metrics: Financial leverage metrics frame how a business can utilize its debt-to-equity ratio for sustainable growth. Learn how to calculate the debt-to-equity ratio for your business.
6. 6. Inventory and product valuation: Maintaining and selling inventory require resources. Inventory and product valuation involves identifying the most efficient ways to do both tasks—for example, by pricing a product differently to increase the contribution margin or altering a business’s storage method. A break-even analysis is a standard tool to determine how much a product must sell to cover its overall cost; learn how to calculate the break-even point.
7. 7. Margin analysis: Margin analysis involves process costing to identify ways to streamline production. One common method is to cut product costs (also known as the cost of goods sold—i.e., the costs associated with the production and sale of your goods). Practicing margin analysis requires considering the direct cost of a business’s overall production, including fixed and variable costs that change based on scale.
8. 8. Trend analysis: Cost patterns and market conditions change from year to year; managerial accounting attempts to make sense of those changes by forecasting how a business may need to adapt.

Managerial accounting and financial accounting differ in a few key ways:

• Audience and purpose: Managerial accounting focuses on an exclusively internal audience (usually decision-making management in the business), compiling internal reports of financial data and confidential accounting information. This focus allows business owners and shareholders to make major business decisions to ensure the company’s economic success. By contrast, financial accounting focuses primarily on external parties—investors, regulators, and other external users outside of the business who use the documents to make decisions or analyze the company.
• Content: Managerial accounting reports are usually more tailored to the individual company and include detailed breakdowns of products, spending, income, and investments, while financial accounting reports are typically predetermined and look at the company as a whole.
• Standards: Financial accountants are subject to standard accounting rules when compiling their financial statements. In the United States, these are the generally accepted accounting principles (or GAAP) of the Financial Accounting Standards Board (FASB). Accountants outside of the US are subject to international financial reporting standards (IFRS). On the other hand, managerial accountants usually only compile reports for internal audiences and are not subject to those same regulations. Instead, Certified Management Accountants (CMAs) undergo regular training, just like Certified Public Accountants (CPAs).

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