What is a management accountant?

Starting my business in 2012 I struggled to understand why management accounting is so underrated and even unknown amongst small businesses in Australia. I got trained in a system where every accountant is a management accountant first and tax agent second – separation of these two areas was foreign to me.

Initially, I tried to conform with the system and applied to be a BAS agent, but it didn’t feel right with me from the start. All procedures and practices are focused solely on reporting the correct amount of tax and withholding back to the ATO – there was no interest or energy spent on creating readable business reports for clients in that area. But I can’t blame anybody because this was not asked for either.

So what’s going on – are business owners really not interested in their figures?

Then I thought maybe it goes back deeper, maybe business margins for small businesses are so slim that the cost of receiving a business report is not viable and that’s when they started to rely solely on gut feeling and bank balance for business decisions. Cut accountant fee down to a minimum because it seems like dead cost as you receive information too late.

Fair enough – that makes sense.

In the last 10 years or so technology around accounting evolved dramatically and business reporting can be done with on-time solutions that give instant reporting to the business operator. Still, most accountants are stuck in their ways and stay focused on the now lucrative tax accounting because the software has automated the whole process. Instead, software providers are trying to solve the need for business reports – is it only me or does that feel wrong?

Software is a tool, it will never be more than that. A tool can’t tell you how to best use it for your specific purpose, it just enables you to achieve the desired outcome in less time. If you buy a lawnmower robot you can’t expect it to mow your lawn right without programming it first for your needs. Why is that not clear for accounting software?

What we have at the moment is a bunch of small businesses using outdated accounting methods because that’s the proven way to stay compliant with the tax office while forfeiting their right to get relevant business reporting. And on the other side is a growing bunch of small business owners that wing it on their own with the help of software and still not achieving the right results. Mostly they are making it worse and soon running back into the arms of the tax and BAS agents. Everything stays the same – software developments profit only the tax agents and small businesses are kept in the dark.

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This would be so easy to fix – because there is a link missing – the management accountant!

When you read back you will realise that I only talk about small businesses. Why? Because larger businesses have their in-house management accountants and they do exactly what I highlighted that is missing – making sense of business figures and reporting back to managers to enable them to make good business decisions. Yet small businesses are not even looking for this solution. It seems as they were brainwashed throughout the years that they are not worth it and that they are too small.

We need to start a revolution!

Software has enabled us, accountants, to provide management accounting, or financial controlling as you can call it as well, to small businesses. We just need to want to do it and offer these services. Unfortunately, management accounting is often not compatible with tax accounting as the management accountant has to work for the business to be able to provide effective results while the tax accountant is liable only to the ATO.

Times are calling for a new breed of accountants and, trust me, management accounting is so much more rewarding than tax accounting.

A management accountant is working alongside the business owner to keep the business profitable, to achieve ROI results and to eventually grow the business. Tax compliance is a by-product as it should be.

What makes a management accountant different?

  • Shared responsibility at data entry

    Management accountants are not liable for tax compliance while still following the tax rules. E.g. If the business owner tells us that he has a receipt we do not need to see evidence as it is his responsibility to provide source documents at an audit.

  • Cost management

    Management accountants have a high focus on allocating cost into the right period and classification. This seemingly small detail can have a high impact in business reports as profitability is not reported correctly if quarterly cost is not allocated into each month.

  • Cost grouping
    Expenses can be split up in various different expense accounts but still belonging to only a few major cost groups. Reporting with cost groups allows the manager to see performance in every area, not only individual accounts. E.g. Labour Cost consists of more than only Wages and Superannuation.
  • Comparable Reporting Periods
    Reporting should be based on management needs, not tax reporting. If a business runs fortnightly payroll it is imperative to show sales performance in relation to labour cost during a comparable time period. Monthly reporting can have different sets of payroll included and is therefore incomparable to monthly sales.
  • Timely Reporting
    Management accounting works for the business and therefore strives to have figures ready as soon as reconciled. Monthly, or often only quarterly reporting in accordance with ATO Activity Statements is information received too late to make an impact – fortnightly and monthly reports published within weeks of the end of the period give management the opportunity to stir figures into the right direction if they get out of hand.

All this seems expensive, you say.

It is not anymore. Software automation has given us a tool to be able to stay on top of your business figures without costing an arm and a leg. After a one-off individual tailored setup fee, you can get management accounting from about $100/week, even less if you are a micro business with little transactions that need controlling.

All in all accounting (including tax accounting) should not cost you more than 2% of your sales, but it usually improves your profit figure by at least 2% or more.

As a pure management accountant now for more than 3 years I am proud that we grew our business mostly inwardly – in creating a healthy environment for our clients that allowed them to grow we doubled our revenue as well. Not too shabby 😉