Who it's for
An owner who looks at the financial statements and doesn't understand why their numbers don't help with decisions.
Key idea
The two sets of books answer different questions for different audiences. A discrepancy between them is normal, not an error. The error is having only one and trying to use it for both jobs.
Contents
- Exactly where they differ
- Three reports that are enough to start
- Why there's profit but no cash
- Who should keep the management accounts
- Signs the accounting is poorly set up
- What to do this week
Take the self-assessment
An owner opens the report from the accountant and sees a profit. Yet there's no money in the account. Or the reverse: there's money, but the report shows a loss. Both situations are normal, and both mean the same thing: you're looking at a tool built for someone else's question.
The distinction
Financial accounting follows rules and protects against claims. Management accounting follows the logic of decisions and protects against self-deception. They're different tools with different users.
Exactly where they differ
Question Financial accounting Management accounting
Who it's for The government, banks, auditors The owner and managers
Rules Set by law Set by you, to fit your decisions
When revenue is recognized When the document is issued When it's useful for management
How cost is calculated By the method fixed in the accounting policy By actual resource use, including your time
Frequency Quarter, year Week, month, matching the speed of decisions
What matters more Correctness Timeliness and comparability
The most common discrepancy is cost. In financial accounting, it's assembled according to cost allocation rules. In management accounting, the question is different: how much does it really cost to fulfill one order, including people's time that isn't formally assigned to any order.
Three reports that are enough to start
Management accounting often gets put off because people imagine it as a big system. You can start with three documents, each of which fits on one page.
- 01
Cash flow report
Incoming and outgoing payments by week, 13 weeks ahead. It answers the question "will we make it?" This is the most important report for a business without outside capital, and usually the only one kept, but it's kept after the fact, not as a forecast.
- 02
Profit by line of business
Revenue minus direct costs for each product, channel or customer segment. It answers the question "what are we actually making money on?" It almost always uncovers lines with negative margins that were being carried by the rest.
- 03
Balance of obligations
What's owed to us and what we owe, with dates. It answers the question "where is the money locked up?" Receivables growing faster than revenue are an early warning sign that isn't visible in the profit report.
On precision
Management accounting doesn't have to be accurate to the cent. It has to be comparable month to month and ready on time. A precise report in six weeks is less useful than an approximate one in three days.
Why there's profit but no cash
Three mechanisms pull apart the moment profit is recognized and the moment cash appears. Understanding each one removes most of the anxiety.
- Payment terms: revenue is recognized at shipment, the money arrives a month later. The faster you grow, the more money is locked up in receivables. Growth eats working capital.
- Inventory: the money was spent on purchasing, and the expense is recognized at sale. A warehouse is your money in illiquid form.
- Investment and debt repayment: there's a payment but no expense in the profit report. A profitable company can be out of cash simply because it's paying off a loan.
Profit is an opinion. Cash is a fact. You need to manage both, but survival is decided by the second.
Related service: Financial Model
When you need to calculate scenarios before a decision, as well as see the current state.
Who should keep the management accounts
A common solution is to hand them to the accountant. It works worse than it seems: an accountant has a different professional logic and a different priority. What matters to them is correctness for the inspector, while the owner needs speed.
Workable options, in order of business maturity: the owner does it on three reports; a dedicated finance manager; a part-time CFO. Automation makes sense after it's been defined what exactly gets calculated. Otherwise the system will lock in the wrong method.
Related service: Management Accounting
When you need to set up a method and a routine, not do a one-off calculation.
Related service: Accounting Outsourcing
If the basic accounting is unstable and the numbers have to be corrected after closing.
Signs the accounting is poorly set up
- Closing the month requires manual reconciliations, and the number changes after a "second look."
- You can't name the margin of a specific product without a separate calculation.
- Cash data is only available after the fact, without a forecast even a month ahead.
- A discount decision is made without knowing whether the deal stays profitable.
- One person prepares the report, and when they're away, there's no report.
What to do this week
Questions to ask yourself
The check takes one evening
- 01 How much money will be in the account in six weeks under the current scenario?
- 02 Which of your lines of business has the lowest margin, and did you know that before calculating it?
- 03 How much money is locked up in receivables, and how does that compare with monthly revenue?
- 04 How many days after the end of the month do you see its result?
- 05 Can you get these numbers without the accountant's involvement?
Materials that continue the topic
- Unit economics for owners: seven numbers
- The cost of doing nothing
