As we start work with a client, there are many times that the owner will say, "My accountant does not provide me advice on my business. They only compile my statements and do my taxes". What most business owners do not understand is that in most cases, they are only paying their accountant to perform those two tasks when they visit them once a year. To provide you advice on your business, the accountant would need to come in and learn more about your business in a lot more depth than your accountant does for what they are doing now. To fully understand this, it is imperative to understand the difference between financial accounting and management accounting, along with what functions you are asking your accountant to perform.
Financial Accounting
Financial accounting is for presenting the financial position of your business to its external stakeholders to understand the health of your business. External stakeholders can include your Board of Directors, other stockholders, investors or lenders. Your financial statements represent the results of your business over a specified period. They are used to compare present results to your past results to see how your business is performing. Financial statements reporting is based upon what has happened, so they are 'backwards' looking.
As a private corporation, your financial accountant creates financial statement compilations (Notice to Reader). Your compiled financial statements are then used to calculate your business income tax. Your accountant may make recommendations based on the information you provide them. Still, they are not digging into your financials to uncover any issues, misclassification, or wrongdoings – that would be done through an audit or review and is not what you are paying for when you ask them to compile your statements. The reports they provide with the compiled statements do not offer an opinion or assurances that the financial statements follow Generally Accepted Accounting Principles (GAAP). In some cases, an investor or lender may require you to have an audit or review, which will need the financial accountant to go through your financials in detail. With either a review or audit, they provide some level of assurance that the statements are free from material mistakes and fairly represent the company's operations.
It is essential that when you review financial statements that, you look at the beginning of the report to see one of 4 things:
Notice to Reader –performed with compilations, or
Review Engagement Report – no audit opinion but rather a statement of belief that statements are following GAAP, or
Audit Report - provide the user with the auditor's opinion regarding the presentation of the statement is compliant with GAAP, and
Compilations are signed by a professional accountant such as a CPA, CA; CPA, CMA or CPA, CGA and the review or audited statement is signed off by a Licensed Public Accountant, usually a CPA, CA; CPA, CMA or CPA, CGA.
Management Accounting
Management Accounting combines accounting, finance, and management with professional insights and methods. Business owners and other managers should use management accounting to make decisions concerning the day-to-day operations of your business. Management accounting is based on current and future trends and does not require exact numbers. Because you often have to make decisions in a short time period through a fluctuating environment, management accountants rely heavily on forecasting markets and trends when working with you.
Unlike financial accounting, where financial statement reporting is based upon what has already happened, management accounting uses these statements combined with analytical tools and techniques. It will focus primarily on 'forward-looking" analysis and reporting suited to management's needs.
Financial Accountants and Management Accountants
It is essential to understand your requirements and expectations when you hire or engage an accountant, as well as what functions they can perform for your business. Most accountants do not perform all financial and management accounting functions. Sometimes, you might have a financial accountant compile your statements and help you file your business taxes. You might then need to engage a management accountant to come in and help you with functions such as performing feasibility studies or assisting you with operations such as budgeting, pricing, costing, productivity analysis, or profit analysis. In many cases, you will have accountants that will perform some functions of each based on their background and clientele. You must understand what services you need and what offering the accountant you hire provides. As with any professional you hire, they will not just give you advice on a particular issue with your business when that is not what you have hired them to do.
RK Fischer & Associates provides management accounting services, as one of our partners is a CPA,CMA. He develops all of the financials for our feasibility studies and business plans and provides financial management services, including business valuations and controller services.
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