September 17, 2019

Management Accounts Vs. Financial Accounts

On this episode, James Kennedy and Garret Carragher discuss the important distinctions between management accounts and financial accounts.
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Management Accounts Vs. Financial Accounts

Show Notes

Management Accounts Vs. Financial Accounts

When the lay person thinks of accounting, they most likely think of financial accounting. Your financial accountants are the ones in charge of summarizing the financial situation of the company, providing a big picture overview of how your business is running. However important this may be, the business insider knows that this is only one piece of the accounting puzzle. More information is needed.

Enter management accounting. When done right, management accounting provides detailed, specific data and combines it with analysis to create a more strategic look at the numbers. In order to be financially successful, you need to learn how to manage both your financial and management accountants. 

On this episode you’ll hear:

  • The important differences between financial and management accounts
  • How to get more useful information from your data
  • The importance of having a clear question when analyzing the data
  • Helpful principles to keep in mind when analyzing reports and data
  • Practical ways to improve your accounting practices

If you are looking for ways to improve the accounting procedures and communication in your company, then this is one episode you won’t want to miss. 


Transcription of This Episode

The gross profit podcast is your one stop shop on the path to profitability. Each week we share authentic advice on the positive, practical steps you can take to make the company you love more profitable. If you’re looking for a positive plan to help you avoid common spending mistakes, control costs, and increase your profits, then this is the place for you. I’m Ryan Gulnar and this week we are joined by James Kennedy and Garret Carragher.

In this episode of the gross profit podcast, James and Garret give advice on how to navigate the important differences between management accounts and financial accounts. When the layperson thinks of accounting, they most likely think of financial accounting. Your financial accountants are the ones in charge of summarizing the financial situation of the company, providing a big picture overview of how your business is running. However important this may be, the business insider knows that this is only one piece of the accounting puzzle. More information is needed.

Enter management accounting. When done right, management accounting provides detailed, specific data and combines it with analysis to create a more strategic look at the numbers. In order to be financially successful, you need to learn how to manage both your financial and management accountants. On this episode you’ll hear the important differences between financial and management accounts. While financial accounts can show you the overall picture of your company, you’ll need your management accountants to give more analysis on what is happening right now.

Next we’ll discuss how you can get more useful information from your data. Using an effective purchase order system in conjunction with your spreadsheets will allow you to add extra fields and search for specific factors in the data you have collected. Then we will share the importance of having a clear question when analyzing the data. Make sure you are clear on the question you are trying to solve and then ask yourself if your data is helping you answer that question.

After that, we will go over some helpful principles to keep in mind when analyzing reports and data. Make sure there is clear and constant communication between your accountants and managers so you can provide timely and relevant information. And finally we will offer some practical ways to improve your accounting practices. From regular meetings with your managers to a couple of book recommendations, we have a lot of advice to share that will help you sort out your accounting procedures.

If you’re looking for ways to improve the accounting procedures and communication in your company then this is one episode you won’t want to miss. There’s a lot of actionable advice in this episode, so grab something to write with because you’re going to want to take notes. As always, I’ll be back on the other side to wrap up any loose ends. So without any further ado, here’s our conversation with James and Garret.

So welcome to the gross profit podcast. It’s your host, James Kennedy, CEO at We help hundreds of companies safely spend billions of dollars each year and today I am joined by my regular cohost, Garret Carragher, the secret CFO. Garrett, how are you today?

Pretty good James. How’s things down in South Africa? Nice and warm, I believe.

It is beautiful here. It’s a bit windy, but the sun is streaming in the office windows here. It’s just beautiful. I hear you’re getting battered with rain in Dublin at the moment.

Bit of rain today, bit of rain today in Dublin, unfortunately, but anyway, shall see how it goes, that’s always the weather in Ireland. It’s always raining, but super excited to talk about our subject today. Something close to my own heart about accountancy. So ready to kick off when you are.

So the topic today we have is why your management accounts are useless and how to fix it. Now, Garrett nearly fell off his chair when I suggested that title because he is a management accountant and that’s heresy, but let’s face it, a bunch of people do produce monthly accounts, which might as well go straight in the bin.

I certainly know from my own experience that sometimes you look at your PNL, your accountant sitting there saying very smart things. You’re supposed to know what it’s all about. At the end of the day, does it deliver any value? Probably. Maybe not. We’re going to talk about that today. And if you are not getting value from the management accounts, or so-called management accounts that you’re getting from your team or from an outsourced accountant, the questions you can ask and how you can make them more actionable. So does that sound good?

Yeah, sounds good James. Looking forward to it. Let’s get kicked off.

So let’s kick off with the PNL report that I get every month with a bunch of GL codes on it versus management accounts. What’s the difference?

Yeah, good. Well the first one I’d like to go through actually is even… What is the difference between a financial accountant and a management accountant, because I think this actually gets to the heart of the problem that a lot of people have with their accounts when they’re looking and reviewing their accounts.

But a lot of accounts that people get are the accounts that you would get on the company’s registry office or the company’s house in the UK. I’m not sure what the one in in the U.S. is. But you can download the financial statements for a business. And that’s actually showing you the very high level is just how the business is performing for the previous year.

So it’s actually not giving you really useful information. And a lot of people might look at those accounts and think, “You know, this is not telling me anything.” And a lot of cases it’s not really telling you that much. It does tell you some useful things like the account’s position and whether it had made a profit or not. You might also see what our gross profit is like and also what the revenue obviously is like for the year.

But really you’re not going to see too much detail and it’s important to remember these are historical figures and this is really what financial accounts do each year. So you think of large financially accountancy firms like KPMG, Pricewater house, Coopers, these kind of companies, Grant Thornton, these kind of businesses.

So they’re really giving you historical data and it’s actually in a prescribed format. So there’s financial reporting rules and they’re actually international ones that go across many jurisdictions and really, they tell you how to prepare the accounts. So they say if you sold something and the revenue is in the current year, in the current period, then you must show the revenue in the current period and you must show a cost for that revenue, the relevant costs for that revenue in the current period. So that’s what the data is showing you and that’s what financial accountants are doing.

Sort of really creating the accounts in a very prescribed manner. We’re actually doing this once a year and the data is consolidated at a very high level. So you’re not really breaking down the numbers, you’re not getting into any detail, you’re not seeing what makes up the purchases, when was it purchased, what different items were bought. You’re not seeing the overtime of people’s wages, how many people you had. But it does show the number of employees but you’re not getting into the detail their costs and in which department. So that’s really what financial accountants do and what the management accountant then is doing is they’re trying to give you… And this is what it should be doing James, oh they’re doing this to you now, if you have a management weekend, is they should be giving you information on a monthly basis. Really showing the prior period’s results.

And they’re showing that in a lot of detail. So they’re showing you a current period or a period that’s just passed. So we’re not looking at data over a year old, you’re looking for much more detail. So they should be breaking it down into different departments or different business units.

And they should also be giving you commentary on that data so that it might tell you, “We hired five people last month, the wages have come in through the middle of the month and this is why you’re seeing an increase.” They might say “You’ve spent, the project’s overran. We had to spend more overtime, pay more overtime for people to complete the project on time.” This is why the wages cost is up 8% in the month and it’s hit our margin. And also they’re not doing this data in any kind of prescribed manner like financial accounting is doing.

They’re really showing you the data should make sense to you. So it’s very, very much bespoke for the company you’re in. So the managers can come back to the management accountants, say to him or her, “I really need to dig more into what I bought in the month in materials because I’m not really understanding why the material cost is 30% to sales. It should only be 20, 25% max. I really need to dig into that and try and understand what we bought in that month and try and make a change” and really this status is supposed to…

These reports and the management accountants wants to work with the management team and try and give them information they can make decisions on, to guide the company for the next period, which is really the next month. And that’s really the difference between financial and management account and now hopefully that’s the kind of data you should be getting.

So the financial accounts then, you do need them because you need to be able to report to the authorities, whatever they be, a company officer or whatever, and they help you compare one company with another. I guess but they’re not, they’re… What’s that expression? They’re sufficient but not enough to get the most out of your business.

You need management accounts as well as financial accounts and they really should look very different.

Exactly. It should look super different and the management accounts, should be in a format that works for the company, gives them information that they can make decisions on. That’s the key word, is information. It’s not data. It’s not giving you the sales or 160,000 last week. Is that good or bad? You don’t know. That’s just a number. The information is, there were 160,000 last week. Your budget was 250,000. No, that’s information. You know you’re down on your sales for last week.

That’s information already. Now you want to find out more. Why were you down? Which product lines were down? Which project wasn’t finished on time? What had happened there? And that’s where you can dig into the information and make useful decisions to guide the company for the next period.

Okay. So I guess an easy way to tell whether you’ve got this fight or not, is if you’re only using GI codes, you’re doing it wrong. So what else? What should you be using? What should it look like? Maybe give us an example of, from your own experience, how do you get to something which is useful for the team to make decisions? A management team like us.

Yeah, so GI codes are really a very high level, again, a bit of a summary of what’s going on. So you get a summary of revenue, you get a summary of purchases, of materials, you get so many of direct labor costs, a summary of sales and marketing and labor costs, these kind of things.

But again, it’s all very consolidated data. So what you need to do is take that data and try and turn information. The way you do that is you break down the GL into cost centers.

So what you need to do is add in additional fields to capture that information. So you might say, “Well this is revenue but it’s revenue for the Dublin department and it’s revenue for the project management part of the Dublin departments.” So now you’ve got three levels of information there. So you know it’s from location, you know which revenue stream’s coming in, which is projects and then you know similar information there. So you can kind of dig into that. And can you use that to pull it out and generate a report that actually makes sense to people?

So someone might say, “How’s Dublin projects comparing to South Africa projects or to London projects?” And then they say, “Okay well this is up. This is down.” So the way you need to do that then is to really break down the data. And as you’re inputting it, I’m sure it’s captured across a number of different fields and that will help you then kind of dig into it then afterwards, you know? And something useful, it can be useful for this, for cost analysis is a good PO system. So when you’re trying to break down buying some items or you’re buying a service, you’re buying some products to sell on and you really want to kind of break that down and try and understand where’s that cost coming from? Where am I going to get the revenue from? That’s the key obviously. And is the cost time back to what I thought the cost was going to be?

So in that case, then you can use your PO system to capture that. You’ll to be able to say, “Well, this is for the Dublin department, this is going to be for projects and we’re going to build this out on a particular revenue stream maybe under reactive works or standard works, understand the contract.” And when you input that information in there, you can use your PO system once itself or system to download it into Excel and then start pivoting to your heart’s content.

Pivots are the greatest invention of all time as you know, James. Along with Excel and you can really do anything you want. Once you can get the data into Excel, you can pivots up your wazoo and make sure you can get some kind of useful information out of it that you can give to managers that they can make decisions on.

There’s a couple of customers, one springs to mind now that does this well and they own a number of farming operations and they would buy a tractor or buy two tractors, for example, a Ford and a Massey Ferguson. And what he would do is he’d use the purchase order system to track the true cost of ownership or the total cost of ownership of both of those vehicles and see over time, “Okay, fair enough. One was a 100 grand and one was 80 grand but one then needed more maintenance than the other” and if you ever see… So I guess it comes down to this, all of your data needs to support a question that you want answered, right? Next time, should I buy Ford or should I buy Massey Ferguson?

And then you’ve got to look at your data and say “Do I have the data to make that decision?” So coming up the questions you want to answer is actually a key thing, right? If you think of the questions you want like should we move the Dublin office to India? Should we buy one brand over another? Should we keep selling a certain product or are we better off focusing on another one? If you’re not able to answer those questions by looking at your whatever accounts or reporting you’re getting, you need to double back and look at what you’re tracking.

Exactly. Whenever I’m doing reports for anyone or looking at new systems or trying to think about what can I provide to the managers this month to make it… I always try to innovate every month, but not innovate, maybe is a strong word. Maybe try and bring something new or improve it every month. So whenever I look at what I’m doing and what reports we’re doing in the finance department, I always first of all look and think about what does the managers need? What information do they require? So that’s my first step. The next step is, I have a three step process. So the next step is I look at what can the system capture? Okay, so what can the system tell us? What can the system hold? Can the system hold 15 fields telling you all this kind of information or not?

Or maybe it only holds three fields. Maybe it holds the GI code, a department code and some other reference like the revenue stream or the cost analysis. So maybe you say, “Okay, when I’m down to three feet, I need to make the best of those.” So I look at the system, see what I can pull in because it has to go through the system. Otherwise if you’re trying to track stuff through paper or through Excel, you’re really on the road to nowhere. It’s not going to work. And the final thing then is, I think about how can I capture this data. So these people inputting the data, they only have so much time. What reports are they getting? What information are they getting? Do they get an invoice?

Is the invoice giving the revenue stream? Is the invoice given to the department? Probably not. So I think the invoice then either has to have a PO that gives the departments, which he usually does, or it’ll have to go to a manager to sign it off and he’ll write the department code on it. So that’s the final step, I think of… So once you put that in place, you put in the data capture, you’re capturing this data, it gets put into your system. The system is holding the data for you and allowing you to manipulate and extract the data and that then, that allows me to pull it into usually Excel and create reports so they can give it to the managers for them to make effective decisions. But also there’s three guiding principles, three guiding parts of data you must always remember.

First of all, the information you’re providing to the manager must always be relevant. There’s no point telling them stuff that was done in Australia when he’s the Dublin office, he doesn’t really care. The next thing is always, always, always has to be accurate. It must be accurate. If your numbers start to get questions, you’re on a slippery slope. People don’t believe what you’re saying and don’t trust you. And finally, it must be timely. So a bit like the financial accountant who’s doing the accounts for last year in the middle of the new year and it’s of no use to anyone. The accounts you’re providing, you must have them within a week or two of the end periods so that the managers can have a look at them, review them and make some kind of decisions on them. So that’s my top tips for creating reports and thinking about data and information.

So say you are on a finance team, if we have someone of our listeners, maybe one of our listeners, one of either of them are sitting on a finance team and they’re wondering where they should, how they get started. What’s the most practical way to get going with this?

I think the most practical way to get going is to go and walk around and meet with your managers, meet with the people who are reading your reports and sit down with your reports. You should be doing this anyway and I’m sure a lot of people are doing this anyway, but you sit down with your reports and really go through the reports and understand from them what’s useful and what’s not useful. So that is key. So, is this information used, do you want to see prior year numbers against this year’s actuals? Do they want to see the budget? Do they want to see the budget by month, do they want to see the budget by year to date? Do they want to see their salaries broken down or by person, by hour, by overtime, by annual leaves or holiday leave? What do they want to see that’s going to make it useful for them so that they understand?

Because a lot of times, and I’ve seen this a lot, people get consolidated data and it’s sort of really little use to them. So they get a number that their wages are 282 titles and they just go, “Well that’s just telling me nothing. Like what does that mean? Have I had four people start? Was there 200 hours of overtime and that number, like what does it mean? It means nothing to me.”

The first thing I would say to anyone is sit down with the managers, understand what they’re looking for, and from there then you can really follow that approach which is to understand what they want, understand what your system can capture so they might want this and that, you say, but a system can only hold this information.

And finally then go back to your people. You’re capturing the data and understand where that data is going to be captured. So if the manager says, “I want to understand who took annual leave last month so I know my billable time is down.” That’s when you’d say, “Okay, where are we capturing the annual leave?” So you need to go back and understand which system’s capturing that and how can that be pulled in to your main reports and into the information providing on a monthly basis.

Okay. Thanks for that Garrett. I will throw in two books to recommend actually, this all sounds kind of similar to this very good book. One of my favorites called Lean Analytics and it goes through how to… What you should be measuring. It becomes a little bit more from a perspective of setting up KPIs and measuring and sales funnels and things like that but I think it’s also relevant for this subject in that it starts off with first defining what the important questions that you need to have answered are. And then from there figure out what data you need and then from there figure out how to capture it and then make sure. And so that’s a good book.

Second book, I would humbly submit that you should be downloading our free comp chapter of our book. We have a great chapter there on embezzlement and how to manage that risk in your business. What to look out for, how to mitigate for it, how to guard against it. Make sure you don’t get caught out like the many, many thousands of other businesses that get caught out. Which fraud and embezzlement each year for… Which is really just money wasted for no good reason obviously. And the courage to go and do that. So thanks very much Garret. I’ll see you next week.

Thanks James, talk to you soon.

All right, folks, there you have it. That wraps up our conversation with James Kennedy and Garrett Carragher. They shared a ton of valuable insights and advice today on the important distinction between management accounts and financial accounts.

We also shared some tools and resources, which will all be linked up in the show notes. Don’t forget to click on one of those links to get a free chapter from the book Profit Leaks by James Kennedy and Garret Carragher. I hope you enjoyed our conversation. Please consider subscribing, sharing with a friend or leaving us a review in your favorite podcast directory. Until next time, best of luck in all that you do and we’ll look forward to seeing you on the next episode of the gross profit podcast.

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