Implementation of management accounting

Management accounting must promptly answer the following questions:  

1. Where is the money? 

2. On whom or what are we making a profit, or not? 

3. What do we own, whom do we owe, and who owes us? 

4. How much is the business worth? 

5. What is the profitability with detailed analytics? 

All these answers are contained in the P&L, CF, and BS reports; they are all interconnected, and only these 3 reports provide a complete picture of the company's business.

 The double-entry method must be strictly and unambiguously used in management accounting to generate the Management Balance Sheet—a report that is the pinnacle of accounting and a snapshot of the company's assets and liabilities at a specific moment. 


 The Cash Flow statement must include 3 cash flows if they exist in the operations: 

•  Operating cash flow (every company has this); 

•  Investing cash flow; 

•  Financing activities. 

All flows converge into the net cash flow, which may be negative or not. And it is very beneficial when flows can be determined/forecasted in advance, which is aided by planning tools such as the CFB (Cash Flow Budget) and, of course, the payment calendar. 

Properly setting up and planning all of this is helped by approved CF items, identifying FRUs (Financial Responsibility Units), and implementing a "Cash Request" document; a clear algorithm for approving these requests helps with financial control, and checking for budget availability will also not be redundant. 

Income and expenses, the P&L also requires approved items of expenses and income; defining whether these expenses are variable or fixed will help quickly calculate the break-even point. It is also critically important to follow the accrual method when building this report, clearly understanding that P&L does not equal CF. At the planning stage, it is good to have an I&E (Income and Expenditure budget) and analyze budget-to-actual variances—why they exist and whether they are economically justified.

 If the P&L and CF are set up correctly, maintaining the canons of double-entry—Voila—we have reached the pinnacle, the BS (Balance Sheet), and can provide an objective assessment of the company's state and recommendations.

In addition to a separate budget for each P&L, CF, and BS report, it is good to turn them into a financial-economic model that will promptly answer the questions “what if revenue is lower/higher, or expenses are lower/higher?” and promptly adjust actions in advance.

 If you have read to the end, then improving or building management accounting or budgeting is relevant to you, so please reach out, and we will be happy to help.