What is management accounting?

When networking, I introduce myself as a management accountant.  Invariably, I am asked what is a management accountant.  Most people are familiar with accountants as the bean-counters, number crunchers, preparers of accounting statements, and so on, but few understand the distinction between financial accountants and the management accountants.

In short, I explain, the financial accountant prepares information for stakeholders external to the organization, whereas the managerial accountant prepares information for stakeholders internal to the organization.

And I continue to explain some of the differences:

Financial accountants focus on past and present, and managerial accountants focus on future. 
The financial accountant prepares financial statements that describe the current state of a business (Statement of Financial Position) and past performance (Statement of Income), most often for the business as a whole.  The managerial accountant analyzes past performance as an indicator of future performance and reports to support management decisions and planning.  Rather than the business as a whole, management accounting tends to focus on components of a business, such as product lines or divisions. 

Financial accounting is precise, whereas managerial accounting is timely.
Because external stakeholders such as investors and creditors rely on financial statements to evaluate the riskiness of an organization, there is an expectation of exactitude in the figures.  To ensure precision, sufficient time must be given at the end of the reporting period for accountants to compile all transactions and verify the results.  However, management information needs to be timely as management is perpetually making business decisions.  There is a recognized trade-off between accuracy and timeliness, and sometimes figures are at best an estimate based on available data.  This is acceptable provided the margin of error is not significant enough to lead to a different decision.

Financial accounting is, well, financial.  Management accounting involves both financial and non-financial information.
As the name suggests, financial accounting largely focuses on the reporting of financial information.  Financial accountants' primary concern is transactions involving monetary exchange.  On the other hand, management accounting is concerned both with financial information as well as non-financial information. For example, as a management accountant I have analyzed product return rates, extracted call centre acquisition rates, conducted customer segmentation, studied attrition rates of subscribers, and conducted statistical analysis of TV advertising response rates by media channel.  The management accountant needs to be able to analyze the drivers of financial performance, which are not always financial.

Financial accounting has to follow rules, whereas management accounting is free from rules.
Because of its obligation to report actual performance to external stakeholders, financial accounting must adhere to laws and regulations, such as securities laws, GAAP and more currently IFRS.  Every publicly traded organization must prepare audited financial statements, and for tax purposes private organizations also require financial statements.  Because management accountants' stakeholders are internal and rely on the information for planning and decision making, the management accountant can break the rules provided the reasoning is relevant to the management issue.


Finally I explain to my new networkees that the primary three accounting organizations in Canada have their respective specialties: Certified General Accountants (CGA) specialize in the preparation of financial statements and taxation; Chartered Accountants (CA) are experts in auditing and forensic accounting; and Certified Management Accountants (CMA) specialize in turning information into management insight.