Understanding the differences between managerial accounting vs financial accounting will help you excel at financial planning and keep your business compliant.
You can think about accounting like driving a car down the freeway: Managerial accounting is looking out the front windshield to navigate safely ahead into the future, while financial accounting is looking in the rearview mirror to get a view of where your company has been.
The same underlying financial data is used for both—it’s just organized and presented differently to serve separate purposes.
This guide explores the differences between managerial accounting vs financial accounting and shows you when to use each for your business.
Overview: Managerial Accounting vs Financial Accounting
Managerial accounting is intended for company decision-makers—such as management and executives—who drive internal company decisions. Through the use of future-oriented reports, including budgets, forecasts, and loan repayment schedules, managerial accounting helps to assist decisions that maximize company health and shareholder value in the future.
Financial accounting is intended for external stakeholders like investors, creditors, and suppliers, as well as internal stakeholders like company employees. It’s used to inform all parties of a company’s financial health by accurately summarizing past data.
Company stakeholders use this information to make decisions that affect their relationships with the company—for the benefit of their own financial interests. It’s also important to note that financial accounting is heavily regulated.
At a Glance
|Drive key company decisions that improve performance
|Provide financial data to stakeholders
|Company management and executives
|External stakeholders, like investors and creditors
|Internal, future-oriented, focused on maximizing shareholder value
|Primarily external, based on past data, focused on benefitting individual stakeholders
What Is Managerial Accounting?
Managerial accounting exists to help companies plan for the future.
Using past and current financial data, such as financial statements, expense reports, and financial ratios, managerial accountants assemble reports that paint a picture of what they expect the future to be like. They then pass these reports on to company managers, who use them to make informed financial decisions. These could include:
- Whether to hire more employees or downsize
- How much to increase product costs by
- Whether to issue another round of stock
In this way, managerial accounting helps managers avoid getting caught off guard by foreseeable changes and instead plan a safe, secure, and profitable future for their companies.
Managerial accounting isn’t regulated since its sole purpose is to help managers steer their companies to better financial health. If it does that, then it’s working correctly.
Managerial accounting is intended for company managers and decision-makers.
Broadly speaking, most employees within a company make use of managerial accounting in some way:
- CFOs: To make changes in capital structure
- Financial analysts: To optimize company investments
- Operations managers: To streamline production workflows
- Marketing managers: To tailor marketing campaigns and allocate budgets
- Supply chain managers: To enhance supply chain efficiency and reduce holding costs
- HR managers: To inform strategic staffing decisions and optimize labor budgets
However, high-level employees aren’t the only intended audience. For instance, when a low-level sales manager receives a basic performance report with updated sales goals for the coming year or a manufacturing foreman receives a productivity analysis, these are also the results of managerial accounting.
In the same way that there’s no single way to perform managerial accounting, there’s no single audience for it either. Savvy managers make sure managerial accounting reports make it into the hands of every employee who can use them to benefit the company.
In short, anyone who has a say in company decisions will—or should—make use of managerial accounting.
Managerial accounting helps managers make operational decisions to maximize company wealth.
The decisions informed by managerial accounting are generally:
- Made by internal management
- Geared towards maximizing shareholder value
Managerial accounting provides actionable financial reports for all areas of a company, from product development to marketing to customer service and everything in between. The managers of these departments use the reports to steer their companies toward greater profitability and company success.
Let’s take a look at some specific managerial accounting reports and the vital information they provide to company decision-makers:
- Budget variance reports: These break down past spending to see if the company was over or under budget. This allows managers to create much more accurate budgets for the coming year.
- Accounts receivable aging reports: These break down the money owed to a company and how long it will be before each debtor pays. This helps with estimating how much actual cash will be on hand in the future.
- Inventory and manufacturing reports: These cover how much it costs to build and store products and how much these costs can be expected to change over the next year. Inventory managers can use this information to create more accurate manufacturing quotas for the future.
Managerial Accounting in Action
The goal—the ultimate goal—of any business is to make money. In particular, it’s to make as much money as possible for its shareholders or owners. Let’s look at a specific example of how managerial accounting, when used properly, maximizes shareholder wealth.
The CFO of a winter clothing company reviews an overall inventory report for November 2023 and notes that New York warehouse costs were higher than expected. A managerial accountant provides a more detailed inventory report for New York, and the CFO finds that extra warehouses were leased in November to store excess products that never sold.
After consulting with the sales department, the CFO found that a warmer-than-expected autumn in New York resulted in fewer sales. Upon learning that winter in New York is also expected to be warmer than usual, the manager moves the excess inventory to a colder area of the country with a product shortage and ends the leases on the extra warehouses in New York.
This results in less company lease expenses, which boosts profits for the rest of the winter. Larger profits result in more money for company shareholders, as well as a corresponding jump in the company’s stock price.
Examples like the one above are commonplace in the business world. Managers and executives use managerial accounting day-to-day to make decisions that guide their companies to brighter financial futures.
What Is Financial Accounting?
Financial accounting exists to inform stakeholders of a company’s financial health.
When you invest in a company, you own a piece of it. As an owner, you’re entitled to receive consistent updates on the financial well-being of your investment.
If you plan on loaning money to a company, you’ll need a way to check in on the company’s financial health to see if it will be able to repay you. And, if you’re an employee, you’ll want to see if your company actually “can’t afford” to give you that raise you’ve been asking for.
This is what financial accounting does—it helps stakeholders obtain an accurate, fully transparent view of a company’s recent financial health.
In contrast to managerial accounting, there is a right (and regulated) way to perform financial accounting. This is to prevent stakeholders from being misled by inconsistent formatting or calculations.
Financial accounting is intended for anyone dependent upon a company’s success.
Broadly speaking, being a stakeholder in a company means your financial well-being is in some way tied to the company’s success. Stakeholders can take many forms, and they all use financial accounting in different ways:
- Investors: To measure the company’s profits and future growth potential
- Creditors: To evaluate creditworthiness and ability to repay loans
- Employees: To measure their job security
- Suppliers: To determine the reliability of a company as a business partner
- Competitors: To one-up rival companies
- Governments: To double-check tax compliance
Most of these stakeholders aren’t part of their companies’ managing bodies, which means that besides financial accounting, they don’t have any sort of direct line into their companies’ financial health. This is why regulations for financial accounting have become extremely strict.
Regulatory standards create much more work for financial accountants but provide an undeniable benefit to stakeholders. History is replete with examples of companies that have illegally amassed fortunes for their executives and owners, to the detriment of external stakeholders—and paid the price for it.
To summarize: financial accounting is for stakeholders who need a consistent, accurate window into the financial well-being of the company or companies they depend on.
Financial accounting helps stakeholders make informed decisions about their relationships with companies.
Whereas managerial accounting empowers management to make decisions that benefit the company itself, financial accounting empowers stakeholders to make decisions that benefit themselves. This is the key difference.
The decisions that result from financial accounting are primarily:
- Made by external stakeholders, though employees are affected as well
- Based on past data
- For the benefit of the stakeholder rather than the company
If you’re an investor in a company, you want that company to succeed. Because of financial accounting, you can examine figures like net income, profit margin, and revenue growth. Depending on how the numbers look, you can make a wise decision about whether to hold your investment, increase it, or get out as soon as possible—even if that’s to the detriment of the company.
In the same way, creditors who loan money to companies can use financial accounting to decide what’s in their best interests. If a certain debtor company was more profitable than expected, creditors will probably want to loan it even more money since they’ll be more certain of repayment. On the other hand, if a debtor company’s last month of business was a financial disaster, creditors may decide to stop loaning altogether.
Most company stakeholders are external. But on the internal side, employees may decide to give their two-week notice if they see that long-term financial success is unlikely or stick around if the future looks bright.
Managerial accounting and financial accounting differ from each other in purpose, audience, and decision-making.
Whether you’re a company manager or an external stakeholder, knowing the differences between these two types of accounting allows you to make informed financial decisions. For instance, managers can decide whether to build a new manufacturing plant or raise product prices, and investors can decide between buying more stock or selling it.
If you’re learning these accounting principles for use in your own business, you may also be interested in our article on the best cheap accounting software in 2024.
What are the main differences between managerial accounting vs financial accounting?
What are the differences between accountants and financial managers?
Should I learn about financial or managerial accounting first?
- Top Accounting Scandals (CFI)