Not every accountant is the same. Certified Public Accountants (CPA) and Certified Management Accountants (CMA) provide distinct services. The difference between the two is not widely understood outside of the accounting profession and established companies. While CPAs or financial accountants are primarily focused on maintaining your financial records, CMA’s core task is to provide management with valuable, actionable, and timely business intelligence. This allows managers to take better decisions, chase new opportunities, and enhance the company’s overall profitability. Especially as a startup, it is strongly advised to involve a Certified Management Accountant/FP&A professional at an early stage.
In this article, you will learn the difference between financial accounting and management accounting, the added-value management accountants bring, and the core tasks certified management accountants perform.
Difference between financial accountant and certified management accountant
Most of the time, when we think about an accountant, we are thinking about financial accountants. The best-known qualification is the US Certified Public Accountant (CPA) designation or an equivalent certificate. Financial accountants’ key aim is to ensure that file your financial statements and taxes on time. Their focus is on the company’s historic transactions.
Their core responsibilities are:
- ensure that every business transaction gets properly reflected in an accounting software program
- produce the company’s financial statements that reflect the company’s financial position and financial performance.
- timely file the annual financial statements with a governmental body and report your profit/loss to the tax authorities.
The users of the financial statements are primarily external stakeholders, such as shareholders, lenders, regulatory bodies, customers, and vendors. Financial accountants rarely provide management with feedback about their financial position and performance and its implications. Unfortunately, financial statements can be quite intimidating for entrepreneurs with a non-financial background. While management is usually quite good at grasping the meaning of the income statement, the company’s balance sheet and cash flow statement are much less well-understood.
In contrast, the focus of certified management accountants is on the future. They provide management with critical business insights to allow them to make the best decisions given the available information. The primary beneficiaries are the company’s internal users. Certified management accountants often work in Financial Planning and Analysis (FP&A) roles within larger organizations. However, it is not unusual to have 1-2 FP&A professionals in an early-stage company, especially if the company is too small to have a full-time CFO on its payroll.
The added value of certified management accountants
Certified management accountants can provide valuable, actionable, and timely insights to your company’s management. They combine an analysis of operational and financial data to develop a deep understanding of the company’s critical success factors. CMAs continuously monitor the company’s performance, investigate unexpected differences, and produce periodic reports on the company’s KPIs. Whenever the actual financial performance deviates from the budget, management would be alerted through the periodic variance reports.
Not only are CMAs accounting experts, but they also possess a deep understanding of the operational aspects because of their frequent interactions with managers across every department of your organization, such as accounting, HR, marketing, and procurement. This makes them uniquely qualified as a strategic business partner because CMAs form the missing link between finance and your company’s operations.
Certified Management Accountants are involved in the following 5 key areas:
Certified management accountants can be involved in a wide range of services, such as cost accounting, financial forecasting, budgeting, variance analysis, working capital management, breakeven analysis, and pricing analysis. While many of their responsibilities are short term and recurring, others have important consequences for the future. One of their most important recurring tasks is the annual budget exercise.
In addition, certified management accountants are also involved in long-term strategic projects, such as marginal analysis and capital budgeting decisions. These projects are often of vital importance for the company’s long-term success because they are costly, time-consuming, and have an impact that spans several accounting periods.
1. Establish the annual budget
To help a company achieve its operational and financial strategic targets, it must develop an annual budget at an individual department function and department level. The budget is a detailed roadmap that usually covers 12 to 18 months. Budgeting is a vital and comprehensive exercise to predict the revenues, expenses, balance sheet items, and cash flows of the company. It defines the level of expenditures that are acceptable based on the company’s expected financial performance.
While certified management accountants and FP&A professionals play an essential role in the production of the annual budget, the accuracy of the inputs is vital. That’s why every layer of the organization should be involved in making the projections accurate and meaningful.
2. Produce and circulate recurring reports
Preparation of various reports about financial and operational metrics, such as sales transactions, margins, headcount, marketing spend and sales efficiency, etc. These reports usually have a weekly or monthly frequency.
An example of a recurring report is the variance analysis report. These reports draw management’s attention to unexpected deviations, whether favorable or unfavorable, from the budget. Material differences need to be investigated and their origin explained. If the driver of a forecast is inappropriate, it will always lead to differences between the actual performance and the forecast. A variance could reveal that the relationship between a historical driver and a forecast value is no longer valid. A thorough investigation of the discrepancy’s origin can lead to better insights into what drives a particular forecasted value.
Many organizations also update their financial projections quarterly. This is to ensure that their budget is based on the most recent inputs, and management’s expectations and the budget are realigned.
3. Assessment of long-term, strategic projects
Some strategic decisions have important consequences in the long run and require a thorough assessment by a finance professional to select the best strategy for the business. For example, the decision to manufacture or outsource, sell a product at a split-off point or develop it further, and keep a product line/product or divest it, can have a major impact on the company’s long-term profitability.
Similarly, the purchase of long-term assets, such as machinery, is often expensive and time-consuming. It requires a detailed analysis of the expected cash inflows and outflows before the company deploys its financial resources. A certified management accountant can perform an assessment to ensure that the project creates shareholder value instead of destroying value. The analysis of which long-term assets are suitable investments and which projects should be foregone.
4. Determine the company’s target capital structure
Certified Management Accountants can help set a target capital structure by determining the company’s weighted-average cost of capital. A company’s capital structure consists of long-term debt and equity. The cost of equity is usually higher than debt because interest expenses are tax deductible and there are additional costs associated with issuing equity. In theory, there is an optimal point where shareholder value creation is maximized. Unfortunately, this point is hard to determine precisely. Hence, most companies maintain their capital structure within a certain target range.
5. Optimize working capital management
A company has current assets and current liabilities. The company’s working capital should be carefully managed to optimize profitability and to ensure that you don’t run into cash flow problems. Even profitable companies can face cash flow problems because their cash got stuck in working capital assets.
One area where certified management accounts can provide a lot of added value is in the design of the credit policies. Accounts receivables are a powerful and underappreciated tool to enhance your sales. By allowing customers to purchase your product or service on credit, you can not only boost your sales but also create an auxiliary revenue stream in the form of interest income.
Unfortunately, offering trade credit also exposes you to the risk of default by your customer. Thus, the boost in sales from relaxing your credit policy needs to be compared with the surge in bad debts. The credit risk can be mitigated by establishing clear credit procedures and processes, performing periodic credit assessments, and conducting a rigorous follow-up of overdue accounts. It could also be beneficial for your company to outsource the credit analysis and collection process to a specialized firm that can perform these operations more efficiently than you can perform them in-house.
Accounts payables are a form of spontaneous market financing. It is one of the most accessible sources of financing because it is provided by your company’s suppliers. By securing favorable credit terms from them, you can partially or fully offset the impact of your investments in working capital assets. Since there is often a discount for early payment, it is important to understand the actual cost associated with utilizing the credit terms offered by your suppliers versus foregoing the cash discount.
Certified management accountants are also qualified to help you determine the optimal level of cash that you should maintain within your business. Since cash yields barely anything these days, the cash balances should be maintained at a bare minimum. However, low liquidity significantly increases the overall riskiness of your business. Thus, you need to balance the need for a safety cushion with the potential for higher returns.
The focus of Certified Public Accountants (CPA) and Certified Management Accountants (CMA) is different. While CPAs are primarily focused on the production of the financial statements and tax reporting based on historic transactions, CMAs provide forward-looking, valuable, actionable, and timely insights to the company’s management about the company’s operational and financial data. That’s why CMAs are often involved in the FP&A function of a company. Certified management accountants’ core responsibilities include:
- Production of an annual budget
- Reporting of various period reports
- Assessment of long-term, strategic projects
- Determining the company’s optimal capital structure
- Optimize working capital management