Association management has two primary areas of accounting that are highly important: financial and managerial accounting. It is important that association leaders must be familiar with both. Most association accounting tasks fall into one of the two categories, and although the two disciplines have a lot in common, they have more differences than commonalities. It is important that an association leader understands the two principles and can keep up with their fiduciary duties to ensure the association is operating effectively and efficiently and with the association’s best interests in mind. Read more about the duties of a board of directors and financial management in this article written by my colleague.
Association leaders do not have to be experts in financial management. Still, it is important that they understand the basic principles and can understand the reports provided to them by finance staff. This article, written by my colleague, highlights the basics. However, association leaders must be provided with the tools to make decisions and evaluate the organization’s health. The two most common tools for this are managerial and financial accounting.
Decision-Making Data for Association Leaders:
Managerial accounting is used by managers, directors or any other person in an association who uses accounting information to make important decisions. These decisions concern the daily operations of an association and need to be made in a short amount of time. Therefore, managerial accounting must rely on predicting future trends. This form of accounting is best used to improve an association’s financial procedures. Association leaders must understand the following processes to keep the association moving forward.
The processes include:
- recording and crunching numbers,
- helping to choose and manage company investments,
- risk management,
- strategizing, and
Managerial accounting is performed solely for the goals of an association or, in other words, for an internal audience. This data is used to make business decisions affecting the association’s output. Association Leaders would use this information to create new member benefits, improve operations, or strategize for coming years.
Association Leaders Must Evaluate the Organization’s Financial Health
Financial accounting presents an association’s financial health to an external audience. It allows the board of directors and chief staff officer to see how the association has performed during a specific period. It is the practice of accounting for all money going in and out of an organization. It focuses on recording transactions in the form of financial statements. This is the reporting that the board treasurer should review regularly and ensure the organization stays on a budget or identifies areas of concern. Reviewed monthly, quarterly and at the annual general meeting when the audited statements are presented to the membership.
Financial accounting is the numbers on paper that provide comparisons to the previous year’s actuals and the budget. It is also a real-time tool for evaluating the organization’s financial health.
Financial management reports are filed annually. These are prepared primarily for regulators and tax authorities and consist of the following statements:
- Retained earnings,
- Balance sheets and,
- Cash flows.
It is also important to understand that financial accounting is highly regulated and must meet International Financial Reporting Standards (IFRS) in its reporting. This leads to more precision needed when reporting and an overall higher standard. This is crucial as one must be extremely cautious depending on financial reporting.
To summarize, managerial accounting presents an association’s internal community, while financial accounting presents an external community. Therefore, managerial accounting can be very useful in planning and meeting an association’s goals and can best use financial management to measure an association’s performance over a specific period. There are many resources available to association leaders to understand reporting and financial statements better by giving leaders the confidence to make decisions that will affect the association. It comes with exposure to both managerial and financial accounting, frequent review of statements, and asking association staff questions as they work within the finances regularly.