Management Accounting vs Bookkeeping for an IT Company

«We already have an accountant, why do we need some other kind of accounting?» — a common objection from IT company owners. Behind it sits a widespread mix-up: bookkeeping and management accounting are treated as the same thing. In reality they are two different tools for two different jobs, and one does not replace the other. An IT company that only has bookkeeping knows how much tax to pay, but not which line of business actually makes money.

Let's break down the difference using an IT company as an example, and why you most likely need both. For a general explanation of management accounting, see Management accounting for an IT company in plain words.

Bookkeeping: accounting for the state

Bookkeeping exists to calculate taxes correctly and file the reports. Its «customer» is the state, and the rules are set by legislation. It answers the question «what and how much do I have to pay and declare». It's a mandatory but external kind of accounting: it's optimised for the tax authority's requirements, not for your management decisions.

Management accounting: accounting for decisions

Management accounting is built for the owner and the manager. Its job is to give you the numbers you base decisions on: which line of business is profitable, which project earned money, how much an hour of a developer's time costs, whether there will be enough cash to cover next month's payroll. Here the rules are set by you, to fit your own questions. For more on the essence, see Management accounting: what it is and why an owner needs it.

Why bookkeeping doesn't answer business questions

The key reason bookkeeping alone isn't enough: it sees the company as a single tax unit, not as a set of lines of business and projects. In bookkeeping, development, support and staff augmentation blend into one overall turnover. You see that the company paid this much tax and had this much turnover, but you don't see that support has been losing money for years while development feeds everyone. For that you need a different cut — by line of business, as in P&L by line of business in an IT company.

Example: the same company in two accounting systems

An IT company with 12M in turnover for the year. Bookkeeping will say: turnover of 12M, this much tax paid, all perfectly legal. The owner is calm. Management accounting breaks that same 12M down by line of business and shows: development +2.4M, staff augmentation +0.3M, support −1.2M. It's the same company and the same money — but bookkeeping shows «all good», while management accounting shows that one line of business urgently needs fixing. Both are right in their own role; they simply answer different questions.

Why you need both, not one

Bookkeeping is mandatory — you can't operate legally without it, and you can't replace it with management accounting. But relying on it alone to run the business is like driving a car while looking only at its paperwork instead of the road. The two run in parallel: bookkeeping for the state, management accounting for you. More broadly on this, see Bookkeeping vs financial management.

Where to start

You already have bookkeeping — start building management accounting on top of it. Set up lines of business and projects, tag your operations to them, and within a month you'll see the economics of your IT company from the inside for the first time, not just from the tax authority's side. Where to start technically is in Accounting for an agency: where to start (the principle is the same for IT).

In Finmap, management accounting is kept separately from bookkeeping: lines of business, projects, profit and cash flow are visible in real time, geared to your decisions. Try it free for 7 days.