How management accounting tools can help businesses drive strategy and make better decisions

There is an adage in business: “If a manager wants to implement a decision but cannot justify it on financial grounds, just say ‘it’s strategic’ and do it anyway.” With contemporary developments in management accounting, this approach no longer applies as the discipline is capable of supporting managers in all decision-making. To highlight this, the ninth edition of Management Accounting for Business includes a greater strategic dimension and embraces digitalisation and sustainability.

Driving strategy

Strategy implementation and strategic cost management signal the current and future role of management accounting. In the latest edition of Management Accounting for Business, in the chapter titled “Strategic performance and cost management for value creation: digitalization, sustainability and the future of management accounting”, this more strategic outlook, which is outward and forward-looking, is emphasised. Management accounting is no longer the internal face of financial accounting; it is much more than that. By outward and forward, I mean taking greater account of competitors and customers, for example, with a long-term focus, not just the year ahead.

To attain this focus, management accounting must align more closely with business strategy. This is where a system of non-financial performance measures and key performance indicators, such as the balanced scorecard, is important. It should engage with all other functions to discuss and develop measures and take responsibility for the reporting of the balanced scorecard content. Much of the management accounting dialogue with managers emphasises the value chain and the horizontal processes that apply throughout the business. This contrasts vividly with the vertical and siloed focus of traditional management accounting.

Life cycle planning

When I say a long-term focus, I suggest a life cycle approach to products and customer relationships. For example, some products have high start-up and research and development costs, which cannot all be recovered in the first year of trading. This can be revealed with life cycle reporting. Alternatively, there may be environmental clean-up costs occurring many years into the future that need to be revealed immediately in any life cycle cost predictions. This life cycle approach and outward focus also occur in target costing applied to new product development, which involves looking closely at competitors, identifying what functionality they deliver to customers and at what price. A business can then judge whether it can effectively compete.

Strategic cost management

All of these new management accounting techniques are developed in cooperation with non-accounting managers. They rely on non-accounting inputs but they have a clear financial dimension, which also applies to quality costing and management. It is important to draw attention to the costs and benefits of quality improvements, and management accounting highlights this. Likewise, the drive towards just-in-time operations of production and purchasing (or variations such as lean manufacturing) relies on operations and logistics staff but has value creation (i.e. accounting) ramifications.

Activity-based costing (ABC) systems and activity cost drivers are well-established techniques covered in most management accounting textbooks. Activity analysis has enabled businesses to focus more on strategic cost management. Given the growth in overhead and support costs, activity cost drivers are vital in revealing what is causing overheads. However, ABC analysis for product costing also applies to the profitability analysis of customers, which helps organisations focus on key customers and their retention. It also reveals customers from whom little or no profit is earned.

Digitalisation

Computers have impacted accounting since the mid-20th century, but with the growth of social media, the Internet of Things and AI, digitalisation has gained greater prominence and become more profound. A well-functioning, modern IT system can bestow significant competitive advantages if handled correctly. Accountants are no strangers to digitalising information but this is a whole new level. Big data is unstructured and needs new technologies and techniques to test its relevance and extract appropriate insights. It needs to be transformed to be useful, say, in informing marketing decisions or supporting manufacturing efficiency.

Sustainability

The environment must be part of any corporate strategy, and companies are required to report externally on their environmental impact. Therefore, it is crucial that environmental impact, and its financial implications, are visible to stakeholders inside the organisation. Environmental costs are often hidden in a company’s accounts, perhaps lost within general overheads. These costs need to be identified and tracked so that their causes can be addressed at a process or product level. The evaluation of environmental impact can be challenging because it may not align with the annual financial reporting timescale and placing a value on the impact of global warming is not an exact science. But these externalities need to be accounted for to create a full picture in environmental management accounting.

Building partnerships

All these issues represent contemporary management accounting and demand a strategic approach. They require partnerships with other functional executives to identify problems and evaluate and implement solutions. Attributing these outward and forward-looking strategic values relies on the accuracy of estimates and predictions, often for years into the future. While making an effort to obtain these estimates and test them for accuracy, the manager and the management accountant must be comfortable with this approximate data as they think strategically and drive strategy. If they can develop a partnership, they are most likely to add significant value to the business and enjoy a substantial competitive advantage.

Discover more about the ninth edition of Management Accounting for Business.

Written by Mike Tayles, co-author of Management Accounting for Business, ninth edition