The Future of Management Accounting - Coursework Example

The Future of Management Accounting ABSTRACT The diversity associated with changing business practices driven by the external environment has evolved the role of management accounting to that of a strategy-minded individual in today’s businesses. The role of the customer and the shareholder drive a good majority of strategic management accounting practices and these have trickled downward into the functional manager role in a way that cannot be segregated. Analysis of financial data and the generic control and planning of organisational components is no longer sufficient to define the role of management accountant if the business hopes to create internal operational processes that meet with profit and customer satisfaction. The paper identifies that the future of management accounting lies in strategic management accounting as a success factor in an ever-globalising environment. Introduction There are some similarities when considering the nature of traditional management accounting versus strategic management accounting. The Chartered Institute of Management Accountants (2010) define management accounting (MA) as a highly internalised assessment of financially-related data so as to evaluate, plan and control activities within the organisation for better use of resources and to measure success in achieving internal business goals. It is a forward-looking process of identifying, analysing and communication information for use by management in areas of logistics, marketing, information management and project delegation. In opposite accord, strategic management accounting (SMA) involves use of similar financial data, however it is a blend of internal strategies and external strategies that are created throughout the process of data accumulation and analysis. Where the two concepts differ is that traditional management accounting is an accounting process in which internal operational components are better organised in order to attain corporate goals. Strategic management accounting, on the other hand, involves more of a governance function by which the organisation develops long-term business strategies, competitive strategies, or general repositioning of the business based on assessed financial data stemming from a variety of sources. Evidence suggests that the future of traditional management accounting does lie in strategic management accounting due to the competitive nature of today’s businesses and the centralised global network that drives new business strategies. Understanding MA and SMA Management accounting “emphasizes data for managerial decisions, including planning, control, performance evaluation and general decision-making in areas of operations” (Delaney 2000, p.18). The role of the internal functional manager is to ensure that resource allocation occurs in-line with corporate goal attainment and internal management must ensure that they have access to necessary financial data in order to maximise success in the planning, execution and control processes throughout the organisation. This role is responsible for the day-to-day operations of the organisation, thus their need for financially-related data is crucial to avoid budget over-runs and meet performance guidelines mandated by executive or governance leadership (as two examples). Traditional MA is not about the construction of business strategy, it is about using appropriate accounting data in order to facilitate meeting the business goals effectively based on senior-level demands. Management accountants act as partners with other managers in the organisation, all working together as a unified team to ensure that strategic goals are met and met efficiently (Baldvinsdottir, Burns, Norreklit & Scapens 2009). Strategic MA is significantly different, according to theorists. Strategy development is a long-term orientation that considers not only internal unit function, but assesses the external business environment (the forces driving a need for change or improvement) using similar financial data to that in traditional management accounting. It involves, according to Lord (1996), collecting competitor information, exploiting potential cost reduction opportunities, and matching accounting emphasis with the long-term orientation determined by senior management. Dixon & Smith (1993) further define SMA as involving a series of strategic cost analyses, evaluation of current or proposed strategy and conducting strategic market analyses related to customers or competition. In many ways, strategic management accounting surpasses traditional MA as it is a collection of internalised assessment and external environmental awareness based on a series of given financial figures such as cash flow or sales analyses. Traditional MA involves the use of such instruments as the balanced scorecard and operational benchmarking as performance measures compared to a series of known financial data (Graham 2005). In many ways, MA is operational in nature involving the routine management of business function so as to serve corporate strategic agenda, taking into consideration raw and human resources as well as areas of production or internal marketing function. What differs between MA and SA, based on theory, is the extent to which analysis of accounting data touches on externalities and actual development of long-term strategy. The future of MA versus SA Based on the given definitions that segregate the two functions, there is evidence that traditional management accounting can no longer be isolated to only internal business functions and must touch on long-term orientation factors in order to be effective. According to one business professional, “MA can no more exist as a separate discipline, developing its own set of procedures and measurement systems and applying these universally to all firms without regard to the underlying values, goals, and strategies of particular firms, but it must serve the strategic objectives of the firm” (Kaplan 1984, p.414). Why is this? As businesses are being exposed to higher volumes of competition in their industries, a more multi-national approach or centralised business connectivity strategy becomes necessary in order to remain competitive. Though strategic goals are being determined at the executive or board governance levels, being able to isolate internal planning, execution and control from these functions is growing ever-more difficult. For instance, strategic MA might identify sales statistics from a variety of customer segments in order to build a new focus on product development for customer satisfaction or competitiveness in the firm’s marketplace. However, the demands placed on functional management in regards to assessing accounting data essentially turns their role into strategist as they attempt to draw together a functional operational strategy, one that is ever-changing, in areas of innovation or process improvements. Ross (2010) describes the role of MA in environmental sustainability to include identifying key issues, followed by setting priorities and objectives by which to achieve solutions and then further prioritizing by drafting new policies, building goals, setting targets and measuring budget capabilities. Using the automotive industry as the relevant example, traditional management accounting relies on assessment of data such as cost of goods sold, operating profit, sales figures and return on investment in order to make internalised operational decisions (Jinkens & Yallapragada 2010). However, use of this data has evolved into making decisions such as building a better product mix, distribution, product pricing and new product development as a somewhat standardized internal management obligation (Helgesen & Voldsund 2009). These had once been left to executive-level strategists, however the functional and centralised designs of today’s businesses no longer allow for segregation of these responsibilities, thus giving functional managers much more of a strategy-oriented role in the company. The MA process now touches on how to build a better internal operational strategy whilst taking into consideration externalities as well. It seems failure to consider the role of external business drivers would make functional managers inefficient with their new and diverse roles as planners and controllers. Roslender & Hart (2010) would support this notion of a diversified management accountant, especially when considering profitability and the role of the customer in driving internal strategies. Traditionally, businesses that rely on customer-driven revenues in order to meet long-term goals or remain competitive in their marketplaces “attempt to construct the customer in a very conventional manner, one which serves the interests of business rather than customers” (Roslender & Hart 2010, p.739). However, with growth in demand for more customer-centric business policies that gear process and operational improvements designed for service and customer satisfaction, customers can no longer be considered a marginal element in operational design but have become the integral focus. Trends in the external market for customer-centric business philosophy essentially force the manager in the role of MA to consider the needs of issues outside of the internal business in order to guarantee success in planning, execution and control of new strategies. The financial data associated with the external customer, such as sales and profitability, are now integrated into operational strategy in a way that cannot be separated as in previous years when businesses were less customer-oriented. Yazdifar (2005) supports this view that management accounting can no longer be isolated from strategic intention. According to this business expert, traditional orientation of MA built primarily on internal accounting information is no longer sufficient as a tool to inform management decision-making due to dynamic and complex changes occurring in the entire business environment. It is referred to as attempting to drive a car down a highway with only the rear-view mirror as a functional guide (Clarke & Tagoe 2002). The role of SMA in a dynamic environment Senior-level management and corporate governance teams are responsible for creating corporate strategy and must review strategic plans, approve their development or launch, develop a series of risk management strategies and policies as well as consider large-scale capital investments (Epstein & Roy 2010). This role is most closely linked to strategic orientation as it involves annual budget creation and approval as well as determining the systems needs in order to make new strategy a reality. This is what constitutes the role of strategic management accounting by most definitions and it is very externally-driven based on market preferences and market stability. In order to create a functional strategy, it is necessary to have access to internalized accounting data as well as a knowledgeable understanding of what is driving certain trends in the external environment that could erode profitability or undercut competitive performance. After creating these new strategic policies, there is a new reliance on functional managers to work within a diversified role to include a variety of planning and control mechanisms that are in-line with these senior-driven expectations. In the role of functional manager, management accounting involves a great deal of emphasis on planning, which is selecting specific goals that need to be reached and then selecting methods by which to ensure that goals are met (Delaney). The MA process then evolves into identifying not only how to delegate and ensure proper allocation of resources both human and financial, but looking at what is driving competitive practices through benchmarking or viewing real-time customer-centric data in order to measure whether new operational strategies are meeting with expectations. The new demands on this role, by design and evolving business practices, guarantee that managers cannot negate strategic ambition from internal operational function. There is simply no way by which to separate strategic orientation from generic planning and execution at this level and still hope to achieve results, especially in a business environment where the external market scenarios are forcing a centralised view that includes marketing, research and development and customer satisfaction. “Companies require management accountants to be more proactive in strategic decision-making and encourage them to integrate themselves in process-oriented managerial teams” (Ward 1993, p.37). The role has begun to incorporate areas of cost accounting, especially in business environments that have a very budget-focused mentality related to lean production and inventories. In this type of environment, efficient use of resources, such as raw materials, must be coordinated on a routine basis. This requires analysis of the costs associated with procurement as well as production labour or any other cost associated with maintaining a just-in-time inventory and production system. This is not possible without assessing the financial data associated with incoming and outbound shipments, purchasing, human resources and production scheduling and line production development. The management accountant must consider all of these factors when budgeting is primary and then blend a series of planning and control strategies to ensure that these efforts are meeting with strategic goals for budget-consciousness. Again, in a lean environment, it would be virtually impossible to believe that the functional management accountant could ignore externalities and extended costs associated with multiple internal departments if they hoped to make their strategies workable and meet with governance or executive level goals laid out for the business. There has been a conflicting view about the role of management accountant, especially in terms of cost accounting related directly to the product and overhead (Jinkens & Yallapragada). A subsection of management accounting roles has been developed known as the Resource Consumption Accounting method where financial ratios are examined by functional managers along with more strategic financial data such as debt to equity and earnings per share. Under Resource Consumption Accounting, there is a new need to have immediate access to broader accounting data in order to lower overhead and also consider the role of external stakeholders in a publicly traded organisation. The traditionalist view of management accounting would suggest that these functions should be better left to the strategist in executive positions, however ratio analysis and stakeholder orientation become part of the role of management accountant in a way that cannot be separated or isolated from other internal operational functions. Those that argue that traditional MA should remain internalised and concern the role with only operational planning and control mechanisms do not take into consideration the broader demands placed on businesses by the external environment including the customer and the shareholder. The activities planned and coordinated by the MA, based on financial data analysis, cannot function without understanding the role of ratios, operating profit, and allocation of plant assets if the strategic goals are to met as laid out by senior-level leadership. So, how has the view of the role of strategic management accounting overcome any conflicts or misgivings regarding the role of the contemporary MA? It has occurred as an evolution of business practices that put more responsibilities on the management accountant due to externalities driving change within the organisation. Increasing globalisation, by evolutionary design, puts widely-dispersed business activities on the MA in a way that is integrated with everyone in the organisation working toward a centrally-determined series of corporate-driven goals (Baldvinsdottir, et al). Functional coordination of resources now include elements from purchasing, inventory management, production, marketing and materials procurement in a way that cannot exist in a proverbial vacuum and have become inter-dependent on one another to achieve goals. The financial data used to drive decisions acts as the forward momentum for ongoing change and improvements that relies on feedback and knowledge of functional departments in order to gain better customer service, higher profit, and competitive advantage or sustained growth. Areas once left to senior-level strategists now rests in management accounting activities. Conclusion Management accounting roles have simply evolved as a matter of globalisation and centralisation that is driving process improvements related to customers and shareholders. It is no longer efficient to simply believe that MA leadership can examine internalized financial data and coordinate resources at the operational level to achieve long-term goals. Managers must have a very strong knowledge management system that takes accounting data from the external environment and makes it relevant to internal process strategies. Without knowledge of what is occurring in the external business environment, development of strategies geared toward profitability will certainly meet with failure especially in a customer-centric business world. The future of management accounting does indeed lie in strategic management accounting and it would be unrealistic to believe they could operate separately and still meet with profitability requirements and competitive advantage. References Baldvinsdottir, G., Burns, J., Norreklit, H. & Scapens, R. (2009). The management accountant’s role, Financial Management, London. Jul/Aug, pp.34-36. Chartered Institute of Management Accountants. (2010). [internet] CIMA case studies and profiles. [accessed 2.11.2010] [available at http://www.cimaglobal.com/] Clarke, P. & Tagoe, N. (2002). Strategic management accounting – do we need it?, Accountancy Ireland, Dublin. 34,6, pp.10-12. Delaney, P.R. (2000). Wiley CPA Examination Review: Accounting and Reporting. 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