Management Accounting in Competitive World

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Management Accounting in Competitive World

Management accounting needs an extra focus and more discipline in a competitive world. There is feeling in US that the effects of global accounting standards convergence are quite significant, they are certainly not the only effects of globalization on US accountants. The pace of globalization is also changing the balance among the multiple disciplines within the accounting profession across the world and, more particularly, in America.

Traditionally, the accounting profession in US was focused on the preparation and auditing of financial accounting statements, which was thought to be the assignment of financial accounting. The focus is now getting shifted to America and across the world and the discipline of management accounting has been well recognized as an important segment of the accounting profession. There is now a clear demarcation between the responsibilities of financial accountant and management accountants.

Following are the areas which differentiate their role:

  • The management accounting deals with both financial and nonfinancial data to support a wide range of managerial decisions, whereas financial accounting focuses only on financial data to support investors’ and creditors’ capital allocation decisions. However, it is observed that real value-add is the integration of financial reporting with operational information.

  • Management accounting looks forward as well as backward, whereas financial accounting is oriented solely toward history. Management accounting involves future forecasting and anticipations as what will, could or should happen, as well as indicating the past happenings and results.

  • The important tools and techniques for management accounting for managerial decisions involve forecasting, planning and budgeting. Financial accounting focuses on financial statements, financial ratios and financial reporting, and important instruments are the balance sheet and the annual reports.

  • In practice, management accounting looks outward as well as inward, whereas financial accounting is solely focused on what happens internally within an enterprise.

  • Management accounting involves proactively seeking and identifying opportunities and threats that an enterprise faces from customers, competitors, suppliers, regulatory agencies and other external parties. However, financial accounting has hardly any role in this.

  • Management accounting is focused on enhancing business performance in a competitive environment, not simply on ensuring compliance with standards and regulations.

  • Management accountants contribute directly to the creation of value, not merely to protect and preserve it. The role of management accountants has increased considerably in the present global competitive environment as their managerial decisions have direct impact on cost optimization and revenue increase, thereby contributing more to the profit growth of a firm.

Management Accounting and Global Environment

Over the decades, the economics and fundamentals of doing the business have changed considerably across the globe. The things have changed in terms of how individuals and business managers interact with each other, how businesses interact with other businesses and how the interactions take place across the government, etc. In addition, there is an ethical change in business climate. In all these changes, management accounting role has emerged as more crucial.

Following are the increased roles of a managerial professional:

  • The major responsibility is to design internal accounting systems to achieve the goals of the firm and at the same time have perfect monitoring of the operations.

  • There is a need to redefine the parameters of performance evaluation which are basically based on budgets and variance analysis.

  • Understand the implications of conducting business across the globe. In this case, interactions with individuals, firms and others assume significance. Therefore, a managerial professional have to acquire a global
    vision to analyze and understand business intricacies across the globe.

  • Management accountants need to thoroughly understand the applications of new costing techniques to effectively use them. An in-depth analysis is required to assess the impact of these strategies on costing and pricing of a product in comparison to global prices.

  • They also need to understand the various ethical issues of business which affect the very brand of the product and firm both. The overall impact of business ethics should be evaluated and a communication passed across the work force to make them more cautious toward this important issue.

  • Of course, the prime responsibility is to establish a perfect management costing system where more focus is required on activity management in the changing context.

  • Identification of proper cost drivers has been quite useful in eliminating the non-value activities and thereby reducing the costs. This exercise has been found quite useful and advantageous. This should be made for systematic approach.

  • Management accounting professionals have a key role in optimizing the performance of the firm. They have a close track not only on costing and revenue aspects but also on other important factors related to the decision-making process.

    The important factors among them are optimizing operations of the firm, boosting morals of the work force through different motivations and incentives, ensuring proper training for updating technical skills of the workers, establishing proper relationship between government and business, keeping close track on business policies and business environment across the globe, etc.

Global Management Accounting Principles

The management accounting professionals and practitioners require a thorough understanding of the business and various business models. They also need to analyze the operating environment so that organizational risks and opportunities are reasonably evaluated. The timely management and taking appropriate strategies to manage various risks will enable the firm to exploit opportunities and generate value for the stakeholders. Management accounting is a key between finance and management.

It provides structured solutions to complex problems by translating them into simple strategies. This can also play a vice versa role. It joins together both the financial and the non-financial considerations. Management accounting is an area which can be better used to run the firms’ operations. The firms’ goals are achieved through better control and performance measurement. The business model is a practical guide and an important means which helps a firm in value addition.

The management accounting professionals require a thorough understanding of the business model, firm’s strategies, market and macro-economic environment; therefore, they contribute their skills for achieving goals and success on sustainable basis. The information system plays a greater role in decision-making process. Most of the decisions are evidenced based on the recent experience.

The role of a management accounting professional lies in extracting more value from the available information for taking better decisions in the overall interest of the firm. Therefore, major global management accounting principles flow from this essence of managerial accounting. The global management accounting principles describe the fundamental values, qualities, norms and features to motivate and inspire the management accounting professionals.

The major factors which facilitate in achieving this are as follows:

  1. An effective communication system which provides insight that is influential helps in strategy development and execution. It also helps in better conversation among the groups. The communication is tailored to facilitate better decisions.

  2. Availability of information which is relevant, reliable and easily accessible.

  3. The further requirement is to analyze impact of communication and information on value of the firm. This analysis also provides insight into various alternatives and options to prioritize actions by their impact on
    different outcomes.

  4. Then the next important pillar of the management accounting principle is stewardship, which builds trust and suggests accountability and credibility for long-term sustainability.

  5. Integrity and ethics are also more important for an effective management accounting system. This, of course, is developed among the skilled and competent people who are closely associated in implementing the management accounting principles. They need to maintain and improve the firm’s performance by practicing. Therefore, all the above principles apply to the discipline of management accounting system. “Stewardship builds trust” applies to the individual behavior of management accounting professionals.

In addition to the above principles, quantitative and qualitative skills are also needed in management accounting professionals to inform decision making on the basis of past and present data and predictive insights. For example, management accounting, based on various analyses, can provide hindsight to decide about the performance and the kind of reward that can be awarded. It can provide insight from real-time information. They can also monitor the execution of strategies and plans and bring them in line with pre-determined targets; there are various tools to do this, such as, scenario planning, forecasting and other predictive tools.

The practical aspects of the management accounting function can be summarized in the changing global management practices perspective as follows:

Cost Transformation and Management

The exercise of reducing waste but at the same time preserving or enhancing value. It involves the continuous exercise to identify activities and eliminate waste across all the operations of the firm. The resources saved through this exercise can be invested in customer focused innovations.

External Reporting

The management accounting professionals are also required to integrate a comprehensive assessment of financial and non-financial performance, business model per se, risks associated and strategies for effective assessment of future performance.

Financial Strategy

This requires identification of the future strategies which will be helpful for maximizing the firm’s net present value. This also involves appropriate allocation of available capital resources among the competing opportunities, and an effective implementation and monitoring system to evaluate the selected strategies to achieve pre-decided goals and objectives of the firm.

Internal Control

The strengthening of internal control systems and procedures is also a prime responsibility of management accounting professionals. They need to prepare a framework of policies, systems, processes and procedures for effective management of risks. There has to be a well-defined system to ensure efficient and effective implementation of the framework.

Investment Appraisal

A decision to evaluate an investment proposal, keeping in view the financial viability and technical feasibility, is an important decision area where management accounting professional can play a crucial role. They can prioritize the investment options based on affordability and expected returns and different kinds of risks associated with the investments.

Management and Budgetary Control

This is of course a traditional role of managerial accounting professionals to control performance against budgeted targets. The controlling areas may include projects, people, activities, processes, sales volumes and revenues, resource quantities, operating costs and expenses, assets, liabilities and cash flows, etc.

Price, Discount and Product Decisions

The most crucial decision in a firm’s operations to decide what to produce, how much to produce and at what selling price and discount the product is to be sold.

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