The aim of any organization – be it private or public – is to be successful. And for that, an effective management accounting is indispensable. Effective management accounting calls for a combination of competent people, clear principles, well managed performance and healthy practices.
This is an age of relentless competition as new innovations emerge every other day, resulting in an increasing volume of unstructured data and inherent complexity. Google’s Eric Schmidt claims that society now creates as much new information every two days, as it did from the dawn of civilization to 2003. The International Data Corporation estimates that by 2020, business transactions on the internet [business-to-business and business-to-consumer] will reach 450 billion a day.
So, only management accounting will ensure quality decision making, as it takes into consideration the most relevant information for analysis.
Too much of information can prove devastating for an organization than being useful. It can even lead to decision paralysis or hasty action. Many organizations incur the unnecessary costs of bad decisions, or waste resources on justifying poor decisions. In fact, 47% of Asia’s CFOs say decision making is hindered by information overload. Even an average consumer is faced with making more than 70 decisions a day!
As Herbert Hawkes, former Dean of Columbia College, says, “Half the worry in the world is caused by people trying to make decisions before they have sufficient knowledge on which to base them.”
Data, without analysis, insight and communication is not knowledge. Management accounting helps organizations translate numbers into meaningful narrative analysis. It improves decision-making because it extracts value from information. It places the best available evidence at the centre of decision- making process, providing more objective insight on which to reach conclusions or base judgments.
Management accounting brings structured solutions to unstructured problems. It provides people with decision-relevant data, rigorous analysis and informed judgment to make better decisions and to communicate with impact. Where uncertainty is high, management accounting provides forecasts, which can be based on an extensive range of information. This might include prior experience and institutional memory that provide opportunities for continuous improvement.
Thus management accounting involves sourcing, analysis, communication and use of decision-relevant financial and non-financial information to generate and preserve value for organizations.”
To achieve success, particularly when uncertainty is high, organizations must develop an effective management accounting function that complements their financial accounting system to provide such analysis. Financial accounting information, though essential, does not provide sufficient knowledge base for making decisions about future. This is because its focus is on past activity.
Management accounting lies at the heart of an organization, at the crossroads between finance and management. It brings together both financial and non-financial considerations to run the organization.
Principles of Management Accounting
There are four key principles that can help any organization – large and small, public and private – to get the most beneficial data out of the increasing volume of information. They can help organizations succeed, by supporting CEOs, CFOs and boards of directors in benchmarking and improving their management accounting systems. This in turn will help organizations to make better decisions, to respond appropriately to the risks they face and to protect the value they generate, thus meet the organizations needs effectively and efficiently. These principles describe the fundamental values, qualities, norms and features to which management accounting professionals should aspire.
Management accounting begins and ends with conversations. By removing silo mentality and encouraging integrated thinking, communication becomes influential leading to better decision making.
Providing relevant information to decision makers when needed is the prime objective of management accounting. The principle of relevance provides guidance on identifying past, present and future information, including financial and non-financial data from internal and external sources, social, environmental and economic data.
Management accounting plays a vital role in connecting an organization’s strategy to its business. The principle of value helps organizations look into different permutations and combinations through simulating different scenarios to understand their impact on generating and preserving the organizational values.
Stewardship builds trust, accountability and credibility. Relevant and reliable information provided by management accounting after thorough scrutiny ensures decision making process is more objective. Blending the short-term commercial interests with that of long-term value for stakeholders, enhances credibility and trust.
An effective management accounting function is made up of skilled and competent people, who apply these principles to maintain and improve an organization’s performance management system through the areas of practice they undertake.
It is important to note that an effective management accounting function not only performs each practice well in isolation but also shares knowledge and information between areas and helps teams work collaboratively.