27 Aug 2014 02:58pm

Why every client needs management accounts

The globalisation of business, the emergence of large chains in every high street in various forms and the spread of e-commerce in every line of business presents threats and opportunities in equal measure. Threats include pressure on margins and substitution, while opportunities include access to a bigger, dispersed market and even to global markets

Businesses are now dealing with many ‘variables’ for which it needs almost real time information:

  • Sales margins – changing dynamics in the sales process through the digital sphere
  • Costs – controls on tight margins means that there has to be a good control on costs.
  • Employees – more part-time or home working means that economic activity by team leaders are required
  • Financing – banks and investors are more willing to invest or support the business if the business performance can be proven with the help of management accounts

These variables highlights the classic saying of the, "only thing constant in business is ‘change'".

Ever-increasing data connectivity, is enabling more accountancy work than ever to be re-configured and re-engineered. This new landscape is encouraging organisations to examine how business support services such as accounting and finance are aligned with, and connected to, the rest of the business.

CFOs have been pressured in the past few years to produce better, more relevant information, faster, and at a lower cost

There’s a growing call for greater specialisation in these roles. Particularly notable is the emergence of more commercially-aware finance business partners who are able to think more strategically and work alongside management as a respected advisor well-tuned to the needs of the business.

CFOs have been pressured in the past few years to produce better, more relevant information, faster, and at a lower cost. The performance bar has been and still is being raised in ways unimaginable 20 years ago.

While many large organisations have increased their expectations of management accounting information, most SME owners have limited expectations of what management accounts can achieve. They may assume that it chiefly concerns ‘historical control information’ rather than future-oriented information that aids decision-making. Consequently, there is a tendency to make decisions without adequate (or sometimes any) management accounting information or analysis.

Why there has been a shift in approach

The crisis since the failure of Lehman Brothers in 2008 has emphasised the need for better management information in many leading large organisations. Initially, the requirement was for a better understanding of cashflow than financial accounts alone could provide. Next, there was a need to cut costs selectively without damaging future prospects.

Now that businesses have adjusted to a ‘new normal’ of slower market growth in recent years, a greater understanding of what is required for profit growth is needed. From survival to recovery phase, each stage of this adjustment has increased expectations of management accountants.

Research carried out by SKS in association with CIMA and Loughborough University in 2013 found that only 55% of businesses enjoy the benefits of management accounts. But the responses from 100 finance directors of SME companies in the UK also highlighted that the regular practice of SME accountants is to spend a large amount of time focusing purely on external reporting and book-keeping.

Clear benefits

Some businesses, large and small, are achieving the necessary balance between cutting costs to improve operational performance and investing in the challenge of building competences. Doing so requires a keen understanding of the drivers of cost, risk and value along the value chain.

Those professional service providers who operate as ‘finance business partners’ have an influential role to play in ensuring performance management is not just about the achievement of current financial targets but longer-term strategic objectives too. However, their influence depends on the quality of management information and the insights they can contribute.

From strategic issues to routine tasks, executives, managers, information workers and staff all expect information to be readily available and for management accountants to provide clear insights to support decision-making irrespective of the size of the organisation.

Regulators, shareholders and stakeholders also require more information and greater transparency about the company’s operations. For the purpose of performance management and decision making, financial data must be combined with operational, customer and competitor information to provide insights and describe opportunities in the terms that business managers find compelling.

We know from evolution that in turbulent times it is not necessarily the biggest or fittest who survive, but rather the most adaptable. For any organisation, adaptability invariably starts with high quality management information. In this respect, backwards-looking financial accounting information alone will not suffice. Management information must demonstrate the ‘cause and effect’ relationships between financial data and non-financial data, and be oriented towards the future. It should help managers to understand current performance, while focusing on future projections.

Not only will investor confidence rise as operational performance and strategic planning improves through better management accounting information, but this in turn will open up access to a wider range of low-cost funding options.

Larger organisations are likely to remain ahead of the game when it comes to developing transformational financial programmes and innovative approaches to new uses of technology. However, as new sourcing options continue to join the market for smaller companies, they too are able to embrace the best of both worlds through taking different approaches to management accounting and transactional accounts.

These small companies will undoubtedly benefit from the drive towards management accounts and it will play a crucial role for the development of a business. It is a role more accountants must take on when advising clients of future development of the business. This insight will, and for some it already does, benefit the businesses in the long run.

Sanjay Swarup is director of award-winning chartered accountancy firm SKS Business Services


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