An insight into sound management accounting practices

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For an organisation to survive in this globally competitive and ever changing world it must put in place sound management accounting practices. Managers need information to make decision. An Understanding of cost behaviour is fundamental to financial and managerial accounting and management accounting information and the way it is used can support or hinder action and change of action in organisation. ( Bescos and Mendoza, 2000). While it is still essential for accountants to ensure that financial statutory accounts meet legal requirement , it is required that companies must shift the focus of their accounting and finance function to additionally include the evaluation of past performance and appraisal of future opportunities ,helping to ensure that company maximises its strategic capabilities. It is required that managers must understand the value of an integrated accounting and finance function, extending from shops floor to board of directors. Franchise development team has two main key area responsibilities: Smooth running and development of existing franchised stores and looking for opportunity for development of new stores. Both these responsibilities require skills that enable the team to make decision and to make them decision correctly they must consider both financial and managerial accounting functions. To proceed any further with this report it is important to understand what these two functions are.

Financial Accounting Function

 Financial accounting is the function that is responsible for reporting financial information of a business, and specifically for preparation of periodic external reporting of financial information, statutorily required, for shareholders (Boczko and Davis, 2005). It has been compared to as a rear view mirror rather than the windscreen of a car as financial accounting is primarily concerned with the historical information. Financial accounting provides information that is useful for third parties of an organization. That is why it is important for financial accountants to provide useful and comprehendible information that can help them in their decision making and sill complies with accounting standards such International accounting standards (IASs) and International Financial Reporting standard (IFRSs).   Such information that can help in assessments of amounts of cash flow, timing of cash flow, and even uncertainty of cash flow.   Also economic resources of an organization, claims on those resources, the effects of transactions if any, events, and circumstances that could affect them. Responsibilities of financial accountants are recording the financial information, classifying it, along with summarizing and communicating it to the public and management.

Management Accounting Function

Managerial Accounting is often referred to as management accounting. Management accounting has been described as "the internal business -building role of accounting and finance professional that design implement and manage internal system that supports effective decisions, and support, plan, and control organizations value-creating operation."(The Institute of Management Accountants) .According to the revised International management accounting practice 1(IMAP),published in March 1998 by Financial Management and Management accounting Committee (FMAC) of International Federation of Accountants (IFCA) Management accounting is an activity that is interwoven in the whole management process of all organizations . It refers to that part of management process which is focused on adding value to organization by attaining the effective use of resources by people in dynamic and competitive contexts. Management Accounting involves distinctive technologies (modes of thought and practices) .Management accounting provides information for managers in an organization .  Experienced management accountants develop projections carefully which put the team at ease about the uncertainty of a product or project being successful or not.   Responsibilities of management accountants are interpreting ,analyzing ,collecting and compiling the information, then preparing the standardized reports, , and being involved in the decision making. Management Accounting is an integral part of the effective management process that adds value by continuously probing whether resources are used effectively by people and organization in creating values for stakeholder's customer and shareholder. Management accounting is mainly concerned with the process of cost determination and financial control using budget and cost accounting technologies and budgetary control techniques. It provides information for management planning, control and reduction of waste in business process through the use of decision analysis and responsibility accounting. In addition to these the information generated helps management in effective formulation of plans to reach objectives ,formulation of short term operating plans ,recording of actual transactions and obtaining and controlling finance. Because information is solely for internal purposes it don have to comply with any international standards mentioned for financial accountants. The two primary functions of managerial accounting are planning and controlling. Both these help managers accomplish Decision making. Planning From an accounting prospective, Planning is referred to as communication of company's goal. Planning is achieved through the budgeting as a basis for decision made by managers. Budgets are company's financial plans. They help to identify source of inflow and outflow of company's economic resources. Budgets ultimately create benchmarks of profit, cash flow and financial position that the company expects to achieve. Budgeting and internal reporting are critical tools used by manager today. It was seen in a group of about 4,000 companies, with about 200 employees, surveyed by the Australian Bureau of Statistics. (Adler, M. (1983) Managers here were asked if they prepared budgets and internal reports and also to tell the revenue forecasts and the related performance. This report also stressed the importance of financial accounting to the manager when managing the franchisee teams. Therefore budgets or internal reports are critical for a company's forecasts. This method of budget preparation activity is targeted to forecast accuracy which will entail the systematic collection of a wide range of data that will lead to more accurate assessment of future performance. In this case however the simple budgeting without internal reporting would not lead to an effective formal control system. (Ajayi, R.A., and Mehdian, M. (1994). Controlling: The controlling function connected to measuring performance, comparing the actual performance with the budget, and talking required action. The controller is responsible for performing managerial accounting activities that are necessary for decision making. Due to Introduction of Sarbanes-Oxley Act of 2002(SOX) introduced recently, Companies must asses and document their internal control structure which has added more responsibilities to management accountant functions.

Importance of the Both

Management accounting makes use of historical data which comes from financial accounting cycle, but focuses almost entirely on present and future. The type of decision made by managers regarding planning and control purposed rely substantially on accounting information. The management accounting process begins with the input to the accounting information system. The data is then encoded in to information using accounting language and transmitted to recipients. To be able to understand this information recipients must be familiar with the concepts used in accounting models that are used to prepare the reports and understand what variances in the numbers signify. And finally how to act on the information .How they will act will depend on how they will interpret the message. From consolidated statements of the group franchise development team need to work out the benefits of investing in franchise model, need to work out Return on the capital employed and decide how much of the profit made to reinvest in business again so that they get better return on it next year. Once they decide to reinvest question arises what they reinvest in, should they re-image the stores or should they open new store. All these decisions are impossible without numbers and to have right numbers they need financial accounting function. Another key dimension to decision making process is the information about the competitors and the market environment .Franchise development team need to come up with Key Performance Indicators (KPIs) which company must achieve in order to succeed in its business strategy which include comparable sales growth like sales at different time of year in different countries or product and on profit growth. Although these indicators are both financial and non financial to ensure a balance scorecard approach. Another key role of the development team would include formulating relevant targets for business and reporting actual performance against these targets. Analyzing data allows the team to highlight area where the improvements might be made within the business. As performance analysis, financial measures are considered alongside non-financial measures and in consideration of long-term effects so as to evaluate the activity from the balanced position. In many organizations like Mothercare plc financial Accounting techniques like budgeting, sales projections and financial reporting are supposed to help prevent franchisee business failures by giving managers realistic plans to guide their actions and feedback on their progress.


For a business to successful it requires managers who understand the behavioral consequences of numbers and who can link controls to strategy .Its accounting personnel should regard themselves as a member of operating team .Management accountants must spend time with non financial personnel and must provide them with financial information that is necessary for development of each individual aspect of their business.