Role of Strategic Management Accounting in Decision Making
Whether the adoption of strategic management accounting contributes to decision making? Let’s take a look!! In the current business scenario, organizations are experiencing greater challenges, increased complexity, and changes within the global economy, increased competition and rapid diffusion of data. So as to be significant in the new environment, accountants should relocate their roles within organizations to have a greater strategic focus. Strategic management accounting uses information from your operations to generate current insightful reports on business performance. Small businesses can take advantage of this strategic management accounting to improve decision making overtime for higher profits and more competitive gains. Strategic management accounting is introduced as a method to live up with today’s competitive and business environment.
What Is Strategic Management Accounting?
Strategic management accounting is the process of identifying, obtaining and analysing accounting information for helping the management team to develop strategic decisions and to evaluate organisational effectiveness. Typical strategic decisions involved pricing, market development, new product development and mergers and acquisitions.
Hiring a management CFO can sort all your financial issues at one stop. Businessmen, chief executive officers, presidents, and managers of the many for-profit and nonprofit firms have realized the benefits of strategic management. The main areas are:
- Information gathering and analysis stage
- Strategy formulation
- Generation of options and choices
- Monitoring and evaluation stage
Strategic management accounting uses different techniques to understand strategy execution, to develop integrated approaches to performance measurement. These are the strategic tools for performance measurement:
1. Target Costing: within this method, many external factors intervene. In price-based target costing, an organisation sets a target cost through comparison of competitive products. They have to obtain data on the market value and subtract their desired profit margin.
2. Customer Profitability Analysis: Measuring customer profitability is crucially important for continued business success because it helps determine whether certain customers are costing you money rather than making you money. It shifts the main target from the merchandise line profitability to individual customer profitability.
3. Life Cycle Costing: It aims at calculating the total cost of a product throughout its life cycle, from the planning to the decline, through introduction, growth and maturity. It is a long-term accounting perspective and market orientation. The cost including planning, design, acquisition, support cost and the other costs due to using the asset being monitored.
4. Benchmarking: Benchmarking is defined because of the method of measuring products, services, and processes. Benchmarking provides necessary awareness to help you understand how your organization compares with similar organizations. Benchmarking may also help first to identify systems, or processes for improvements—either incremental improvements or dramatic improvements.
5. Activity Based Management: Activity-Based Management (ABM) is a way of analysing
company’s business activities through value chain analysis. ABM method is also used to analyse the cost of an activity in relation to the value-added by the activity, with the aim of strategic improvement. The strategic emphasis of this method involved in the management of the activities through which it is possible to describe actions aiming at achieving a competitive advantage.
6. Just In Time Method: In manufacturing, rapid marketing efficiency and costs of production can make or break a corporation. Just in time (JIT) could be a workflow methodology aimed towards lowering flow times within production systems, in addition to response times from suppliers and to customers. JIT helps organizations in controlling variability in their manufacturing processes. It allows them to raise productivity while lowering costs.
7. SWOT Analysis: A SWOT analysis may be a simple and practical sort of evaluation model. SWOTs observes a mix of internal and external factors, furthermore as assessing strengths and weaknesses. This mix of evaluation metrics means a SWOT analysis is especially useful for gaining a radical overview of a business, product, brand, or a new project too soon within the project life cycle. SWOT stands for Strength, Weakness, Opportunities, and Threats.
8. Strategic Pricing: It focuses on the employment of competitor information, like competitors reactions to price changes, price elasticity, economies of scale and experience, within the pricing processes
Strategic Financial Management Goals
On hiring our best financial services, we ensure your goals are attained promptly and timely on a priority basis. We offer you the best steps to consider while setting strategic goals are:
1. KPIs: Identity which KPIs you can use to track progress toward your goal. It is easier than other types of strategic decision making because you are always working toward a concrete number.
2. Teams: At the enterprise level, strategic financial management often involves other departments, such as marketing, sales, and IT.
3. Make plans to achieve goals: Your plans should be feasible and attainable to bring you closer to your goal.
4. Timelines/milestones: How long will it take you to reach this goal? What steps along with the adjustments in your strategy and when needed?
Strategic financial management goal-setting process tends to focus on financial benchmarks that can be reached within a specific time frame. Specific goal setting conceptualizes goals and tracks progress. Hiring the best CFO services can help to enhance your earning. Examples of strategic financial goals could include:
- Increase net profit by 10% in FY 2020
- Reduce operating costs by AED 500,000 by the start of Q3 2020
- Grow revenue by at least 2% over the next three fiscal quarters
- Increase reserve working capital by 50% within the next 12 months
CDA Accountants in Decision Making
Data precision and accuracy are critical to the success of every company. Without meaningful and actionable insights, you will be able to hardly evaluate the present state of affairs or plan the long-term business moves. Firms using strategic-management concepts are more profitable and successful. It shows significant progress in sales, profitability, and productivity compared to firms without systematic planning activities. In such circumstances, strategic management accounting becomes an anchor of recent business. If you are preparing strategic management accounts, it is extremely important to be aware of strategic techniques. It requires wider skills including business acumen, interpersonal skills and therefore the ability to make a relationship with senior management.
You may also read, How Can a Professional Accountant Help your Business?
CDA Accounting and Bookkeeping Services LLC are always there for you to assist with these techniques. We offer services such as Accounting Services, Auditing Services, Vat & Tax Consultant Services, Implementation of Accounting Software Services. If you have any queries or need any of our services, feel good to contact us. Our expert will call you back immediately and will offer you a one-hour free consultation.
Hope you got a clear understanding of the importance of strategic management accounting in decision making. If you still have any doubts, contact CDA and solve all your business accounting problems.