Two things are certain in business: change and risk.
Everything else is unknown but a well prepared and well-resourced business can anticipate change and have a flawless plan to deal with calculated risk.
In my previous blog I explained how an effective cost accounting system can change your business outcomes. The trick is that managers need a constant flow of timely, reliable and meaningful information to make rapid decisions.
This information comes from a strong management accounting system.
Peter Drucker said, “If you can’t measure it you can’t manage it.”
A good management accounting system will tell you:
- what you need to measure,
- the measurement of it, and
- how you can use it to manage your business.
In addition to this you need to know where you are going, hence your business plan.
For this reason, your management accounting system should be driven by your operational activities and your operational plan, which in turn is derived from your overall business strategy.
Just like the dashboard in your car, your management accounting system monitors all areas of your organisation. It is essential then that you have a firm grasp of the Key Performance Indicators (KPIs). They will help to identify if your business is lined up for success and what to do if it’s not.
Visualise your car’s dashboard and compare it with your business. Fuel and speed would could be your major KPIs. How is your fuel economy in relation to your speed? Or how are your cash resources doing in relation to how fast you turn around your stock levels? If I go faster I use more fuel, I might break the law and get a fine, I can burn out my engine but it would be good to arrive 20 minutes earlier. Is the risk worth it? I can spend more money on advertising, appoint more sales people, sell like crazy and double my annual sales in the first half. I might run out of cash, grow faster than my systems allow or harm my human resources and marketing strategy. Is the risk worth it?
Management accounting equips managers in an organisation with the information they need to confidently make those critical decisions, knowing they are aligning with business strategies and goals to achieve sustainable success.
Working closely with decision makers in your organisation – managers, operational staff, finance and HR – management accountants deliver information to support your business goals and Key Performance Indicators (KPIs).
Ultimately an efficient management accounting system and effective cost models will deliver a higher level of cash management and better allocate cash resources in line with your business goals. Failure to do so will head you toward insolvency. Get it right and you’ll sustain the momentum of your operational engine and secure financial stability and profitability.