Management Accounting as a Control and Decision-Making Instrument to improve competitiveness and ensure survival.
The management of the company has expectations about what the employees must achieve, but the employees often fail to meet the expectations of the management.
If the employees always achieve the established objectives by the Management, the control would not be necessary, the company would be an example of a perfect management and organizational model. But the reality is that the objectives are not always fulfilled, perfection does not exist.
For this reason, instruments are necessary to allow detecting the possible divergences between the achievements of the employees with the desired objectives by the Management.
You may be wondering that whether your company does not work with objectives, then no control mechanism is necessary.
But the reality is that it is impossible for any company or individual entrepreneur not to have a single objective, a company always has a mission, its existence is based on the achievement of something, even if your company does not have quantified and measured objectives, unconsciously your mind has internalized what you want to achieve.
You may have in mind a sales quantity, the wage you want to earn, the benefits you want to achieve, or simply an idealized image of how you would like your company to be in a few years. Perhaps you are comparing it with a company in your sector or if you are a dreamer and a visionary, perhaps you are comparing yourself with some of the leading companies with the highest growth in recent years.
Simply starting a business activity means that you have some goal in mind, even a small one, but the wonderful thing is that the activity itself generates information that you instinctively begin to group, synthesize and compare.
You start to measure invoicing, expenses, taxes to pay, available cash, investments to be made … You keep track of the number of new customers, the number of contracts, actions carried out by the competition …
Even if you do not have it reproduced in a document or you do not have it quantified, your mind begins to compare these measures with the objectives you had or the expectations that you had set for yourself. And your analytical mind tells you if you are doing well, fair or bad, your mind sends you signals of what you should change to improve results and achieve expectations … Once you reach those unconscious goals, your mind asks you for more and more and more … If you’ve made it this far, you can surely get a little more. So the objectives or expectations become more demanding.
It is quite human to set yourself new challenges and set new goals. A clear example is the one that is applied in sports activities, when one begins a sporting activity their expectations are very low, but when they have practiced and reached the initial goals, they quickly change them for more demanding ones. It is very rare that someone who practices running does not try to beat himself in each training or try to improve times in order to reach the limit that has been established, but when that limit is reached, a higher one is set.
That is why those who practice it regularly and consistently end up with goals far above those they had when they started.
The same happens with companies. It is rare to find a company that has lower objectives than the previous year. And even more so when we are in an extremely competitive and aggressive market environment, a market in which, if you don’t eat, they eat you.
There are companies that are truly clear about what they want to achieve and how they are going to achieve it … these companies are rockets. They are crushing companies.
But not only is it enough to wish something, you need to control that the wish is fulfilled. And this is where the role of Management Accounting or Management and Financial Control comes into play.
What role does Management Accounting have in decision making?
Decision-making is usually made based on quantifiable criteria.
For example, you do not decide to sell more and that’s it, what you do is decide to sell 20% more, lowering prices by 5%, increasing the sales force by 10%, improving the appreciation that the consumer has of the product in 25%, investing 200,000 Euros a year in advertising campaigns …
As you can see, any strategic decision in the company is accompanied by a chain reaction of operational decisions, since a decision is a thoughtful action to meet an objective. Strategic objectives by themselves are not achieved, they are related to operational objectives, forming a global network with implications in all directions. It is like fitting the pieces of a Rubik’s cube together until all the faces are the same color.
Therefore, in order to make a decision that brings you closer to the desired objective, all the variables involved must be quantified, and this also includes the operational objectives.
Today there is still in many companies the figure of the “Orchestra Man” Director, the one who is above everything and does everything, but the decentralization of the decision-making process is becoming more and more frequent, even in small companies, in these cases the Management does not have the necessary information to directly carry out operations, but it does need instruments that allow it to control the objectives delegated to the different centers or areas of the company.
What role does Management Accounting play as a Control instrument?
In companies that delegate objectives and responsibilities to the different centers, they are assuming part of the role that the Management would perform.
Therefore, it is essential to coordinate the objectives delegated to the different centers so that they are aligned with those of the Management.
There are 2 types of control for the delegation of objectives and decisions to work properly:
The control that is performed “a priori”, is a planning process through which the objectives assigned to each center or department are established. Tools such as the economic Budgetary Control, the treasury budget, the Balanced Scorecard and the cost budget are used in this type of control.
And the control that is carried out “a posteriori”, which evaluates the fulfillment of the delegated objectives. The tools above mentioned are also used, but with real information.
One of the most popular tools for controlling economic objectives is the Budgetary Control systems.
In addition, being able to manage the overall profitability objective of the company, it can also keep a departmental control or by business units.
But the Budgetary Control is not only a tool that allows the control of objectives and evaluations with the analysis of deviations, using it correctly through the technique of annual forecasts, it facilitates the company with enough time in advance to take decisions and execute actions that allow you to achieve the formalized objectives.
Management Control not only focuses on the control of economic variables that improve the overall profitability of the company. It also focuses on those non-economic variables that evaluate the effectiveness and efficiency of a center or department.
It can be the case of an unprofitable center managed efficiently or a very profitable center managed poorly. This can lead to many interpretations when having to make decisions that affect the global interests of the company.
Are the strategy and organizational culture of the company decisive when designing a Management Accounting system?
For example, a strategy aimed at a policy of lower prices than the competition to achieve a greater volume of sales will require a greater importance of cost control, while a strategy of differentiation of quality, service or technology will require the control of more qualitative aspects.
The structure of the company will be important when organizing the configuration of the Management Control system, such as products, markets, business areas, cost centers, profit centers, investment centers….
The design, implementation and use of Management Accounting is influenced both by the people who are part of the organization and by the organizational culture itself and the business environment.
In recent years to face changes in the environment, it has become essential for companies to adapt their management systems to the new conditions. Continuous innovations in product, process and material technology, continuous changes in the legislative framework, changes in consumer habits …
These changes mean that companies move in increasingly dynamic environments. The increase in the actions of the competition that affect the products and markets in which the company operates and that threaten the maintenance of its competitive position imply a progressively more hostile environment.
The greater number of products on the market and the productive resources in which companies operate imply greater complexity in management.
As the environment has become more dynamic and hostile, business management has become more complex, so that companies have had to adopt a more professional and formalized management style to maintain competitiveness and ensure the survival of the company.
So now you know a little more how Management Accounting can help your company.
If you still do not have tools to control the management of your company, contact me.
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