What on Earth is a Management Accountant?
Put simply, management accounting (often called managerial accounting in the US) is the provision of financial and non-financial information to managers. A management accountant, therefore, is someone who does exactly that. This description, however, fails to grasp the importance of management accountants to the functions of a business, and dramatically understates the fact that management accounting represents a small revolution in the way that accountants conduct themselves in the world of modern business.
The days of accountants as ‘scorekeepers’ and ‘box-tickers’ are well and truly over. Whilst the traditional functions of an accountant in assuring compliance with financial regulation and keeping track of costs still exist, management accountants are more business focussed, specialising in forward-looking views of a business’s data and adopting a broader, more strategic role within it.
Another important distinction between Management Accounting and the more traditional Financial Accounting is that whereas financial accounting information is used primarily by agencies external to the business (for the purposes of regulation, shareholder information, etc.), the output of management accountancy is used internally and is often confidential, seen only by senior management for the purposes of planning and strategy. Generally speaking, management accounting encompasses three main domains: Strategy, Performance and Risk. More specifically, management accountants are engaged in three principle activities:
Cost accounting, the oldest of the three disciplines of management accounting, has been around since the early days of the industrial revolution, as management experts at the time began to identify differences between fixed costs like hardware and machinery, and variable costs like raw materials and labour. The first true cost accounting methodology, now known as Traditional Standard Costing (TSC), evolved from this. For the next sixty years there was little change in accounting practice despite rapid changes in the way that business was done, and in the 80s there was widespread criticism of practitioners and educators who were accused, amongst other things, of ‘living in ivory towers’.
Following this, management accounting as a whole, and cost accounting in particular, entered a phase of rapid innovation with the simultaneous evolution of a huge number of approaches to costing, ranging from those that actively influence the processes they measure, such as Lean Costing, to those that take a radical view of the nature of costs themselves, like Resource Consumption Accounting. The Smith & Brown services page has a fuller discussion [link to Cost Accounting Service] about different methods of cost accounting if you want to know more.
Performance Evaluation and Analysis
In almost all businesses of a certain size, Key Performance Indicators (KPIs) are used to assess the performance of a business over some pre-determined period. Management accountants are typically responsible for the collection, analysis and presentation of this data, often in unique ways that reflect the needs of the organisation for which they work.
This information may be financial (cashflow statements, cost performance, etc.) but it may also be non-financial, perhaps relating to production efficiency or sales and marketing performance. This area, more than any other, illustrates the flexibility required of modern management accountants, and their gradual evolution away from purely financial functions.
The timeframe over which this data is collected and presented can be very flexible. Traditionally, financial statements were presented quarterly or monthly at management review meetings, but the dawning of the digital age now means that this information can be viewed remotely and in real time, with a resolution of just a few seconds through cloud-based software and information dashboards.
Planning and Decision Support
Perhaps the clearest distinction between Management and Traditional accounting practices is the extent to which management accountants are forward-facing, and the discipline of Planning and Decision Support illustrates this most clearly. Whereas a standard cashflow statement or statement of account describes what has already happened, a cashflow forecast or budget gives information about what is predicted or expected to happen in the future. With the increasing availability of high-power computing, so-called ‘what-if’ analysis allows for complex risk analysis and modelling of virtually any scenario that a business can encounter. Again, the data used for this kind of modelling can be financial or non-financial, requiring a degree of flexibility from management accountants not previously seen in the history of the profession.
Data from forecasts, models and projections is used to give insight to managers during the process of decision-making. It allows them to see the likely consequences of a particular course of action. The models are complex, often combining a range of financial and non-financial information with mathematical representations of the likely behaviour of the market based on personal experience. The data used to drive them is real data from the company and can typically be updated in real time if required.
The principle regulatory body of Management Accountants is CIMA, the Chartered Institute of Management Accountants. They ratify courses [link to accountancy qualifications blog] in management accounting and offer programs of continuous professional development to existing members. Another of their important functions is to define the role of management accountants within the modern world and one of their recent documents available here is extremely insightful. The thrust of their argument is that management accountants now have a critical role in helping organisations to ride out volatility (regarded as the norm in the modern global economy) by offering the chance to predict rather than react to changes in the market. Our blog about ‘Diffusing the Volatility Bomb’ illustrates this still further.
- Accountants no longer provide purely financial services; today they have evolved to focus more on business and strategy
- The output of management accounting is used internally by senior managers for planning and strategy
- Management accounting encompasses three main domains: Strategy, Performance and Risk
- Management accountants are engaged in three principle activities: cost accounting, performance evaluation and analysis, and planning and decision support
- There are a huge number of approaches to costing, ranging from Lean Costing to the more radical Resource Consumption Accounting
- Management accountants are typically responsible for the collection, analysis and presentation of data relating to Key Performance Indicators (KPIs)
- This information may be financial, for example cashflow statements and cost performance, but it may also be non-financial, perhaps relating to production efficiency or sales and marketing performance
- While traditional accounting reports what has already happened, management accounting can project and predict what is expected in the future for a business
- High-power computing now allows for a ‘what-if’ analysis; modelling virtually any scenario that a business can encounter
- Data from forecasts, models and projections is used to give insight to managers in decision-making
Apr 14, 2015