The Importance of Strategic Management Accounting

by Osmond Vitez; Updated September 26, 2017

Accounting is the business function of recording and reporting financial transactions in a company’s accounting ledgers. Financial accounting is the preparation of information to external users regarding the company’s financial health and business operations. Management accounting is an internal accounting function used to allocate business costs to goods or services and prepare reports for internal management business decisions. The management accounting function has slowly been transforming into a critical strategic management function.

Facts

Strategic management accounting is a form of management accounting focusing on information relating to external business situations, non-financial information or other internal information relating to various business decisions. This transformation takes accounting into the strategic financial planning environment, which requires accountants to include a variety of business scenarios when planning and preparing financial information for business use. Companies may specifically employ certified public accountants or certified management accountants to advance its strategic management accounting function.

Features

Strategic management accounting includes external economic information when analyzing and preparing financial information. Traditional management accounting typically uses the company’s internal information when aiding business management decisions. Including external economic information can help companies plan for changes in the business marketplace outside of the company’s control, such as competitors entering the market or the threat of substitute goods and services competing for the company’s market share.

Considerations

Companies can also use strategic management accounting to develop and implement cost leadership strategies in its business operations. Common cost leadership strategies include lean accounting or manufacturing, six sigma or total quality management. These strategies help companies develop the lowest operating or production costs in its industry, giving the company an opportunity to pass these savings on to consumers. While cost leadership strategies can be difficult to implement, strategic management accounting can usually estimate the future profits against the implementation costs.

Benefits

Using strategic management accounting to develop cost leadership strategies and strong economic forecasts can help companies improve its market share in the economic marketplace. Companies may also be able to create a distinct competitive advantage over competitors in its business industry or sector. This advantage means more profits for the company and the opportunity to expand its operations or enter new business markets. Strategic management accounting can also determine if a company needs to drop certain business lines to improve its profit margin and cut wasteful operations.

Warning

Implementing strategic management accounting can be an arduous and expensive process for companies. Accountants are usually trained to simply collect financial information, input the information into the accounting software and prepare financial reports. Strategic management accounting attempts to change this mentality by including management accountants in the strategic planning and decision-making process of the company. This change goes against decades of traditional accounting training, requiring companies to develop new business thought processes in their accountants.