Accounting is the language of business, making it indispensable for executing strategic management concepts. The more clearly your accounting department is able to express your company's financial situation, the better you'll be able to understand where you are and where you are headed relative to your short- and long-term strategic goals.
Strategic management accounting applies accounting principles and information to the strategic management process of setting goals and working to achieve them.
Strategic Planning and Accounting
Strategic planning uses accounting to plan and assess. Effective goals are expressed in terms of quantifiable objectives, and sound accounting is invaluable for evaluating whether your company is meeting these goals and if not, how far you are from the mark. It's more useful to project that your company will increase its sales of a particular product by 20% over the next year than to say that it will significantly grow its overall sales volume. Accounting reports tell you whether you have met this sales goal and if you have fallen short by an inch or a mile.
Because strategic planning is geared toward future business activity, it also uses pro forma financial statements to chart paths to profitability. A pro forma cash flow statement will show how much your increased sales will cost you in added direct expenses and how much cash you can expect to have left over at the end of the day.
Of course, the usefulness of this information depends on the quality and accuracy of the numbers you plug in. However, if you do your homework and make predictions based on sound information and realistic assumptions, your financial statements will help you to set achievable goals and develop a good sense of what is necessary to achieve these objectives.
Strategic Management Accounting Steps
- Research. Before you start working toward your goals, you'll need to gather the background information necessary to project and predict. This may require data from departments other than accounting, such as marketing research and production logistics.
- Setting goals. Once you develop a sense of what is feasible for your company to achieve, your accounting department can process these numbers and work with management to frame goals that stretch your capabilities and build on your strengths.
- Evaluating progress. As your company works toward achieving the goals that have been set, strategic accounting services play the role of analyzing results to determine whether your company is on track to achieve its objectives.
- Analyzing variance. Strategic goals aren't set in stone nor are they indications of absolute success or failure. There is a world of difference between falling short of your goal by a statistically insignificant amount versus achieving sales that aren't even in the ballpark. The process of analyzing variance can also tell you whether the goals themselves were unrealistic and need to be reevaluated.
Time Frames and Strategic Accounting
Short-term goals are most relevant to short-term needs. If your company needs to generate money to pay rent on a space you currently occupy, this objective will be more urgent in the short term than a longer-term strategy, such as mapping out how you will finance your next store. You will orient your cash flow strategy toward making sure you have sufficient funds available right away.
Medium-term goals create a bridge between long- and short-term objectives. They usually cover time frames of two to three years in the future. The better your assumptions and predictions for your short-term objectives, the more gracefully you'll be able to link them with these longer-term strategies.
Long-term goals are the most difficult to predict accurately because so many variables can come into play over longer time frames. Accounting for long-term strategic planning also involves evaluating and adjusting goals as longer-term variables become apparent.