How strategic management accounting works (and why it’s on the rise)

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Most, if not all, accountants will take a strategic approach to their work, but not everyone will actively make use of strategic management accounting (SMA) techniques. And those that do won’t necessarily be aware that they’re actually practising SMA. As it is increasingly utilised, it has become a byword for modern management accounting methods.

A quick search online shows that SMA was first defined as far back as 1981 as the “provision and analysis of management accounting data about a business and its competitors, for use in developing and monitoring business strategy”. Those principles remain, but it has developed.

Forward-looking with a commercial mindset

The general consensus is that there are two broad categories of management accountant:

  • the classical management accountant deals with historic results, historic impact of activity, revenue and trading of the business and then reports that to stakeholders and management;
  • the strategic management accountant is more forward-looking with a commercial mindset.

According to Chris Biggs, Partner at Theta Global Advisers, the SMA will ask: “‘What are our most profitable revenue streams? What are our most profitable products? How can we see that changing in the environment and in the economy going forwards? What can we do to increase margins and revenues we see in the future?’”

In simple terms, SMA is focused on external factors such as competitors, the economic landscape and the customer and/or client base. It looks at pricing, business and/or market development, product development and merger and acquisition activity.

“Usually, management accounting is focused on the internal element,” says Ali Jaw FMAAT, associate Director at Severn Accounting and finance and operations manager at MB Technical Services Ltd (pictured). “But as soon as you bring in the strategic element, then you focus on external factors as well. You are looking at the holistic view.”

How the Strategic Management Accountant adds value

SMA plays a critical role in business because it can help business leaders predict future performance while helping to sustain the business for future generations.

“Strategic management accounting can help predict and plan your business for five, 10 or more years by utilising new techniques and innovative approaches,” says Dr Mohamed Saeudy, Director of the Research Centre for Contemporary Accounting, Finance and Economics (ResCAFE) at the University of Bedfordshire. “This will encourage business continuity, business growth and business sustainability.”

Sustainability has various dimensions, he says.

“Not just in terms of carbon footprint and emissions, but helping businesses to refurbish, recycle or update certain assets that have reached the end of their economic life.”

Strategic management accountancy in action

“Benchmarking is fundamentally quite difficult because not all companies publish their management accounts and you can only really benchmark against what you know,” says Joe Lennon, Partner at Wellers Accountants. “We have many clients in the hospitality sector, so we know it is a very margin-driven sector. Businesses succeed or fail on hitting those margins.”

Lennon knows any hospitality business spending over 35% of their turnover on wage costs will struggle. This is where strategic decision-making comes in.

One of his clients was spending 40% of their turnover on wage costs. Initially, Lennon raised concerns, but the restaurant explained they’d made the conscious decision to pay the head chef above the market rate in order to retain his expertise. This, says Lennon, is where the strategic piece comes in. “The workforce in the hospitality sector moves around a lot, so recruitment can be really difficult. The decision to pay this amazing head chef turned out to be the right one. They knew they had to overpay, but they were making savings elsewhere. Customers usually choose a pub or restaurant because they’re walking past it (so it’s got good footfall), but if it isn’t ideally located, it needs to have something else to recommend it, so that’s what they were doing. They therefore pay lower rates in rent because they weren’t in the city centre, but pay higher rates for great staff so it balances out.”

Techniques used in strategic management accounting

  • Benchmarking

Through tools such as the SWOT analysis, which identifies a business’s strengths, weaknesses, opportunities and threats, benchmarking typically allows accountants to analyse business performance in comparison to competitors.

According to assistant professor of accountancy Dr Xihui Chen, 75% of her interviewees used this technique during the pandemic. But interestingly, it was approached from a support and share angle rather than a competitive one. “Traditionally, benchmarking is a way to rate your performance in the sector and compare and compete but, during the pandemic, organisations were using the technique to share best practice, even sharing supplier contact details.”

  • Customer profitability analysis

This helps accountants identify those customers who generate the most income for a business. Armed with this data, accountants can develop a strategy around targeting this demographic from a sales and marketing perspective.

  • Investment capital appraisal

This technique helps identify which projects or assets will be the most profitable, how they will be financed and duration of ROI. Financial health is also an important factor. “For example, can you generate enough cash for the project or asset? Will the cash flow sustain your project team for the necessary duration or will you run out halfway through?” says Dr Chen.

  • Strategic planning and budgeting

Simply put, forward-thinking accountants will make use of external factors and big data to forward plan and forecast. Most larger companies will use rolling budgets, which are reviewed, evaluated and monitored on a monthly basis to forecast the following year.

Data analysis

In-depth data analysis to help with the reporting and monitoring of business strategy is also a key element of strategic management accounting, says Dr Xihui Chen, Assistant Professor of accountancy at the Accounting Research Centre at Heriot-Watt University.

Dr Chen, who has conducted thorough research around the practice and its use during and after the Covid-19 pandemic, takes the view that SMA is more akin to business partnering and making use of big data to improve decision-making.  

“Based on literature and my own research where I’ve interviewed 26 accountants who are finance directors across the UK, it’s clear that big data is king to organisations, now more than ever,” she explains. “And it’s a lot about connection – connecting the information and data with the company’s performance and projected performance so they can provide a forward-looking plan. That is crucial for any business strategy.”

Business benefits

Ali Jaw’s coffee shop client, Worcester-based Francini Café De Colombia, was initially buying coffee from the UK, which was expensive.

The owner was already growing his own coffee in Colombia, and discussions were had around whether to continue to buy coffee in the UK or import instead. Jaw and his colleagues conducted a cost analysis exercise while the owner trialled importing for one season.

“Our analysis revealed that it was actually cheaper to grow coffee in Colombia and import it to the UK rather than simply buy coffee here,” Jaw explains.

“When we looked at the value chain, it was clear that the cost per cup of coffee was cheaper. We also carried out competitor pricing and a strengths, weaknesses, opportunities and threats (SWOT) analysis.

“We found that not only was our client able to offer a slightly lower price compared to its competitors and still make profit. Changing sources meant the quality of the coffee was actually better because it was grown fresh in Colombia so, in the end, he had a major competitive advantage.” 

“They knew they had to overpay, but they were making savings elsewhere.”

Annie Makoff is a freelance journalist and editor.

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