The Importance of Strategic Management Accounting - Assignment Example

? Strategic Management Accounting Introduction Strategic management accounting refers to a business practice that focuses on external factors and non financial information as well as information within the organization. In above connection, strategic management accounting presents numerous benefits in organization decision making. Some of its benefits include; helps in analysis of variances, monitoring and control, financial reporting, controlling cost among other benefits (Codjia, 2013). The analysis of variance involves finding the difference between the budgeted figure and the actual figure. Whereby, a positive or a negative variance may be obtained. Whereby, a positive variance implies that the budgeted figures were higher than the actual amount. This means that management an over cast was made when preparing the budget (Codjia, 2013). On the other hand, a negative variance indicates that the budgeted amount was lower than the amount obtained. This means that there was an under cast during budget preparation. Therefore, strategic variance analysis may be categorized into two divisions namely; mutually exclusive strategic variance analysis and discretionally strategic variance analysis. Whereby, exclusive variance analysis focuses at determining the deviations in terms of budgeted and actual sales volumes. On the other hand, exclusive variance analysis focuses at determining deviations in terms of contribution margin and production cost (Codjia, 2013). Additionally, strategic management accounting helps in monitoring and control. Whereby, internal auditors conduct a thorough scrutiny of financial reporting mechanism. This helps auditors to exercise internal control of financial reports as well as prevent errors that could occur. Connectively, strategic management accounting helps accounting professionals in preparing accurate and comprehensive financial reports such as comprehensive income statement, statement of financial position and cash flow statements by providing a comprehensive accounting data that can not only be utilized to prepare ledger account but can also be utilized in the entire accounting circle. In above connection, strategic management accounting helps decision makers to set limits on the amount of expenditure to be incurred (Codjia, 2013). Therefore, this study will provide an insight on the two major sections regarding strategic management accounting as discussed. Question 1 Advice on two entirely different businesses about the benefits and problems associated with what is termed the “traditional approach to budgeting and budgetary control”. The benefits that may accrue from an organisation that tend to adopt traditional approach of budgeting and budgetary control may vary between different organisations. This is because a budget that can be applied in one organisation may not be effective in another organisation. Additionally, external factors influencing a business may not be similar because different organisation might be operating under different business environments. Additionally, organisation differs in terms of goals, objectives and activities carried out (Bhattacharyya, 2006). For instance, a budget that may be utilized in a business that operates in a very stable and static market place may not be suitable to a business that operate in a very dynamic, rapidly changing, innovative environment. This means that on out of the two organisations, one might obtain more benefits than the other as a result of adopting traditional approach of budgeting and budgetary control. Connectively, traditional approach of budgeting and budgetary control has the following feature; budgets are approved prior the onset of the budgetary year, secondly, plans, assumptions and factors that could affect the next year budget are made in advance. Thirdly, control to rectify deviations might be taken into consideration. Additionally, the budgeted figures are normally compared with actual figures on both cumulative and monthly basis (Bowhill, 2008). In above connection, traditional approach to budgeting and budgeting control presents both benefits and disadvantages to individuals and corporate who adopt it. Normally, budgeting control involves application of budget towards ensuring that managers and staffs are highly motivated to achieve organisation goals. Budgetary control system provides all stake holders with a target to achieve. The target could be defined in terms of, profits targets, sales target, minimum cost that should be maintained to mention just but a few (Bhattacharyya, 2006). In above connection, budgetary control involves three phases. The first phase focuses at monitoring the budget to determine whether all stake holders are working towards implementing the budget. The second phase involves comparing the budgeted outcomes with the actual outcomes to determine whether there is variance and establish an appropriate control mechanism. The third step involve finding correction between the desired and the actual, whereby, the senior management may determine whether to reward for attaining the desired goals or punish for failures to achieve the goals (Bhattacharyya, 2006). Traditional approach to budgeting and budgetary presents numerous benefits to both individual and companies that exercise this approach. For example, it helps the senior management to direct, motivate and influence lower level employees towards implementing organisation goals and objectives. Additionally, traditional budgeting approach help senior managers in carrying out business function such as; planning, controlling, coordinating, communicating, delegating as well as carrying out performance measurement (Bhattacharyya, 2006). This means that traditional budget approach provides the top management with a detailed plan on what to be achieved and how to achieve it within a specific time frame. Connectively, traditional budgeting approach helps towards controlling and directing individual efforts towards meeting the set goals. Whereby, encase of any deviations, traditional budgeting approach provides a budgetary control tools for minimizing variances. Additionally, traditional budgeting helps towards coordinating employees, departments and the individuals toward implementing business strategic goals (Bhattacharyya, 2006). This because traditional budgeting approach acts as a communication tool via which the role each participant in implementing the budget is defined. In addition, traditional budgeting approach provides a benchmark via which performance measurement may be compared. Whereby, actual performance may be compared with the budgeted performance to determine whether there are any deviations in order to establish necessary control mechanisms to remedy the situation. Connectively, traditional budgeting approach provides the top management with a tool for monitoring business spending. This may be achieved by making expenses adjustments as well as cutting down overheads (Bhattacharyya, 2006). However, despite having numerous advantages, traditional approach to budgeting and budgetary control presents some limitations/disadvantages to both the individuals and business. Among the limitation of traditional budget include; flexibility problem, lack projections, tedious documentation procedures and lack of realistic objectives among other limitations (Demand and Dave, 2013).Traditional based budgeting tends to be inflexible /rigid because it does not allow adjustments during and after it has been prepared. Additionally, traditional budgeting is based on projections and assumptions made at the beginning of the budgeting period. This means that it utilizes fixed figure in making future plans. Traditional budgeting fails to make projections because it is based on assumptions made at the beginning of the budgeting period. Connectively, traditional budgeting is based on tedious recording of items such expenses and revenues into numerous different columns. This could deny management with an opportunity of tracking the spending that were incurred as well as tracing the actual dates when such spending were incurred (Demand and Dave, 2013). Research indicates that, traditional budgeting approach may not be effective because it consume a lot of time and resources hence subjecting the company into losses. Connectively, traditional budgeting approach utilizes spread sheet programmes. This programme may not be effective because of limitations involved in computations of budget figures (Yvanoviah, 2012). Connectively, traditional budgeting approach does not motivate employees to continue exercising the best practice. For instance, it does not provide a room for rewarding employees because it’s fixed and may not allow additional expenditure in rewarding employees. This because traditional budgeting approach focus at implementing decision made by managers. Whereby, managers tend to focus at meeting the budget figure and forget about the strategic aim gaols of a budget (Yvanoviah, 2012). This means that traditional budgeting approach fails to integrate financial objectives with business strategic goals. In addition, traditional budgeting approach does not take into consideration dynamism that could occur during budget implementation process. This is because there are no budgeting reviews could be carried out prior the fixed date that was set for review. This makes traditional budgeting to be undesirable and ineffective (Yvanoviah, 2012). Additionally, traditional budgeting approach tends to demotivates employees at lower levels of management because top management fails to include them in the process of preparing a budget. Research indicates that employees at lower levels of management feel motivated to implement those decisions where they were involved because they feel that they own those decisions (Yvanoviah, 2012). Therefore, based on the above analysis, it can be scrutinized that the benefits of traditional budgeting approach are numerous whereby most of those benefits may suit a business that operates in a very stable and static market place, where there is little change in either products or demand year to year. On the other hand, traditional budgeting may not suit in a business that operates in a dynamic environment due to the following disadvantages rigidity problem, lack projection, tedious documentation procedures, as well as failure to have realistic objectives. Therefore, the directors of the two entirely different businesses should take into consideration both benefits and limitation of each budgeting approaches prior making any decision on whether to utilize traditional budgeting approach and budgeting control (Yvanoviah, 2012). Question 2 A report to XYZ Company managing directors on how they can improve parts of working capital cycle such as; Cash, trade receivables, inventories of raw materials, work in progress, finished goods and trade payables as well as implications of the improvements on XYZ and other connected parties (for example trade receivables and trade payables). Working capital refers to the amount of money required in a business to meet daily expenses and short term debts without strain. This means that working capital act as measure of business liquidity by comparing whether the available short term assets can meet short term liabilities (Mathur, 2003). In order to compute the working capital of XYZ Company, a difference between Current Assets and Current Liabilities may be determined. On the other hand, working capital cycle involves a measure of time used to finance amount of goods supplied and the time when the receipts were issued to the suppliers. Normally, a short working capital is said to be effective because it increases the effectiveness of a business. Additionally, working capital helps a firm to retain goodwill as well as maintain business solvency. Additionally, it provides corporate managers with an effective way of organising companies’ financial resources to repay bank loan (Mathur, 2003). Through proper management of working capital, a business becomes prepared to face emergencies such as economic crisis. The management team of XYZ should take some measures to effectively manage working capital. Among the measures that should be taken include; ensuring there is proper forecast of cash flows, solving all the issues involving cash flows, establishing a contingent plan, combining both financial and operational skills, establishing proper mechanisms for addressing disputes as well as enhancing proper customers relationship (Mathur, 2003). Whereby, proper forecasting of cash flows may involve taking into consideration any unforeseen uncertainties that may arise and compromise business operation. For example, XYZ Company should take into consideration threats that may arise from competitors, business cycle and losses that may detriment business operations. On the other hand, contingent plan should be establishment. This plan involves taking into account uncertainties that may arise and establishing steps and solutions that could be adopted to address the problem. Additionally, the issues of working capital may involve utilization of funds earned from a certain sources into other areas (Besley and Brigham, 2008). This means that proper communication flow between the internal and external systems should be established. In addition, working capital involves may involve four basic components namely: cash, trade receivables, inventories of raw materials, work in progress and finished goods and trade payables (Mathur, 2003). The diagram below indicates the working capital cycle and its components. Cash Debtors Creditors Inventories Source: Author XYZ Company can improve the above components working capital such as cash via proper cash management. Whereby, cash may be improved in numerous ways such as: using the available cash to create more wealth, selling preferred and ordinary shares for cash, utilizing long-term debts rather than short term debts, selling non-current debts for cash, repaying short term debts at a figure below the stated figure as well as collecting account receivable at an earlier date. In above connection cash improvement may be carried out through proper monitoring of account receivable in order to ensure pavements are received prior the deadline as well as reducing the amount of provisions for bad and doubtful debts (Besley and Brigham, 2008). Additionally, the available cash should no be kept idol but rather it should be utilized to make more wealth. For example, XYZ Company may utilize idol cash to diversify its portfolio and to earn more returns. This may help to improve its working capital. Additionally, the board of directors of XYZ should ensure that both ordinary and preferred stocks are sold on cash rather credit bases. This may help to prevent credit risk due to defaults. The company should try to avoid financing its operation using short term debts but rather they should adopt long term debts so as to give the company more time to create wealth. Connectively, XYZ company should sell its bonds, debentures and other long term debts for cash rather credit in orders to avoid credit risk exposure (Besley and Brigham, 2008). In above connection, the directors of XYZ Company may improve trade receivables by making cash sales to avoid credit risk. Additionally, customer’s credit worthiness should be evaluated prior advancing any credit. The managers of XYZ Company should improve receivables always demand for deposits especially when large amount of sales have been made to the customers. These deposits may act as collateral as well as a commitment fee that indicates that the amount rendered will be paid (Normad, 2006). Additionally, the company should adopt credit card application forms. Whereby, customers may fill there contacts details such as area of residence, telephone/mobile number, email address and postal address. This may help to track customer in order to ensure they make payments on the amount of goods advanced on credit. Connectively, credit limits should be set depending on customer’s credit worthiness in order to avoid credit risk. The company should adopt some accounting systems such as quick books. Those systems might help to prevent time wastage when managing accounts receivables (Normad, 2006). In above connection, inventories of raw materials could be improved by breaking down inventories into three categories namely; safety level, replenishing level and absolute level. This break down may help to ensure that the company does not over produce or under produce as well as ensure that customers obtain goods at any time without inconveniences. Additionally, the company should adopt the most appropriate software when calculating stocks levels such as Statistical package for social science to enhance accuracy and efficiency. In addition XYZ Company should perform an analysis to determine the root cause of excess and ways for addressing those excess. The company should further utilize demand based matrices as well as reducing the amount of time utilized in recycling inventories for raw materials (Mukharji, Israelit, Faelli, Catfolis and Tsang, 2011). XYZ managent should improve work in progress and finished goods by involving all employees and stakeholders in monitoring and evaluation. This could have been done by ensuring that employees and all the workers understand their roles towards improving work flow. Additionally, cross-functional impacts should be conceptualized whereby; managers should monitor progress and evaluate success as well as establish mechanisms for ensuring continuous performance improvements (Werner and Stoner, 2010). Trade payables may be improved by making a prior planning on how to make payments to the suppliers at an earlier date. This may be done by utilizing the amount advanced and making payment almost at a due date. Additionally, instead of making payments using checks in buying merchandise and raw materials, procurement managers of XYZ Company should utilize credit cards. Connectively, XYZ Managers should always negotiate for repayment terms and utilize the fund advanced to create more wealth. For example, managers should negotiate with the suppliers to be given an allowance/an extension date upon which they should make payments (Besley and Brigham, 2008). Therefore, when making improvements, it is vital to take into consideration the level of working capital. Whereby, the level of working capital may depend on numerous factors such as; industry in which business operating, size of the firm, levels of profits, nature of the business among other factors. Normally, a firm that manufacturer products may require a high working capital than the one that sells services/products. This is because they do not have to pay for inventory (Besley and Brigham, 2008).In above connection, if a business has very high working capital it is a bad indication that there are some idle funds which have not been utilized to make more wealth for the business. On the contrary, if the working capital is substantially low, it may imply that the company is undergoing via some financial problems. Therefore it is crucial to maintain a balanced working capital in order to be efficient and effective. Whereby, proper management of all the components of working capital may help the business to avoid relying on external capital such bank loans that may expose the company to credit risk (Besley and Brigham, 2008). Therefore, in order to be successful in cash and liquidity management XYZ directors should take effective control of all component of working capital. Conclusion Strategic management accounting helps to carry out an analysis of variances between the actual budget figures and the budgeted figure. Additionally, it helps in controlling and monitoring of financial reporting. The study has provided an advice to the two entirely different businesses on the benefits and problems associated with “traditional approach to budgeting and budgetary control”. Among the benefits discussed include; it helps directors to motivate and influence lower level employees towards implementing organisation goals. Additionally, it provides a detailed plan on what to be be done. In addition, provides traditional budgeting approach acts as a communication tool via which roles of each participant might be defined. In addition, traditional budgeting approach provides a benchmark via which performance may be compared. However, despite having numerous advantages, traditional approach to budgeting presents some limitations/disadvantages to both the individuals and business. Among the limitation include; flexibility problem, lack projection, tedious documentation procedures as well as lack of realistic objectives. Conclusively, the study has put forth a report on how the directors of XYZ Company should make improvements to the components of working capital cycle as discussed. Therefore, based on the report, XYZ Company should take effective control and necessary improvements to all the components of working capital cycle. Reference List Bhattacharyya, A. K. (2006). Principles and practice of cost accounting. New-Delhi, Prentice-Hall of India. Besley, S., and Brigham, E. F. (2008). Essentials of managerial finance. Mason, OH, Thomson/South-western. Bowhill, B. (2008). Business planning and control: integrating accounting, strategy, and people. Chichester, England, Wiley. Codjia. M. (2013).What are the Benefits of Strategic Management Accouinting.Retrieved :< http://www.ehow.com/list_6732343_benefits-strategic-management-accounting_.html on 26th April 2013. Demand.M. and Dave. S. (2013). Disadvantages of Traditional Approach to Budgetin.Retrieved. on 27 April 2013. Mukharji.P, Israelit.S, Faelli.F. Catfolis.T and Tsang.R. (2011).Ways to Improve to Improve Inventory Management.WSJ.com. Retrieved :< http://www.bain.com/publications /articles/ten-ways-to-improve-your-inventory-management-wsj.aspx> on 27 April 2013. Read More