I. Raising awareness of predictive analysis by management accounting.
Over the last 10 to 20 years, management accounting has evolved significantly. However, the evolutionary stage of management accounting is not yet finished, as complexity, uncertainty, and general competition in the business environment are on the rise.
Overemphasized in stereotypical pictures, management accountants are still often assumed as being “bean counters” and “number crunchers,” nameless robots typing endless columns of numbers on Excel spreadsheets. While a focus on numbers can surely not be declared untrue even today, the picture has been changing rapidly.
Management accountants’ responsibilities have shifted, and are still shifting, to a more valuable position within the company. They are shifting from, pejoratively spoken, simple number crunching—or, to put it more mildly, the recording and reporting of diverse aspects of an organization’s current financial health status—to a close partnership with the management and other decision-makers, assisting in strategic decisions, business risk analysis, or financial planning or forecasting, for example. The value management accounting is contributing or adding to the organization is generally increasing.
Nevertheless, that is no reason for management accountants to rest on their laurels. They still have to adapt their work routines and results, as well as to redefine their internal reputation and understanding of their service function as information providers within the organization. Only if they develop their business function further can they face newly arising challenges, and be highly valuable to their company in the future.
Therefore, in a four-part article series, we will focus on four trends, or challenges, that have already had a great impact on management accountants’ role, and will yet have more:
I. Raising awareness of predictive analysis by management accounting
II. The management accountant taking on the role of a change agent
III. Management accounting focusing on the company’s customers
IV. The management accountant getting useful hold of Big Data
In this first part, we will start by covering the management accountant’s need to increasingly favor predictive business analytics over its solely descriptive counterpart.
Balancing descriptive and predictive analysis in the scope of management accounting
One of management accounting’s main purposes is to provide useful, or rather valuable, information. In business reporting, there is often still a gap between the information that the management and other executive staff want to get regularly and quickly, and the data that is finally reported.
This does not mean that the reports created, or rather, the information provided, basically are of no extra value. Over the last decade, business reporting has been influenced by far-reaching improvements. Costs and revenues are calculated and reported with much more accuracy and detail, and the reports have strived toward greater target-group orientation.
However, there is a change in the decision-makers’ information demand. No longer do they just want to know about, for instance, the costs of a specific product, or which costs some actions have invited in the past. Instead, there is an increasing need to be informed in detail about what the future costs will be and why.
Historical costs are and will remain important, not the least because they often serve as the essential and relevant basis for projecting future costs and revenues. Nevertheless, still today, the established reporting structures in many cases focus too much on past events. Those, for example, measure and analyze the variances of actual-to-budget figures, but without making assumptions and drawing conclusions for the future.
Managing an organization only by looking in the rearview mirror instead of the front window is no longer fully adequate in a world of growing volatility, complexity, uncertainty, increasing competition, and faster changes in business. Past data reflects the decisions already made. Decisions that will be made—supported by predictive business analytics—are the ones that impact the organization’s sustainability.
How can management accounting contribute to that alteration? First, the management accountant has to review his/her own understanding of his/her role as the information provider. And secondly, one has to think about the methods and instruments that currently form the definition of his/her management accounting. Do these meet the changed needs of internal information recipients?
Management accounting can be split into a descriptive and a predictive component. The descriptive part of management accounting focuses on present and past data, providing a low to modest additional value to the company. Such cost reporting and analysis represent insights, conclusions, and analysis of what has already taken place in order to give feedback on the business performance (performance measurement, actual/budget variance analysis, profitability reporting, process analysis, etc.) In other words, the money has been spent, and costing says where it has been used.
Predictive management accounting, on the other hand, means providing some additional decision support. It uses historical data and descriptive reporting information as well, but also adds a future-oriented layer based on, for instance, forecasts and planned changes (in products, services, channels, processes, business environment, and so on). Finally, this managerial support is aimed to lead to a better, high-value decision-making, and, hence, to a successful and financially healthy company.
The following are some examples of instruments and methods that comprise predictive elements, and support decision-making:
Budgeting, (rolling) financial forecasts, and strategic planning: How are future demands in our market expected to develop, and which further changes will prospectively occur (forecasting of sales volumes, technological enhancements, customer preferences, competitor tactics, etc.)? How can we meet these needs and changes? Do we have to adapt our own resources (production capacity, staffing level, place of location, material procurement, funding, and so on)?
Outsourcing and make-vs.-buy analysis: Should we produce the component of our product by ourselves, or commission an external supplier with that task? Which one is more profitable?
Process analysis in connection with scenario-based decisions (what-if analysis): Which processes could be changed to enhance productivity? What are the possible opportunities, or risks, in doing so? How can these be rated among each other?
Product, channel, and customer analysis: Which customers, products, services, channels, routes, etc. are the highly valuable ones, and should, therefore, be improved or retained? Which customers, products, etc. can potentially develop from less valuable to very profitable ones in the future? On the other hand, which ones could be rationalized because of economic inefficiency?
To sum it up, traditional cost reporting and financial analysis is about explanation and interpretation of information from the past (descriptive view of costs). In comparison, decision support based on cost planning and economic/scenario analysis is about possibilities, examining the costs and revenues in a context from which decisions are considered and evaluated, influencing the organization’s future development (predictive view of costs). Normally, it has a more long-term, strategic point of view compared with short-term descriptive management accounting.
While predictive business analytics stimulates more and more complex questions, it also provides the instruments, or at least the impulses, to answer these questions in the long run. In today’s harsh business environment, meaningful analytics may be the only sustainable competitive advantage. Traditional strategies focused on achieving a unique selling proposition via low production costs, in combination with low supply prices, or the offer of customer or product differentiation no longer work in highly flexible markets. Dynamic competitors are quick to replicate those.
As it appears, in many organizations, descriptive management accounting still outbalances its prescriptive counterpart. Therefore, by initiating appropriate changing measures, management accountants have to make sure that there is a balance between these two approaches, so that the needs for both descriptive and predictive information within their companies can be satisfied.
Read on with Part 2: II. The management accountant taking on the role of a change agent
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Must-read blog posts about management accounting and financial control—classical topics, as well as modern subjects, latest trends, and current challenges in the management accounting discipline. Aimed to inform, inspire, and entertain management accountants and anyone with a deeper interest in management accounting.