IV. 1. Management Accounting

A business has a legal responsibility to present each year an audited set of accounts. Such statements are known as its financial accounts. Management accounts serve a completely different purpose. These are financial statements produced for use inside the business. Their objective is to provide the information necessary to manage the business effectively.

Managerial requirements are threefold:

(i) Planning

Planning is the process of setting overall objectives—the strategic plan—and then determining what actions and resources will be required to achieve these— the operating plan. Operational planning involves deciding what to produce, how to cost and price the production, how to provide and allocate the resources necessary to keep the business running.

Making projections about the performance of the enterprise becomes easier with experience. How does a new business start to estimate the results it will achieve? The difficulty, and possible inaccuracy, does not invalidate the undertaking. A business must have an operating plan, an agreed set of objectives and targets. Without this, it is very difficult to know whether performance is good or bad, or to decide whether changes need to be made. An operating plan, expressed in financial terms, is called a budget.

Imposing the discipline of stopping to reflect on what is likely to happen increases the chances that everything material will be thought of. A business might be caught unawares justifiably by what is unforseeable—a typhoon might destroy the workshed; a new tourist market might open up—but it shouldn't be taken by surprise by what is forseeable with a little thought—the roof might need repairing; an adult education class might be starting.

Budgets give everybody something to work towards. People are motivated to perform more effectively if they understand clearly what is expected of them.

(ii) Monitoring

This is the process of comparing plans with actual performance. Assumptions made in projections can be wrong. It is vital to monitor what actually happens in day to day operations. Businesses cannot survive on fine plans which don't actually come to fruition.

Management accounting information must be timely. It is for each business to decide exactly what information it needs at what time. In a periodic statement for internal uses the budget is set down against actual performance, and the variance shown (Figure 10).

Figure 10. Fibre Mat Society Monthly Statement of Profit & Loss

Note: adverse variances are shown in brackets

The budget provides the yardstick against which to measure performance. Where the variance is significant, questions must be asked, and answered in the next stage of planning.

The involvement of the artisans in discussing performance is a valuable educational element, and can bring out new ideas.

(iii) Control

Where performance is unsatisfactory, it is the task of management to take corrective action, and to ensure awareness of responsibilities among everybody. Clearly, adverse variances indicate the need to look in further detail at what has gone wrong. A distinction needs to be made between variances which are controllable and those which are not. For example, if the cost of raw materials is above budget, it might be because the price went up unexpectedly—a noncontrollable factor—or because the artisans were careless in using it—a controllable factor, necessitating action.

The process of planning, monitoring and control must be followed by one of replanning in the light of actual performance and new realistic targets. Indeed, the whole procedure is a continuous one. Successful management depends on the careful interpretation of current financial information, so that both difficulties and opportunities can be understood quickly and responded to in time.

The limitations of financial information in a social production unit need to be recognized. It says nothing about the quality of the enterprise, its employment policy, the special benefit to the community. As well as financial statements, a unit would want to produce projections and reports which deal with the non quantitative aspects of its activities, analyzing the impact on people's lives of the income-generation opportunity. The social objectives must always inform the planning, and be given full account in monitoring performance. To argue for proper financial management is not to undermine the social purpose of the enterprise. On the contrary, it aims to strengthen this, by guarding against financial difficulties which might threaten its effectiveness.