Management accounting. Internal reports and business models
As set out in the Introduction, affirmation of where you are is essential and key to tracking and thus properly implementing strategy. Quarterly, half-yearly or annual financial accounts will assist with this but at an overall or summarized level. Fast-moving and possibly fickle businesses that are found particularly in the service sector could not be managed if we had to wait three months for reports, and it is analysis of detail that may reveal positive or negative trends. Thus a key aspect of management accounting is the production of timely and suitable detailed reports showing figures and often also quantities.
If an entity has a management accounting function, this could well be the most appropriate department to initiate and manage the budget process -budgeting has traditionally been seen as a management accounting topic.
How does management accounting support strategy?
Management accounting and models can assist with understanding your business or project and in predicting how a chosen strategy may unfold, followed by tracking and controlling all aspects of the business. The need for detailed management accounts is made clear at the highest level, as there is a requirement for UK listed companies to produce a strategic report (see Chapter 6) and within this report a sub-requirement to explain the entity's business model. A business model is defined as a model that reveals how the entity generates or preserves value over the longer term.
As introduced in Chapter 6, guidance from the UK FRC (Financial Reporting Council) describes a business model as follows:
FRC Strategic Report Guidance
The description of the entity's business model should set out how it generates or preserves value, and how it captures that value. It should describe, at a high level, what the entity does and why it does it (ie what makes it different from, or the basis on which it competes with, its peers).
The description of the business model should provide shareholders with an understanding of how the entity is structured, the market in which it operates, and how the entity engages with that market (eg what part of the value chain it operates in, its main products, services, customers and its distribution methods). It should also describe the nature of the relationships, resources and other inputs that are necessary for the successful continuation of the business.
This chapter presents typical reporting styles and then explores some thoughts on why and how we ought to report. In my view, most companies 'over-report'. Appropriate design of reports can assist with budgeting and some of the examples below are particularly relevant to the budgeting process, particularly with respect to ensuring that action will result when reporting is appropriately aligned with culture.
The summary chapter (Chapter 13) gives some pointers as to mapping your strategies in the context of the objectives of your business.
The term 'management accounting' covers almost any exercise, normally involving some figures, that may assist in analysis or planning business strategy.