Strategic management accounting (SMA)

In business and finance, strategic management accounting (SMA) is the gathering and analysis of financial and nonfinancial information of a company and its competitors to develop that organization's corporate strategy. The approach aids management in making decisions. While traditional management accounting emphasizes internal information, SMA focuses on external factors, such as costs, prices, and market share. Through SMA, a company collects and evaluates information about its competitors, customers, and suppliers to determine its position in the marketplace. A variety of techniques supports SMA. Cost-based techniques include cost management, activity-based costing and management, value chain costing, life cycle costing, and target costing. Performance-based techniques include benchmarking and the balanced scorecard. SMA helps businesses build and maintain a competitive advantage, strengthening their prospects.

Background

Strategic management accounting (SMA) merges strategic management with management accounting. Strategic management refers to the planning, implementation, and monitoring of a company's business strategy based on the organization's long-term objectives and goals. Strategic management has an external emphasis as it examines and evaluates the environment in which the organization operates. Management accounting focuses on internal data. This includes operations such as managing a company's resources and collecting the company's financial information, including operating income, sales, and profit.

Professor Ken Simmonds first used the term strategic management accounting in 1981. Simmonds believed that accounting should factor in external information to help a company determine its competitive standing. The combined approach expands beyond the limitations of traditional management accounting. Management accounting looks at the past as it evaluates financial information and performance from previous reporting periods. SMA, however, keeps an eye on the future by analyzing trends in the industry, which helps management make long-term decisions. SMA includes both financial and nonfinancial information. Reviewing only a company's financial information may not provide an accurate picture of the state of an organization.

A company can collect various metrics, called key performance indicators (KPIs), to assess its progress toward reaching its goals. Financial and nonfinancial KPIs help a company track its competitors, customers, and internal processes. An example of a nonfinancial KPI is market share, the percentage of sales a business claims in its industry.

SMA is a vital tool in helping a company differentiate itself from other businesses within an industry. By using SMA techniques, organizations can gauge the costs associated with supply chains, value chains, marketing, and customer service and ensure they are pricing their goods and services competitively. SMA aligns with the interests of a company's managers and stakeholders as the approach considers the organization's objectives. The approach provides the tools to help a company improve its stock value.

Overview

SMA techniques can be categorized as cost-based or performance-based. These techniques illustrate the relationships between companies and their suppliers, competitors, and customers. Cost management deals with a business's costs and cost drivers, or the causes of those costs. By using cost management, companies seek to lower costs, usually through budget cuts, while maintaining productivity, or to keep costs the same while increasing productivity. Cost management promotes the effective use of resources. Through SMA, companies can collect information about supplier costs and profits and evaluate if they are making excess profits on certain parts of the supply chain—the process of making a product that starts with the supplier and ends with the customer. Businesses can then use this information to negotiate with suppliers and reduce costs.

Activity-based costing and management (ABC/M) differs from traditional cost management. Activity-based costing assumes a company's activities cause costs and then assigns costs to the resulting products. Activity-based management emphasizes resources, or the underlying drivers of costs, by holding that managers cannot control costs but can control the activities that cause them. The SMA technique gathers information about the activities along the value chain—the activities associated with producing a good or service that adds value to it. The value chain includes design, development, production, marketing, and after-sales. Companies can use this information to make their processes more efficient.

Value chain costing relies on value chain analysis, which evaluates all activities in the value chain to determine which ones are the most valuable. This technique allows companies to determine their strengths and weaknesses and find ways to improve their competitive advantage. The SMA technique allows a company to compare its value chain to one of another company by examining its rival's costs. The business can then aim to perform some activities at a lesser cost than its competitor to gain an edge in the marketplace.

Life cycle costing estimates and gathers the costs of a product or service over its whole life cycle from its introduction to its growth, decline, and end. Traditional management accounting focuses on the production phase of a product's life cycle, but it does not factor in the costs associated with its design or discontinuance. The SMA technique considers this information to determine if the profits cover the total life cycle costs. The data can also aid businesses when deciding on future products and related costs.

Target costing considers whole-life costs during the product's production phase. The SMA technique involves pinpointing a product's target price, the price that customers will likely pay; determining the target profit margin; estimating the product's actual cost according to its design; and figuring out how to lower the estimated cost to match the target cost. The technique's goal is to make a product at a price that can be recouped over its life cycle through the selling price.

Benchmarking, a performance-based SMA technique, can assist companies in achieving their strategic goals. Organizations determine the best business practices in their industry, including those used by their competitors. Companies analyze financial and nonfinancial information to find efficient and productive procedures, which they can then implement themselves.

The balanced scorecard, also performance-based, involves setting strategic objectives and deciding which metrics a company will track. When the data is collected, the combination of financial and nonfinancial information is displayed for managers. The managers then discuss and analyze the information, which gauges the progress of the company's strategy. Integrating SMA techniques with the balanced scorecard (often accomplished using SMA software) allows managers to evaluate financial reports with nonfinancial performance metrics, such as employee engagement, customer satisfaction, and company efficiency.

SMA provides companies with the information necessary to make far-reaching decisions that align with their goals. By analyzing cost structures and performance, monitoring market trends and customer behavior, and considering competitor strengths and weaknesses, SMA techniques enable businesses to evaluate where they can improve along the supply and value chains. This allows companies to build a competitive edge in the marketplace and boost their chances for success. Most modern organizations use software programs to conduct SMA activities. SAP Business Planning and Consolidation, Oracle Cloud ERP, Microsoft Dynamics 365 Finance and Operations, and Adaptive Insights are commonly used for this purpose.

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