Strategic management accounting is a set of tools that help you understand your business and plan for growth. It can be used by anyone in any role, but it’s especially useful for those who are responsible for making strategic decisions about their company’s finances.
If you don’t use this type of accounting yet, now might be the time to start; here are six ways in which strategic management accounting can help your small business grow:
1. You can identify cost-saving opportunities and understand cash flow projections
There are certain decisions that business owners make that have a direct impact on cash flow. Strategic management accounting is designed to help businesses analyze the efficiency of their operations, identify opportunities for improvement, and determine how best to use scarce resources (such as cash) given a specific goal.
It helps you understand how each of your decisions (hiring an employee(s), reducing or increasing product price, acquiring machinery, etc.) will affect your cash flow projections. The ability to make these types of decisions quickly is critical in an ever-changing business environment that requires constant innovation and adaptation.
2. Strategic management accounting can help you understand your business’ KPIs.
One of the most important things that strategic management accounting can help you do is understand your business’ KPIs.
These are key performance indicators, which measure progress and success in a particular area or aspect of an organization’s operation.
For example, if you have a sales team that focuses on increasing the amount of revenue they bring in each month, they might use a KPI like “number of new clients acquired” as an indicator for measuring their performance against expected goals.
With strategic management accounting in place, it will be much easier for small businesses to track their own KPIs—and make improvements where needed—by keeping tabs on key areas such as:
- Revenue growth (e.g., number of new clients acquired)
- Cost savings (e..g., number of employees who have left)
3. You can track the performance of individual customers and projects.
Strategic management accounting can help you track the performance of individual customers and projects, which is particularly useful when making adjustments in real time.
You can also use this information about your customers’ current status at any given time as part of your decision-making process.
For example, if one or two things are going wrong with one particular account, how does that affect all other accounts? Are there other factors that could increase the risk for all accounts?
Also read: How to track your business growth
4. You can test growth options with a break-even analysis, and make adjustments in real time.
The break-even analysis is a tool that helps you understand the cost of doing business and the impact of changes in your business. It also helps you make adjustments in real time, so you can test new growth options before investing too much time or money.
The interactions of all the costs incurred by your business against the selling price when compared with sales volume will help you identify the point where your business is performing optimally. With that information, you can track the business growth against the target performance.
For example, if a new product line is expected to increase revenue by 10% while at the same time increasing costs by 5%, this will cause an unfavorable balance sheet position:
The costs will outweigh the benefits. This is often referred to as “the cost of doing business” or “cost of sales,” and it refers to all expenses related to making a sale. These include everything from materials and labor costs, to shipping and handling fees, marketing expenses, rent on retail locations, etc.
5. Strategic management accounting lets your manager see how their individual actions impact the overall business.
This allows them to make decisions that are in the best interests of the company as a whole.
For example, if a manager is considering whether to increase their advertising budget or reduce materials costs for an upcoming product launch, strategic management accounting can help them understand what impact each decision would have on the business overall.
6. It helps you understand industry-specific standards.
Strategic management accounting can help you understand industry-specific standards so you can use them as benchmarks to compare your reports. With this report, you can ascertain if your business is performing better or otherwise.
For example, if your business is a retailer of new and used cars and parts, it will be important for you to understand how dealerships in other states operate. You may want to know what customers expect from them, or how they compare with competitors in terms of customer service and salespeople who are knowledgeable about the products that are being sold by those dealerships.
You also need to make sure that you are delivering the right product or service at a price point appropriate for your target market(s). This means knowing what people want from their cars or trucks by understanding their needs on an individual level (e.g., safety features), as well as looking at broader trends across all demographics within those groups (e.g., age groups).
Make your accountant a member of the advisory board
An advisory board is a body of professionals that provides non-binding strategic advice to the management of a business. Include your accountant on the board as most times they are able to assist you with certain decisions.
Accountants can help with most decisions that deal with business growth, they can provide guidance on making a budget, forecast, analysis, and management of cash flow.
Use strategic management accounting to help provide the insight your business needs to succeed.
Use the insights to know where you stand today. You need to know where your business is today in order to make strategic decisions about the future.
- How are things going?
- What’s working, and what isn’t?
- Are there any big opportunities or threats looming out in front of you?
As a business owner, you should be aware of the value of your business, regardless of your decision to sell the business or not. This information will help you maximize brand value and also minimize your tax liability.
Use the insights to know where your business needs to go next. Once you have a good understanding of how well things are going, it’s time for some real action!
- What kind of growth strategy would work best for this company based on its current situation?
- Where might it want to expand next, or perhaps even sell off parts of itself (if necessary)?
These questions will require strategic thinking from all members—from top executives down through junior staff members—to answer correctly before moving forward with plans that will benefit everyone involved at every level throughout those organizations’ operations.
If you’re looking for a new way to manage your small business, strategic management accounting can help.
With this approach, you can use financial statements as a tool to analyze your finances and make sure they’re on track with the growth you want to achieve.