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Essential Tools For Management Accountants PDF
Essential Tools For Management Accountants PDF
MANAGEMENT ACCOUNTANTS
The tools and techniques to support
sustainable business success
Two of the worlds most prestigious accounting bodies,
AICPA and CIMA, have formed a joint venture to establish
the Chartered Global Management Accountant (CGMA)
designation to elevate and build recognition of the profession
of management accounting. This international designation
recognises the most talented and committed management
accountants with the discipline and skill to drive strong
business performance. CGMA designation holders are
either CPAs with qualifying management accounting
experience or associate or fellow members of the
Chartered Institute of Management Accountants.
Introduction 3
1
Planning and forecasting
Rolling Plans and Forecasts 70
Activity-Based Budgeting (ABB) 74
Scenario and Contingency Planning 78
Cash Flow Modelling 84
Value recognition
Value Chain Analysis 104
Customer Relationship Management (CRM) 108
Appendix
Bibliography and sources 114
Acknowledgements115
3
What you will find in this book
This book contains the need-to-know information about the essential
management accounting tools, old and new. This includes:
What is the tool and what value can it bring management accountants
and their organisation?
What are the crucial considerations for implementing and using
the tool?
What actions do you need to consider, and avoid, to maximise its
potential?
What best practice looks like including real examples and case
studies from organisations that have implemented the tool.
Resources, including further reading and material on each tool,
if you want to delve deeper.
5
Using this book
Size, sector, culture and leadership in each organisation are different, as
is their appetite for change. So there is no one-size-fits-all approach to
successfully implementing and realising value from such tools and practices.
This book provides a high-level summary of the benefits and value that
essential management accounting tools can bring to the majority of
organisations, regardless of size or sector. It provides objective analysis
and reviews of the tools effectiveness as well as considerations and tips
on how best to implement and use them.
7
Governance and Risk Management
Value chain
Current strategy and business plan clarity/
core competencies
Culture values and performance-based
Talent
Assets/liabilities
9
What benefits does the scorecard provide?
The CIMA Strategic Scorecard provides a simple, effective process that
helps the board to focus on strategic issues and ask the right questions.
It is structured around four key dimensions of strategy: strategic
position, strategic risks and opportunities, strategic options and strategic
implementation. This means that the board can work constructively
with management to promote the future success of the organisation.
It can help to ensure a high-level perspective on strategy, thus avoiding
the comfort zone of detail.
The scorecard framework helps boards, and the businesses they control,
to: summarise key aspects of the operating environment; highlight risks
and opportunities; identify major strategic options; and chart and track
progress against significant milestones.
The format of the scorecard has evolved since its initial creation,
and CIMA is continuing to undertake further development work to
strengthen the ability of the scorecard to support the level of strategic
and risk discussion necessary to help boards and their organisations to
avoid major problems.
11
ACTIONS TO TAKE/Dos
ACTIONS TO AVOID/Donts
Avoid including too much detail. Less is more is the best principle
for the scorecard.
Dont stop modifying the scorecard if it is not engaging the board
effectively.
Do not turn the process of updating the scorecard into an onerous,
tiresome chore. Highlight material changes only.
Avoid holding back information from the board just because it is not
yet complete or exact.
Avoid taking an ad-hoc reporting approach. Agree a schedule with
the board as to when you will present the scorecard to them.
The discussion about strategic options was held just before the
end of the first day. This meant that they could continue the
conversation informally over dinner. The impetus for introducing
the scorecard came from the new chief executive in consultation
with the chairman. After the initial awayday, the scorecard was
presented at board meetings on a quarterly basis.
13
Feedback from the executives involved in its implementation
included:
Board mandate
Boardroom conversations
Further resources
cgma.org/essentialtools
15
Governance and Risk Management
Self-assessment Monitor
Internal audit performance
Plan Implement
Identify
mitigation
Risk owner risk
strategy Risk
oversight
committee
Accept
Plan
Share Assess Potential impact
response
Mitigate strategy risk Likelihood
Avoid
If a business has its doors open, then it is managing risk in some way.
However, that does not mean the organisation has an enterprise-wide,
holistic and strategic approach to risk management.
M
ark S Beasley PhD, Director, ERM Initiative at North Carolina
State University, January 2012
17
What benefits does ERM provide?
ERM provides greater awareness about the risks facing the organisation
and the ability to respond effectively. It can give enhanced confidence
about the achievement of strategic objectives and improve compliance
with legal, regulatory and reporting requirements. ERM also provides
increased efficiency and effectiveness of operations.
ACTIONS TO AVOID/Donts
19
ENTERPRISE RISK MANAGEMENT
IN PRACTICE
Gemini Motor Sports, a hypothetical
illustration from a CGMA case study: how to
evaluate enterprise risk management maturity
In the first year of implementation, the ERM team met with senior
management, and identified and prioritised a number of crucial
risks that had been disruptive to GMS. Their initial presentation
to the audit committee was criticised for being a rehash of past
problems, and not useful to the board as they discussed the
strategic direction of GMS.
Further resources
cgma.org/essentialtools
21
Governance and Risk Management
Extreme 5 10 15 20 25
High 4 8 12 16 20
Potential Impact
Medium 3 6 9 12 15
Low 2 4 6 8 10
Negligible 1 2 3 4 5
Likelihood
23
What benefits do Risk Heat Maps provide?
Risk heat maps provide a visual, big picture, holistic view to share while
making strategic decisions. They can improve the management of risks and
governance of the risk management process with increased focus on risk
appetite and risk tolerance of the company. Risk heat maps can allow for
more precision in the risk assessment process with the identification of gaps
in the risk management and control process. They can also support greater
integration of risk management across the enterprise and embedding of
risk management in operations.
ACTIONS TO AVOID/Donts
25
RISK HEAT MAPS IN PRACTICE
How to communicate risks using a heat map
By mapping these risks, it was clear that the likelihood and the
impact of physical asset risk were relatively low in relation to
the risks associated with new product introduction, customer
concentration and supply chain. Each of those was considered
to be both more likely and to have greater impact.
Further resources
cgma.org/essentialtools
27
Governance and Risk Management
The questions cover areas such as: ethical statements and codes of
conduct; training; collection of ethical data; reporting of ethical issues;
and support when faced with ethical dilemmas.
Who will you share the information with afterwards and how will
it best be used?
ACTIONS TO AVOID/Donts
29
CGMA ETHICAL management
REFLECTION CHECKLIST IN PRACTICE
31
Strategic Planning and Execution
Values are the shared set of beliefs that determine the culture of
an organisation.
Vision statements are future oriented and describe the desired or
ideal state of the organisation or enterprise. They answer the question
where do we want to be?
Mission statements describe the fundamental purpose of the
organisation, why it exists and what it is trying to do to achieve its
vision. Mission statements answer the question what do we do?
Common tools for performing an assessment of the internal and
external factors impacting on strategic decisions are SWOT, and PEST
or PESTEL analysis.
Identification Presentation
Prioritisation
of Creation of of proposals Implementation,
Brainstorming of actions Continuous
opportunities working and team building
with staff and improvements
for groups facilitation and follow-up
deliverables
improvement of consensus
Source: How to improve your finance organisations efficiency and effectiveness: How to use SWOT
analysis for finance organisation transformation, CGMA
33
What benefits do strategic planning tools provide?
Strategic planning enables an organisation to set priorities, allocate
resources and align employees with its mission and vision. Effective
mission and vision statements reduce ambiguity and provide clarity
and direction. Comprehensive SWOT and PEST analyses help an
organisation to understand how to exploit its strengths, neutralise its
weaknesses and take advantage of its opportunities.
ACTIONS TO AVOID/Donts
Never fill the strategic plan with theory and abstraction strategy
must be translated into daily actionable goals and plans.
35
STRATEGIC PLANNING TOOLS
IN PRACTICE
Effective performance management
with the Balanced Scorecard
(CIMA Technical Report, 2005)
Strategy mapping
Scenario planning
Further resources
cgma.org/essentialtools
37
Strategic Planning and Execution
The Balanced Scorecard has also been successfully adapted for use by
not-for-profit and public sector organisations. While the top line financial
objectives of for-profit organisations are replaced by mission-related
Financial
To succeed financially,
how should we appear
to our shareholders?
Objectives
Measures
Targets
Initiatives
Objectives
Measures
Targets
Initiatives
Adapted from Robert S Kaplan and David P Norton, Using the Balanced Scorecard
as a strategic management system, Harvard Business Review, January-February 1996
39
We learned early that the BSC was much more than just a better
performance measurement system; it can become the basis for a new
strategy management system.
S
trategy execution and the Balanced Scorecard. Harvard Business
School (HBS), Aug 2008
Link to compensation.
41
ACTIONS TO AVOID/Donts
Lessons learned:
Further resources
cgma.org/essentialtools
43
Strategic Planning and Execution
STRATEGY MAPPING
45
What benefits does strategy mapping provide?
Strategy maps describe how organisations create value by building on
strategic themes such as growth or productivity. They provide a way
for companies to tell the story of their strategy to employees and other
corporate stakeholders, thereby increasing engagement in the strategic
process. Strategy maps force organisations to place the onus first on
the strategy, then on measuring implementation, thus removing the
problem of numerous, unfocused measures. They form the appropriate
basis for balanced scorecard performance measures, links to appropriate
management and validation techniques, and allocating resources to
initiatives and strategies that support an organisations value propositions
and overriding objectives.
ACTIONS TO AVOID/Donts
47
STRATEGY MAPPING IN PRACTICE
An examination of a homebuilders
performance measurement
and incentive systems
(CIMA, Research Executive Summaries Vol. 5, Issue 6)
Further resources
cgma.org/essentialtools
49
Strategic Planning and Execution
This theory is based on the concept that there are five forces that
determine the competitive intensity and attractiveness of a market.
Porters five forces help to identify where power lies in a business
situation. This is useful both in understanding the strength of an
organisations current competitive position, and the strength of a
position that an organisation may look to move into.
2. B
uyer power. An assessment of how easy it is for buyers to drive
prices down. This is driven by the: number of buyers in the market;
importance of each individual buyer to the organisation; and cost to
the buyer of switching from one supplier to another. If a business has
just a few powerful buyers, they are often able to dictate terms.
Threat of
new entrants
Rivalry among
Bargaining power existing Bargaining power
of suppliers competitors of buyers
Threat of substitute
products or services
3. C
ompetitive rivalry. The main driver is the number and capability of
competitors in the market. Many competitors, offering undifferentiated
products and services, will reduce market attractiveness.
4. T hreat of substitution. Where close substitute products exist
in a market, it increases the likelihood of customers switching to
alternatives in response to price increases. This reduces both the power
of suppliers and the attractiveness of the market.
5. T hreat of new entry. Profitable markets attract new entrants,
which erodes profitability. Unless incumbents have strong and
durable barriers to entry, for example, patents, economies of scale,
capital requirements or government policies, then profitability will
decline to a competitive rate.
51
What benefits does Porters Five Forces analysis
provide?
Five forces analysis helps organisations to understand the factors
affecting profitability in a specific industry, and can help to inform
decisions relating to: whether to enter a specific industry; whether to
increase capacity in a specific industry; and developing competitive
strategies.
ACTIONS TO TAKE/Dos
Use this model where there are at least three competitors in the market.
Consider the impact that government has or may have on the industry.
ACTIONS TO AVOID/Donts
Avoid using the model for an individual firm; it is designed for use
on an industry basis.
Further resources
cgma.org/essentialtools
53
Performance Management and Measurement
Relational Structural
Human
resources eg resources eg resources eg
know-how supplier information
relationships and data
Physical Financial
resources eg resources eg
technology funding
55
There is lack of consensus as to what a balanced scorecard is. Many
organisations develop a balanced scorecard without first developing
a strategy map, from which key performance indicators (KPIs) for the
balanced scorecard should be derived. In addition, many organisations
confuse strategic KPIs, which belong in a balanced scorecard, with
operational performance indicators (PIs), which belong in a dashboard.
ACTIONS TO TAKE/Dos
Make sure KPIs are based on valid data and are easy to understand.
ACTIONS TO AVOID/Donts
Do not collect data and measure too many things too many KPIs
lead to confusion rather than clarity. Five to ten critical KPIs, and
20-30 overall, is a good rule of thumb.
Avoid focusing solely on quantitative measures qualitative
assessments also provide valuable information.
Dont forget about the importance of feedback and learning.
57
KEY PERFORMANCE INDICATORS
IN PRACTICE
Unlocking Performance
(CGMA Magazine, February 2012)
Strategy mapping
Further resources
cgma.org/essentialtools
59
Performance Management and Measurement
BENCHMARKING
Implementing benchmarking?
Questions to consider:
Which activities or processes will we benchmark?
61
ACTIONS TO TAKE/Dos
ACTIONS TO AVOID/Donts
Further resources
cgma.org/essentialtools
63
Performance Management and Measurement
There are five facets to the Performance Prism which lead to key
questions for strategy formulation and measurement design:
4. C
apabilities: What capabilities do we need to operate our processes
more effectively and efficiently?
Stakeholder Satisfaction
demand delivery
Strategies Capabilities
Sta
ehk
old
Stakeholder
er
co
satisfaction
ntr
ibu
tio
n
Strategic
direction
Solutions
development
Processes
The key message here is that all organisations require certain things of
their stakeholders and all organisations are responsible for delivering
certain things to all of their stakeholders.
65
Implementing the Performance Prism?
Questions to consider:
Does the complexity of our organisation and our stakeholder groups
warrant the use of the PP?
Which important stakeholders do we need to consider that might be
overlooked by another performance management system, such as the
Balanced Scorecard?
How well do we understand our business model and our relationship
with our important stakeholder groups?
ACTIONS TO TAKE/Dos
Understand not only what stakeholders want from you, but what
their contribution is to the organisation such as financing from
investors, and talent, energy and commitment from employees.
Develop measures specific to the processes and capabilities
necessary to meet the needs of each stakeholder.
ACTIONS TO AVOID/Donts
Lessons learned:
Implementation of the Performance Prism created a shift in
the board review process from scrutinising lots of numbers to
having a meaningful conversation about strategic issues and
the direction of the company.
The more strategic discussions stimulated by the PP created
an emphasis on working together on issues rather than on
individual functional responsibilities.
67
Related and similar practices to consider
Balanced Scorecard
Strategy mapping
Further resources
cgma.org/essentialtools
x 18 months
x 18 months
x First look at Annual plan 18 months
x Annual plan finalised 18 months
x
Source: Quarterly rolling planning get it right first time, CIMA Insight, August 2011
ACTIONS TO TAKE/Dos
ACTIONS TO AVOID/Donts
71
ROLLING PLANS AND
FORECASTS IN PRACTICE
Driving success at Southwest Airlines
(Beyond Budgeting Roundtable, 2013)
Further resources
cgma.org/essentialtools
73
Planning and Forecasting
The most basic form of ABB uses cost drivers (identified through activity-
based costing, ABC) to help derive budgets. As its name suggests, ABB
focuses on activities rather than functions.
2. Forecast the number of units of cost driver for the required activity level
The following simple example uses a sales office scenario, where the cost
driver is number of sales orders.
This example assumes that costs incurred by the sales office are mostly
variable in practice, they would also include elements of fixed and
semi-fixed costs, such as accommodation, heating and salaries. Further
analysis would be required to determine how much staff time is spent
processing sales orders.
ACTIONS TO TAKE/Dos
ACTIONS TO AVOID/Donts
Dont try and implement ABB unless you are using activity-based costing
(ABC) as it is only suited to organisations that are also using ABC.
Do not ignore the need to engage with operational managers, or
they may struggle with the concept of ABB, making the process
more time-consuming.
75
ACTIVITY-BASED BUDGETING
IN PRACTICE
Calculating the purchases budget at GS
GS has budgeted sales for the next two years of 24,000 units a
year spread evenly throughout both years. The estimated opening
inventory of finished goods at the start of the next year is 500
units but GS now wants to maintain inventory of finished goods
equivalent to one months sales.
Each unit uses 2 kg of material. The estimated opening raw
material inventory at the start of the next year is 300 kg but GS
now wants to hold sufficient raw material inventory at the end of
each month to cover the following months production.
The change in the policy for inventory holding for both raw
materials and finished goods will take effect in the first month of
next year and will apply for the next two years. The budgeted
material cost is $12 per kg.
Raw material
purchases budget 54,700 kg x $12 = $656,400
Further resources
cgma.org/essentialtools
77
Planning and Forecasting
1. Political: How will the expansion of the European Union change the
political power of governments within the union?
2. E conomic: How will the rapid economic growth of China and India
change global markets?
79
Scenario Plan Work Approach
Develop scenarios
Apply scenarios
What are the major external factors likely to impact on our scenarios?
ACTIONS TO TAKE/Dos
81
ACTIONS TO AVOID/Donts
Lessons learned:
Further resources
cgma.org/essentialtools
83
Planning and Forecasting
85
ACTIONS TO TAKE/Dos
87
CASH FLOW MODELLING IN PRACTICE
Helping Marks & Spencer deliver 185m
in cash flow between 2007 and 2010
One of the ways that cash flow was delivered was through
improved cash management. Managing net debt over the period
helped Marks & Spencer to sustain its credit rating, cost of
borrowing and ultimately its profits. We were able to sustain
the debt during the credit crunch when credit markets tightened
significantly. If we had needed to renegotiate any of our facilities,
then that would have been difficult and potentially expensive.
You needed to conserve as much cash as you could during that
time. We have to make sure that we create commercial value
value in understanding the connection between the business
behaviour, the commercial driver, the business project and the
financial ledger.
Capital ratios
Investor ratios
Further resources
cgma.org/essentialtools
89
Product and Service Delivery
ABC was first defined in the late 1980s by Kaplan and Burns. It can be
considered as the modern alternative to absorption costing, allowing
managers to better understand product and customer net profitability.
This provides the business with better information to make value-based
and therefore more effective decisions.
ABC focuses attention on cost drivers, the activities that cause costs to
increase. Traditional absorption costing tends to focus on volume-related
drivers, such as labour hours, while activity-based costing also uses
transaction-based drivers, such as number of orders received. In this way,
long-term variable overheads, traditionally considered fixed costs, can be
traced to products.
Directly
Identify trace or Calculate
Assign Assign
activities estimate activity
costs to costs to Prepare
and costs to cost
activity cost reports
activity activities drivers
cost pools objects
pools and cost rates
objects
91
ACTIONS TO TAKE/Dos
Get buy-in from the rest of the business. ABC provides business
managers, as well as the finance function, with the information
needed to make value-based decisions.
Use ABC for pricing and product prioritisation decisions.
ACTIONS TO AVOID/Donts
Further resources
cgma.org/essentialtools
93
Product and Service Delivery
LEAN
Lean... provides a way to do more and more with less and less less
human effort, less equipment, less time, and less space while coming
closer and closer to providing customers with exactly what they want.
The concept of doing more with less has significant appeal to the
not-for-profit sector. The UKs National Health Service has used lean
management successfully to improve bottlenecks in accident and
emergency departments.
ACTIONS TO TAKE/Dos
ACTIONS TO AVOID/Donts
95
LEAN IN PRACTICE
Lean management in the garment industry
(CIMA Edge, 2011)
Six Sigma
ISO 9000
Further resources
cgma.org/essentialtools
97
Product and Service Delivery
Kaizen
CIMA Official Terminology describes Kaizen as a Japanese term for
continuous improvement in all aspects of an entitys performance, at
every level.
The philosophy of Kaizen seeks to involve all levels of employees,
encouraging suggestions for small incremental improvements across
all areas of the business which over time have a major impact. In a
manufacturing context, processes are standardised, assessed and then
improved, with the ultimate result being decreased waste and increased
productivity.
99
Six Sigma
CIMA Official Terminology describes Six Sigma as a methodology based
on TQM to achieve very low defect rates. The sigma refers to the Greek
letter used to denote standard deviation, so six sigma means that the
error rate lies beyond six standard deviations from the mean. To achieve
six sigma, an organisation must therefore produce not more than 3.4
defects per million products.
Enablers Results
Leadership
Customer results
Strategy
People results
People
Society results
Partnerships and resources
Business results
Processes, products and services
ACTIONS TO TAKE/Dos
101
ACTIONS TO AVOID/Donts
5-S
ISO 9000
Further resources
cgma.org/essentialtools
103
Value Recognition
Firm infrastructure
Support activities
M
Human resource management ar
gi
n
Technology
Procurement
Service
Operations
Marketing
n
Outbound
gi
logistics
& sales
Inbound
logistics
ar
M
Primary activities
1. S
eparate the organisations operations into primary and
support activities
P
rimary activities are those that physically create a product, as well as
market the product, deliver the product to the customer and provide
after-sales support. Support activities are those that facilitate the
primary activities, for example, HR.
105
Implementing Value Chain Analysis?
Questions to consider:
Can we identify our areas of activity easily?
ACTIONS TO TAKE/Dos
ACTIONS TO AVOID/Donts
Further resources
cgma.org/essentialtools
107
Value Recognition
CUSTOMER RELATIONSHIP
MANAGEMENT (CRM)
Align systems
with goals
and strategy
Personalise
Segment
customer
customers
interactions
Source: Adapted from the CRM Excellence Model, Best Practices 2001
109
ACTIONS TO TAKE/Dos
Consider the impact that implementing CRM will have on staff, who
may be wary of the new software.
Plan and budget for staff training at the beginning of the process
do not allow cost over-runs in other areas to impact on this key area.
ACTIONS TO AVOID/Donts
CRM IN PRACTICE
How Tesco and ASOS.com work with
customer information
(FM magazine, 2013)
This wasnt always the case. When Sir Terry Leahy, who
pioneered the use of big data in large-scale retail during his
14-year tenure as CEO of Tesco, arrived at the group, he found
little in the way of sophisticated research.
The bar code came along in the 1980s and that revolutionised a
lot of things. You were getting the beginnings of a database then
on products, and then the big breakthrough was when you had
enough computing power to gather customer information as well
as product. It really did make a difference. The year the Clubcard
was launched was the year we overtook Sainsburys to second
place in the UK.
111
Related and similar practices to consider
Customer profitability analysis (CPA)
Further resources
cgma.org/essentialtools
115
116 ESSENTIAL TOOLS FOR MANAGEMENT ACCOUNTANTS
2013, Chartered Institute of Management Accountants.
All rights reserved.
117
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