Management accounting looks at the controlling of a company and how managers of an organisation should act in order to develop their organisation further. Traditional management accounting in the late 1980’s received many criticisms. New approaches were required in order to make management accounting more applicable with today’s business environment. One approach which was identified as a way forward was strategic management accounting. This has been identified as: ‘A form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non-financial information and internally generated information’ (CIMA Official Terminology, 200: 50)
This approach focused on the provision of information for the formulation of an organisation’s strategy and management implementation. Emphasis was later placed upon integrating performance measurement along with management strategy, in order to assess the success and application of the management strategy. This technique used internal factors as well as external factors in order to assess the performance of the company externally as well as how the company is being run internally.
The purpose is to show a company how they are performing in comparison to external competitors, so to give the company a competitive edge in growing and advancing as a whole. Many different techniques have been used to help a company achieve this and to perform at its optimum level. Some of the processes and techniques which also fall within strategic management accounting are, activity based costing, life cycle costing and also internally the learning curve. However, although strategic management accounting has been around for quite a few years, it is still seen as an area which can develop further to contribute largely to the future of management accounting.
‘Strategic management accounting is an emerging field whose boundaries are loose an, as yet, there is no unified view of what it is or how it might develop. The existing literature in the field is both disparate and disjointed’ (Coad, 1996: 392) As we can see from the above quote, develop has been vast but it still lacks a concrete framework. Great emphasis was given to the use non-financial performance measures to help a company with feedback which allowed it to compete in the economic environment. However it was not very clear how the non-financial performance measures were to be evaluated and applied to help management in a financial manner.
Balanced Scorecard The increased need of an integrated system which used both financial and non-financial performance measures in conjunction was required. This need led to the emergence of the balanced scorecard, which was an integrated set of performance measures which helped management gain a fast and comprehensive view of the company’s performance. The balanced scorecard was developed in 1992 by Dr. Robert Kaplan and Dr. David Norton, and was later refined in 1993, 1996a, 1996b, 2001a and 2001b by Kaplan and Norton. This Strategic management technique provided a prescription as to what should be measured in order to balance an organisations financial perspective. It built upon previous strategic management accounting techniques and brought together the difference performance measures to help organisations clarify their vision and strategy and translate them into action.
This process helps management to transform strategic planning from an exercise into the main nerve centre of an enterprise. Feedback is provided from both internal processes and external outcomes, as to allow a continuous improvement in strategic performance and results. The scorecard collects information, both financial and non-financial, and puts it into metric form to measure and analyse it. The feedback from the analysis helps show the status of an organisation for the decision makers, a guide to improvements, trends in performance and how to make wiser long term decisions for the management of the organisation.
‘The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.’
(Kaplan and Norton) The philosophy used by the balanced scorecard is that vision and strategy is best achieved when interlinking four perspectives, and viewing the organisation. The four perspectives are the learning and growth perspective, internal business process perspective, customer perspective and financial perspective. In recent years the balanced scorecard has become as essential instrument, used by managers in order to fulfill their visions and strategies. Organizations from different fields all apply the philosophy of the balanced scorecard technique to measure the performance of and to see how to improve upon their organizations status.