Abstract

This is an article about management accounting. The roles and importance of management accounting are discussed. The context is limited to how management accounting can assist an organization to ride out from the recessionary economic situation. It is discussed the many possible roles and benefits offered by management accounting system to assist a financially distressed hotel operator to revitalize and restructure in order to return to profitable status. As discussed, many concepts or frameworks offered by management accounting, such as the Investment Appraisal methods, the Balance Scorecard, the accounting reporting system, as well as contemporary management accounting philosophy, such as lean accounting system, are useful for a firm. Last but not least, the article also discuss about several limitations of management accounting, so that management can understand better on how to effective utilize concepts or system of management accounting in the business management process.

Introduction

In the competitive business landscape, management accounting is being used as an important tool to support the formulation and implementation of strategic directions for a firm (Yazdifar, 2003). This is particularly true during the recessionary period when the global economy turn gloomy and negative due to the financial crises in 2008. In this article, the roles of the management accounting in assisting a recessionary hit service sector organization will be discussed. For illustration purposes, a recessionary hit hotel will be used as the case study to be discussed in this paper.

To begin, the definition of management accounting will be presented. Generally, management accounting is about the process to identify, measure, accumulate, analyze, prepare, interpret and communicate the accounting information for the usages of management (Roslender et. al., 2003). In some instances, management accounting is also useful to present the financial information for review by investors, creditors or regulatory agencies.

Roles of Management Accounting

There are many important roles played by management accounting in organization today. Traditionally, management accounting is mostly concern with reporting and supporting the decision making process of management (Langfield-Smith, 2008). However, as the field of management accounting evolves, more roles are being assumed by the management accounting system. It soon not hard to found that management accounting is used extensively in performance appraisal, evaluation and management, to used as a mean to control the risks or work flow in the workplace, as well as the support the strategic management of a organization (Ma et. al., 2009). In this section, the roles or importance of management accounting to revive a recession hit organization will be discussed. This is important because consistent with the gloomy economic outlook due to serious financial crises in 2008, many firms are yet to recover from the crises. Thus, proper usage of management accounting is very important to revitalize, restructure or to revive the firm to ride out from the crises. Generally, management accounting can be beneficial in four areas as follow.

To cut costs as well as to minimize wastages. In hard times, the most logical and easy way to ride out from the recession is to cut costs (Tillmann et. al., 2008). For this, management accounting system is particularly useful. Taking the hotel operator as an example, when the customers cut spending, it is very important to stop the cash flow bleeding (i.e., a situation of serious cash outflow) in the business. Management accounting is useful as it is very easy to track where the expenses go in the business. For example, expenses may be contributed by unnecessary electricity fees, excessive paperwork, or any other non value adding expenses. Thus, management can then zoom down on the various areas, and try hard to cut the necessary expenses whenever relevant. In fact, this is pretty consistent with a contemporary concept in management accounting, which is called lean accounting system (Naranjo-Gil et. al., 2007) or organization. Through the data collected, the value chain in the firm can be analyzed and investigated. As long as the activities are not necessary or not bringing huge benefits to the organization, they should be cut or eliminated. By focusing on eliminating wastages in the process flow, the many expense can be reduced, to a point whereby the organization can return to a positive cash inflow situation.

To stop unproductive activities – and to concentrate on the most profitable activities in the firm. With modern concepts in management accounting, it is now possible for the management to ferret out the costs incurred or associated to a certain activities, and thereby enable the firm to more readily and accurately analyze the value adding or low value activities. This can be done through accounting concept such as Activity Based Costing (ABC). Through Activity Based Costing, the cause and effects of the various activities and its associated costs can be understood (i.e., thereby, ABC is also called Cause and Effect Accounting). Thus, through a comprehensive and more accurate Activity Based Costing, the relevant costs and revenue can be ferreted. This is important so that the management understands which activities contribute the most to the company financial performance, and then able to made realistic decisions to cut down those low value adding, or perhaps value destroying activities in the organization. In the context of a hotel operator, there are possible many services that add no value to the customers. For example, operating the cafeteria in the hotel for 24 hours may not be a good option (whereby it may be better for the hotel to substitute those services with provision of instant foods to customers in the hotel room). All of these low value adding activities should be eliminated, and then the management focus and efforts should be channeled to those more productive activities.

To identify new value adding or wealth creation activities. According to the 80/20 principle, an organization can prosper more by focusing on what it really does well and have the high margin in the marketplace (Horngen et. al., 1997). Such a concept should be applied to a financially distressed hotel as well. Thus, besides identifying the existing most value creating activities in the firm, the management can also use various management accounting concepts to identify new viable new venture or projects to take on to bring the firms to greater heights. Several management accounting concepts; such as the Net Present Value (NPV), Internal Rate of Return (IRR), Accounting Rate of Return (ARR), Payback Period that is widely adopted in investment appraisal can be employed. Example, for a financially distressed firm, management can ride out from the recession if they able to find a new business model with high NPV, IRR or ARR returns (Clarke et. al., 2002). When the firms can venture or take up positive NPV projects, which can create value to the shareholders, the firm can then return back to its profitability and ride out from the gloomy business environment.

To support the performance management and reward system in the organization. There are many ways in which management accounting can be used to support the performance and reward management system in the organization (Simons et. al., 1990). For example, in the recent years, the use of Key Performance Indicators (KPI), to measure what is truly important in an organization is becoming more widespread. By measuring the truly important indicators, to judge how the company really perform, in the various important aspects or functional departments of an organization, the manager can better manage the performance of the different departments (Shank et. al., 2009). This in turn enables the manager to form a better reward system to shape the behaviors of the workforce. In our context, managing the key performance indicators is more important for a recessionary hit hotel operator. This is because it is crucial for the financially distressed hotel to focus on the truly effective and critical performance indicators, in planning how to deal with the hard situations. A strong focus on the key performance indicators enable the manager to correct the necessary weaknesses of the firm, and to guide the workforce to concentrate in fulfilling and performing on the truly important key success factors, that will bring the firms back to the successful track again in the future.

To support strategic management of the firm. In the ever challenging business environment, management accounting had evolved to analyze and provide comprehensive information to the decision makers (Cadez et. al., 2008; Cadez, 2006). One such holistic management accounting concepts widely used today is the Balance Scorecard approach. Under the Balance Scorecard system, the various crucial dimensions leading to organizational success are considered. The four dimensions considered include evaluating company performances and strategy from customers perspective, internal business process perspective, learning and growth perspective, and lastly, financial perspectives (Seal, 2001). By taking into account on all of these perspectives, the company can be managed from a holistic manner. Besides, as these various dimensions are being measured and evaluated in the management accounting system, a more comprehensive data and information can be collected and integrated into a comprehensive system to assist the decision making process of the management. A comprehensive Balance Scorecard is also crucial in supporting the strategic management of the firm. In the case of a recession hit hotel operator, the application of Balance Scorecard will enable the firm to come out with the proper strategies to ride out from the competitive and yet gloomy economy outlook. The strengths and weaknesses of the firm can be identified (Parker, 2008), and then these can be incorporated into the strategic management decision making process. Besides, as the Balance Scorecard enable the management to understand the organization condition in a more comprehensive manner, and thus, enable the management to implement better strategies. The system also lead the management to think widely, and demand them to formulate internally consistent and mutually supportive actions plans between the various functional departments in the organization, ranging from the marketing, human resources, operation to the finance department.

Limitations of Management Accounting

Although management accounting is a very powerful tool or conceptual idea to assist management in the daily management of organization, it has several limitations that worth mentioning. Perhaps the most critical drawback of the management accounting system is that it is not taking human psychology into consideration in the reporting process. In analyzing the situation or implementing strategies using the management accounting framework, management should not neglect the psychological process that may affect employees’ behaviors or attitudes (Anthony et. al., 1999). This is particularly true in a recession hit firm. For example, when a firm is suffering losses, it is easy to refer to the reports generated from the management accounting system, and to retrench workers or close down operations for those division that are not profitable or losing money. However, such an act can be a risky one from the perspective of effective human resources management best practices. When workers are retrenched in large scale, it is possible that the psychological contracts between the workers to the employers may be affected. The employees may be frightened, feel unsecured and becoming not motivated to work in the organization. This can be serious issues for a service oriented organization, such as for a hotel, because the employees’ attitudes and behaviors will ultimately affect the perceptions of customers. In the worst case scenario, customers’ satisfaction may be affected, and that would mean drop of revenue and causing the firm to suffer even more in the recessionary period.

Apart from that, although management accounting is powerful, it is never the substitute for other functional departments, such as the marketing or the operations department (Heidmann et. al., 2008). In fact, in many of the instances, management accounting is playing only a supporting roles to enhance the effectiveness and efficiencies of the decision making process in these departments. Thus, management should also place more importance in the other functional areas in the firm. For service oriented firm such as a hotel, significant emphasis should be place on how to meet the customers’ needs and demands in an effective and accurate manner.

Besides, management accounting is not really a tool designed to be forward looking, or be responsive to the market changes, or to formulate strategies to change the market (Al-Hazmi, 2010). There are limitations whereby management accounting framework is not able to be utilized to continuously and proactively maintain the competitive advantage of a firm. Thus, it is important to realize that strategy formulation or innovation approaches to lead the firm in the dynamic and fast changing market place and market space is an art, and required extensive experience and wisdom from the management. For this, management accounting is not substitute for creativity and innovative strategies or brings the firms out from the recessionary pressure, or to improve the financial position of the firms by growing market shares or revenue in the competitive business environment.

Last but not least, management accounting is also not substitute to the mind set and attitudes of the managerial staffs in managing the corporations for success, especially in hard times, when everyone tend to be troubled with negative news in workplace. It is very important for the manager to keep a positive mindset and attitudes in handling the daily challenges. For example, having proper attitudes and behaviors such as commitment, determination, passion, and persistent in solving the problems troubling the financially distressed organization are all very important elements in leading the organization out from the mess. Ultimately, it is attitudes that matter and change the situation, as well as to enable the managers to persuade and convince the workplace to work together in a positive attitudes to bring the organization back to profitability and success, despite bad news and gloomy economy or industry outlook.

Conclusion

In this paper, the importance as well as roles of management accounting to an organization is discussed. Today, management accounting no longer play only the traditional roles to support the organization, but instead is burdened with greater responsibilities in managing the organization for competitive advantage (Cadez et. al., 2008). In this paper, the discussion is concentrated on a recession hit organization. The examples provided are concentrated on discussion on how management accounting can assist a financially distressed and recession hit hotel operator to ride out from the gloomy industry or business landscape. Although the examples provided is meant to discuss the importance of management accounting to a hotel operator, the roles as well as importance of management accounting, however, do applied to other businesses as well.

As discussed in the article, there are many benefits that can be reaped from proper and effective applications of management accounting concepts, system, and frameworks in managing a business for success and performance. This is particularly true for a company suffering from weak economic environment as well. Generally, there are many tools or concepts that can be applied to cut costs, to re-focus on the value adding activities, to understand the cost structure of the company better, to reduce wastages, to stop unproductive or low value adding activities, as well as to identify new wealth creation projects or business ventures. Besides, management accounting is also useful for performance management, setting reward system, as well as to support the strategic management of the firms. Overall, it is powerful tool and system to link, collect and analyze the data and information from all other functional departments, such as marketing, operation, finance or human resources divisions for better decision making process and strategic formulation process for an organization. However, there are limitations to the usage of management accounting as well. All of these limitations should be noted by the management, to avoid being over-reliance or having excessive confidence on the capabilities of relying on the data presented by management accounting in the complicated business management process.

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