Management accountants use the financial data available to them to advise senior managers. They therefore have a significant role to play in many organisations. CIMA is the largest professional body for management accountants. It provides membership and qualifications for accountants who wish to contribute towards business performance. As such, CIMA members may work across a range of different roles within organisations. To reduce risk during the decision making process, managers need to have the appropriate information – including financial data. Management accountants analyse the data available to them to extract the relevant messages. Two of the key financial documents used by a business are the balance sheet and the income statement. The balance sheet is a snapshot of the wealth of an organisation, showing what the business owns (assets) and owes (liabilities). The income statement, on the other hand, documents all the sales and costs of an organisation over a period of time – usually one year. By reading these two statements together, problems and opportunities can be identified.
Hugh Osmond is a business tycoon who, among other business ventures, built up the Pizza Express brand. He has just made a takeover offer of approximately £350 million for Crest Nicholson which is a house building organisation. Crest was bought by HBOS and a Scottish entrepreneur for £1.2 billion in May 2007. However, many house builders across the UK have suffered from the collapse in property prices, leading to difficulties in paying back their lenders. Many have had to sell off assets at significantly depressed prices. Hugh Osmond and business people like him would not consider a takeover like this without scrutinising financial data on the organisation. For a decision like this to be made, the data must have highlighted opportunities at Crest Nicholson that can be exploited. (The Sunday Times 25th April 2010)
- List some qualitative factors that may be used to aid decision making.
- Using the CIMA case study, explain the difference between financial and management accounting.
- Analyse the benefits of using financial data during the decision making process.
Answers to questions
- List some qualitative factors that may be used to aid decision making.Answer may include: • Objectives of the business • The culture of the organisation • Managers' attitudes towards risk • Reputation • Hunch • Past experience • Ethical considerations.
- Using the CIMA case study, explain the difference between financial and management accounting. • Financial accounting is concerned with keeping historical records of a firm's transactions and using these to prepare accounting statements. • Management accounting is concerned with the evaluation and interpretation of financial data to advise managers and aid decision making.
- Evaluate the benefits of using financial data during the decision making process.On one hand: • Financial data can be compared over time, with other organisations and with organisational objectives • Qualitative methods may be used to aid decision making, such as payback period, average annual rate of return and net present value • Key performance indicators (KPIs) can be used to measure how well an organisation is performing against set standards.On the other hand: • Quantitative methods should be used alongside qualitative factors during decision makingThe benefits of using financial data will depend on: • The accuracy and relevance of the data • The impact of external factors on the organisation.