3 financial information in decision making

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Introduction

CIMA is the Chartered Institute of Management Accountants. It supports over 164,000 members and students in 161 countries.  CIMA works with some of the world”s leading businesses and provides a professional qualification in management accounting. 

Management accounting plays a vital role in a business. Management accountants look forward and use financial information to help a business make key decisions about its future. This demonstrates the value of the qualification in supporting business.

CIMA's qualification is the leading management accounting qualification in the world. CIMA-qualified members work in both the public sector and private sector, in commercial and not-for-profit organisations. CIMA updates its qualifications regularly to take account of the changing needs of employers, students, managers and businesses.

CIMA stakeholders include its own students, qualified members and major employers. It supports students and members through all stages of their careers, with a focus on lifelong learning.

CIMA works to maintain the highest standards that businesses want. Its training provides CIMA members with the necessary skills to manage some of the world”s most successful businesses. CIMA members may lead the finance function in any organisation or work in roles outside finance. They have roles in top management leading companies like Norwich Union, Cadbury Schweppes and Nintendo.

Financial Accounting

Financial accounting refers to the figures, balances and accounts that a business must produce to demonstrate how the business is performing. In a small business, such as a sole trader or partnership, these accounts may be quite simple. However, they still need to be accurate. This is so that the business owner/s and the tax authorities have clear information about the costs and profits of the business. Once a business becomes a limited company, there is a legal requirement to publish certain figures. These include:

  • balance sheets, showing a snapshot of what a business owns and owes at a specific point in time
  • profit and loss account, showing the profit or loss the company has made in a specific period of time
  • in public limited companies, the cashflow statement, showing where cash has come from and how it has been spent over the past year

Financial accounting tasks

Financial accounts relate to the past performance of the business. They give an important baseline of financial information for managers. However, this information is also publicly available to anyone else, including competitors, suppliers, government and investors. Managers need to be able to see how the business has performed in the past to enable them to look to the future.

The main tasks for financial accountants are:

  • keeping accurate records such as ledgers, books and accounts
  • ensuring invoices are raised and bills paid
  • checking and monitoring spending and balances.

Management Accounting

Management accountants look ahead - they focus on forecasting and decision-making. They use information to advise on how the business can move forward, for example, should a company buy another, should it invest in new equipment. Management accounting involves using the internal financial information available to managers, as well as that information which companies must publish by law. This contributes to forward planning, reviewing and analysing the performance of the business.

Management accounting is fundamental in strategic planning. When a business is looking to make a strategic decision, for example, whether to develop a new product line, acquire another business or expand into other countries, the CIMA trained management accountant can provide advice. They can use a number of tools to assist decision-making. These include ratio analysis, budgets and forecasts (such as cash flow and variances).

Management accounting tools

A ratio is one variable measured in terms of another, for example, how many girls are in a class compared to the number of boys. Ratio analysis is one tool in the strategic decision making process. Management accountants use ratios along with other internal business data and publicly available information to assess aspects of a company”s performance.

The main ratios used in management accounting are:

  • efficiency or activity ratios, including liquidity - these show whether the business is able to pay its debts. They look at whether the assets of the company (its buildings, land equipment) could repay any debts.
  • gearing- shows the long-term financial position of the business. It can show balance of funding in a business i.e. how much money is from loans (on which it needs to pay interest) and how much is from shareholder funds (on which it needs to pay a dividend to shareholders). More money from loans carries more cost and therefore more risk.
  • profitability or performance ratios - show how well a business is doing. They relate to the business objectives, which might be to make profit or obtain a return on investment, or collects its debts quickly.

It is important that management accountants look at all the relevant ratios when making a decision. Management accountants need to be able to produce accurate analysis, correct forecasts and a detached and professional overview to a company”s performance. These contribute to the future success of a business.

Other tools available to a management accountant include:

  • cashflow forecasts which look at likely future flows of costs and revenues. The business uses these to plan expenditure and to see where it might need to borrow.
  • budgets, which are financial plans for the future. They help the business to see where it will incur costs and where revenues will come from. They are particularly important in helping to co-ordinate the different parts or activities of a business.
  • variances which show the difference between what was forecast to happen (in a budget) and what actually happened. The reasons for these differences can then be analysed to show why the variance occurred. Management accountants can then see how the business can build on positive variances or avoid negative ones in future.
  • investment appraisal helps to decide whether a particular investment is worthwhile or not. It looks at the costs of investing, for example, in a new factory or processes and at the likely financial returns.

Business strategy

Strategic decisions are major decisions taken at the highest level of management in an organisation by the Chief Executive, Directors or Board members. They determine the direction of the business over future months and years. They have greater and wider-reaching consequences than the tactical decisions (such as changes to factory layout or processes) or operational decisions, such as increasing the number of staff on a product line, made by junior or middle managers. These affect the day-to-day running of the business.

Business strategies enable a business to grow and to strengthen its position in the market. If a business wants to grow it can do this by:

  • organic growth - developing the business from within. This can be by either growing more or different products within its own market. Alternatively, it can be by developing new markets. This could be through various routes, for example, new products and new geographical markets, such as overseas or new distribution channels.
  • Inorganic growth - joining with other businesses through take-over or merger.

Benefits of strategic decision making

Management accountants help a business make strategic decisions by:

  • identifying and collecting key information
  • measuring and interpreting information
  • analysing information
  • communicating findings
  • joining with other managers to plan changes
  • monitoring, measuring and controlling progress.

The tools of management accounting help support the policy of a business. Strategic, long-term decisions involve the future direction of the business. If the forecasts and decisions are right, the business will grow and succeed. But if a business makes poor decisions, it may fail.

For example, a business may decide to invest in new technology to improve the efficiency of production. If it has analysed the benefits properly, the investment will lead to growth and more profit. However, if the business has not evaluated all factors and the technology is untested, it may not give a return on investment.

CIMA strategists in practice

CIMA qualified management accountants can reach high-level and well-paid jobs in many well-known companies.  Management accountants are responsible for key areas of the company, helping in strategic decision-making.

Matthew Parker is the Retail Finance Manager at Topshop, one of the seven key brands of the Arcadia Group. Arcadia is a young and very vibrant company. People are passionate about what they do and that comes through in their jobs. For Matthew it provided a passport to a job with variety and challenge:

'With CIMA you”re getting involved in the strategic management within the business.  You have the chance to influence and suggest ideas to key decision makers. A CIMA qualification is almost a commercial toolkit that gives you a way of breaking information down and looking at investment decisions to make sure what is the most profitable. I know it”s a cliche, but no two days are the same. I”ll sit down with the regional controllers and area managers at the beginning of a financial half and we”ll discuss the plan and then that strategy gets passed on to the decision making body. I just don”t think in many other accountancy roles you get such a level of variety and input, which makes it fantastic.'

Gajen Ganandran is a financial analyst with Aviva, which owns Norwich Union. Aviva is the world's fifth largest insurance group and the biggest in the UK. Gajen has a degree in computing but realised early on in his career the importance of understanding financial data, so he undertook a CIMA qualification. Since then he has travelled to New York and the USA and is hoping to take up an opportunity with Aviva to work overseas, ideally in Singapore.

Tom Pearce is Finance Director of Nintendo UK the global leader in interactive entertainment. Tom did his 'A'-levels in business studies and accountancy. He then took a degree in accounting and finance. From his first job onwards, Tom set about improving his qualifications through CIMA. Tom works in an office full of the latest Nintendo gadgets and games, including the successful Nintendo Wii. From his experience of working within a business, Tom decided that he did not want to be a 'traditional' accountant. “I wanted to apply my skills to a commercial setting. I chose CIMA because it was recognised globally and the most geared to the business environment.”

In the same year that Tom qualified with CIMA, he was offered the role at Nintendo, starting the UK side of the Japanese company from scratch. In a short time he became Financial Director, responsible for decisions affecting sales of over £600 million.

Sharon Bhachu found CIMA”s support invaluable in her job at Cadbury Schweppes. She is a CIMA Training Co-ordinator and one of the key players in the relationship between Cadbury Schweppes and CIMA. Cadbury Schweppes is a CIMA Training Quality Partner. Sharon”s job includes the evaluation of new product ranges, deciding on promotions and working on seasonal ranges for Easter and Christmas. She even decides which products should go into a selection box.  'I”m loving every minute working with current brands and developing insight for the future'.

Conclusion

Financial accountants maintain a business' balances and accounts. They keep the business records legal and financially stable.

Management accountants focus on forecasting. They have an exciting and forward-looking strategic role in many different types of organisations. They use various tools, such as ratio analysis and investment appraisal, to identify, measure and analyse the financial performance of a company.

Many CIMA-trained management accountants are at the heart of top businesses in a wide variety of roles, including financial analyst or finance director. They contribute to decision-making across the organisation. The analysis they provide is vital in taking a business forward.

Chartered Institute of Management Accountants | Financial information in decision making