The best management accounting practices are very clear: the following three steps are a must if you want to turn your corporate strategy into concrete action while remaining true to your business context.
Step 1: Strategic Planning
This reflection must take account of certain concepts such as your corporate mission, vision, strengths, weaknesses, the opportunities your company needs to capitalize on and the threats it faces. Through this exercise, you can set your targets and turn them into strategic objectives and an action plan, which will guide you in making short-, mid- and long-term business decisions.
Since a strategic plan is an integral part of a business plan, it’s very likely your banker has already requested a copy to round out your file at the bank and become familiar with your initiatives and needs. Nevertheless, this plan isn’t set in stone; rather, it’s a process that evolves over time. Your strategic planning must reflect any significant changes in your market or event that alters your objectives and targets.
Step 2: The Budget
This phase involves quantifying the strategic initiatives and decisions established during your strategic planning. Your objectives and timelines are illustrated in a budget exercise wherein you estimate the resources needed to achieve your targets.
During the budget process, you will make decisions affecting several operational and financial aspects. For example:
- Sales volumes and product-specific production;
- Standard costs for raw materials and supplies;
- Energy costs;
- Labour costs;
- Operational performance;
- Product line,
- Product bills of materials;
- Capitalization initiatives;
This best practice is an ongoing process that requires a proactive approach. The budget is usually developed at the beginning of the year, and analysis meetings where discrepancies are explained must be a priority for those managing the budget.
Step 3: Costing
The strategic plan provided management with a direction, while the budget was used to evaluate the financial and human resources needed to achieve the objectives for the year. Now you need to ensure that the decisions made in the previous steps will enable the organization to deliver products and services at a cost and sale price that meet profitability objectives and satisfy market constraints.
It’s essential to calculate the cost per product and service. This step brings the decisions and assumptions made in the first two steps together in an operational whole. Various analyses, notably operating costs, costs per product or service, the distribution and profitability cost per client and product will help you measure whether you’re achieving your financial objectives. If objectives are not being achieved, costing will provide indications on which budget items or targets need to be adjusted.
We’ve noticed in our practice that few SMEs perform all three of these steps. Many of them only produce a budget since it’s often required by the bank or their business partners.
Failure to align the strategy, budget and costing often yields results that are below target. The following list of symptoms and scenarios may provide an indication that your strategy, budget and costing are misaligned:
- Sales are increasing but profits are declining;
- You’re making or losing money and don’t know why;
- You’re not able to assess the profitability of your products or services or that of your clients;
- Your business partners have little faith in your financial forecasting;
- Cost reduction initiatives are not bearing fruit despite the resources invested;
- Your business is evolving in a low-margin sector;
- You don’t produce a yearly budget or financial forecasts;
- Your costing hasn’t been reviewed in the past year or is unknown;
- The complexity of your products or services is not reflected in your rate setting;
- Your clients increasingly require custom products or services and this is not reflected in your rate setting.
Our team of experts can guide you in implementing tools and processes to achieve your objectives.
Please note that this article was co-written with Yann Vandevoorde, Analyst, Raymond Chabot Grant Thornton.
06 Oct 2016 | Written by :