Management for Doctors: Management accounting

There is a distinction to be made between financial accounting and management accounting.Financial accounting is concerned with having sound financial systems in place to enable routine transactions-the payment of wages and salaries, the purchase of goods and services, the collection of income from customers, and so on-to take place; to maintain appropriate records; and to produce year end accounts.Manage- ment accounting, on the other hand, is concerned with producing financial information to assist the manage- ment ofthe organisation.Back in 1978, a Royal Commission noted the almost complete absence of dynamic management accounting information in the NHS,' so most financial develop- ments during the 1 980s were developments in manage- ment accounting.However, the government's reforms following the 1989 Working For Patients white paper have initially had an enormous impact on NHS financial accounting.In particular, the creation of the NHS trusts has been important in two respects.Firstly, they need their own finance departments-with all the appropriate systems-within the trust.Previously such systems were usually located within the district health authority.This has entailed a massive re- organisation of finance departments.Secondly, trusts are subject to a three point financial regime which affects their balance sheet, their income and expendi- ture account, and their funds flow statement.Now that the restructuring of the NHS is nearing completion (well, maybe) the pendulum is swinging back towards management accounting.The Chartered Institute of Management Account- ants Official Terminology defines management account- ing as "an integral part of management concerned with identifying, presenting and interpreting information used for: * Formulating strategy * Planning and controlling activities * Decision taking * Optimising the use of resources."2Such a definition requires that we are clear about the overall objectives of the organisation.Most private sector commercial organisations might define their financial objectives as "maximising their return on capital employed," but in the public sector the financial objective must be "to deliver value for money" from the resources provided.Furthermore, as a result of the work of the Public Accounts Committee and the National Audit Office, value for money can be expressed in terms of the three e's: economy, efficiency, and effectiveness.These terms can themselves be further defined, but for our purposes, the simplest definitions will suffice: * Economy means "doing it cheaply" * Efficiency means "doing it right" * Effectiveness means "doing the right thing."While many would argue that effectiveness is the most important, what value for money really requires is that we must deliver effective services and we must deliver them efficiently and economically.Perhaps the main aspect in which management accounting differs from financial accounting is the time perspective.Whereas year end (financial) accounts are historical documents, management accounting is essentially forward looking.It involves making projections, preparing plans, and asking "what happens if?"And the type of questions to be addressed in manage- ment accounting would include: * How much does it cost to deliver our services?* How much does each activity cost?* How much does it cost to treat patients in this particular category?* Is it cheaper to contract out particular activities (such as catering, pathology, laboratories) or to pro- vide them ourselves?* Should we build an extension to our existing hospital or should we build a new hospital?* When should we replace our motor vehicles?* Should we replace the hospital boiler plant?And crucially: * How can we ensure that we live within our means?These questions can therefore be one off, requiring ad hoc investigations and reports, or they can be on going, requiring some continuous form of reporting.And it is the latter-the process of ongoing financial planning, monitoring, and control-which forms the core of management accounting.-This process is known as budgetary control. Budgetary controlBudgetary control, or as it is more popularly known, budgeting, is usually an annual, cyclical process BMJ voLuME310 11FEBRUARY1995 7T his is the seventh in a series of articles dealing with issues arising as clinical practitioners increasingly take on managerial roles.