Organisations and management accounting
Organisations and management accounting

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Organisations and management accounting

1.3 What types of organisation are there?

Organisations can be classified in different ways. One way is according to their over-arching purpose, or primary objective. Broadly, organisations may be classified as ‘for-profit’ (i.e., commercial) or ‘not-for-profit’ entities. ‘For-profit’ (commercial) organisations may have several different objectives. For a very long time, it was generally accepted that maximising the wealth of the owners and continuing in existence were the primary objectives of profit seeking organisations. However, as organisations also aim, for example, to provide goods and services to customers and employment to employees, it is perhaps more reasonable to suggest that increasing, rather than maximising the wealth of owners, is a more fitting objective. ‘Not-for–profit’ organisations comprise a large variety of organisations including charities, clubs, cooperative firms/social enterprises and public sector organisations. Public sector organisations are owned, funded and run by central or local government. They include:

  • public hospitals
  • the armed forces (military)
  • most schools and universities
  • government departments.

These organisations exist to provide services which, for various reasons, it is considered impractical or undesirable for the commercial sector to provide.

Whereas commercial organisations, charities and social enterprises must generate sufficient funds from their activities to sustain themselves on a continuing basis, public sector organisations are funded by government. Nevertheless, constraints on government expenditure mean that resources are limited. Consequently, economic scarcity requires that virtually all organisations be run effectively and efficiently. As a result, many of the management principles employed by the commercial sector are also employed in the not-for-profit sector, requiring extensive use of management accounting in all sectors.

A traditional view of differences between sectors is illustrated in Figure 2. However, these distinctions are becoming blurred, as indicated by the overlapping circles. Commercial organisations are increasingly pursuing social responsibility objectives, while not-for-profit organisations are increasingly adopting commercial criteria to ensure the sound financial management of scarce resources.

Maximisation of shareholder value has long been the publicly stated objective of most business enterprises. It is likely, however, partly as a result of the global financial crises that began in 2008, that the publicly stated objectives will be expanded to embrace more stakeholders, such as employees and the local community.

Described image
Figure 2 Organisations highlighting differences between sectors

Activity 1

Think of an organisation that you know well.

  • In which sector or sectors from Figure 2 do you feel your organisation most comfortably fits?
  • Which factors (profit, accountability, commitment) exert pressure on it or influence its objectives?
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Discussion

You may have decided that your organisation sits clearly inside one of the circles or, more likely, you will have sited it in an intermediate position – operating for commercial purposes, but anxious to satisfy other criteria such as accountability to a wider public. For example, there has been a rise in the number of investment companies which use not only financial but also ethical criteria to decide in which organisations to invest. Such criteria could include the environmental impact of the production processes used by the companies in question, or the working conditions and wages of their employees. Another example of the mixture of the pressures that can affect organisations could be taken from the social care sector: a organisation in this sector might be keen to provide an excellent service to local people, but it could also have to operate on commercial principles in managing costs in order to compete with more cost effective providers.

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