Why lean accounting?

Monday, June 6, 2016
It doesn’t take long before a company serious about lean to see that their accounting systems need to change. Lean thinking and methods are quite different from traditional business and require different ways to measure their work and their lean progress.

The purpose of Lean Accounting is both positive and negative. The positive includes accounting, control, measurements, and decision-making processes that actively support their lean strategy. The negative is to remove the harmful impact of traditional accounting. Lean accounting also eliminates waste within the accounting processes by stripping them down to the minimum amount of work.

What’s the Problem with Traditional Accounting?
Traditional accounting and measurement methods are NOT wrong and bad, but they are the opposite of lean. Traditional measurements like labor efficiency, machine utilization, and others motivate large batches, long lead times, high inventory, shortages, expediting, and crisis management.

A very potent anti-lean measurement is overhead absorption variance. General Motors and Chrysler were critically impacted by overhead absorption in the 2008 recession . In order to absorb their overheads, the car plants continued to make thousands of cars that nobody wanted to buy. As a result, GM was bankrupted until being bailed-out by tax-payers money. Lean organizations must eliminate these anti-lean accounting and measurement systems and replace them with lean accounting methods that support and prosper lean thinking and practices.

How Does Lean Accounting Help Us?

Lean accounting has been designed to support lean manufacturing (and lean sales, lean product development, lead engineering, lean healthcare, etc.). Lean accounting reflects lean thinking throughout the entire organization.
 
1. Working by Value Streams.
We focus our financial and operational reporting around the whole value stream. We are not so much interested in the efficiency of individual departments, processes, or products, but we are very interested in the productivity of value stream as a whole. Ideally, a value stream starts from a sales process and goes all the way through to purchasing, production, and shipping.
 
2. Timely, Plain English Financial Reports.
The financial and operational reporting is at a value stream level and is usually available weekly. Instead of the traditional, complicated financial reports with meaningless variances, we create “plain English” income statements that everyone in the company can readily understand and use. Similarly, the “vital few” operational measurements are posted weekly on the value stream performance board.
 
If you have timely and understandable financial information, the value stream leaders can quickly see what’s happening in their business, make better decisions leading to growth, productivity, and profits. This operational and financial information is also shows the TRUE, bottom line savings and profitability coming from lean improvement.
 
3. Customer Value.
The value stream team members have a clear focus on the value created for the customers. When we know what the customers truly value, and when we have full control over the processes that create this value – then we can work step-by-step to increase the value while at the same time reducing the costs. Increasing value for the customers leads to customer loyalty, unprecedented growth, and profits.
 
4. Decision-Making and the Box Score
Lean Accounting uses a “box score” which is a single page report showing the three aspects of a value stream that determine the operational and financial results. These are the operational performance measurements, the capacity usage, and a summary of the income statement.
 
The Box Score is widely used in Lean Accounting. It shows the performance of the value streams; operational results, financial results, and the capacity usage. The Box Score is also used for calculating the operational and financial benefits of the value stream’s lean improvements.
 
The Box Score is the primary decision-making method for lean companies. All routine decisions no longer use product cost information.  When decisions are made the information is entered into the box score so as to understand the true impact of the decision on the value stream as a whole. The box score shows how the decision impacts the operational measures, the use of people’s capacity, and the value stream profitability. The box score financial numbers are real. They show how much money will go into the bank as a result of the decisions being made.
 
Using the Box Score for decision-making leads to better decisions and better profits. The Box Score also allows decisions to be made at lower levels in the organization because the information is simple and readily understood by everybody. The Box Score is real win-win for everyone.
 
5. Lean Accounting is a Lot Less Work.
Lean Accounting does not need the thousands or millions of transactions required to maintain the departmental reporting, the labor tracking, the other so-called control systems traditional companies anguish over.

There is a maturity path to making these changes. As your company becomes proficient with lean thinking, your processes will come under better control. Much of this control comes from pragmatic, visual tracking by the people in the processes. As your company makes more progress with lean, you will get to the point where the secondary, transactional control systems (ERP/MRP) are increasingly unnecessary and can be largely phased out. ERP systems are valuable tools for any lean company, but they are largely wasteful and we need to eliminate waste from the systems as well as the physical process. Similar, we also simplify and greatly reduce transactions in accounts payable, account receivable, inventory tracking, and other processes.

An important purpose of Lean Accounting is to reduce the work required for the routine accounting, control, and measurement system so as to free up the time of the accountants (and others) so as to give them time to work on more strategic activities that drive the company forwards.

Why Lean Accounting?
As you begin to make progress with lean manufacturing, lean product design, lean sales, lean engineering, and lean administration; it soon becomes clear that the traditional accounting, control, measurements, and decision-making systems are no longer appropriate. In fact they are in many ways anti-lean.

The purpose of Lean Accounting is:
•    Accounting Everybody Can Immediately Understand and Use.
•    Accounting that Supports & Motivates Lean Progress.
•    Effective Operational & Financial Controls.
•    Reports & Information that Empowers People for Lean Continuous Improvement.
•    Eliminate Much of the Waste in the Accounting Systems.
•    Correctly Calculate the Financial Impact of Lean.
•    Better Decisions leading to Better Business leading to Better Profits.