Lean Accounting

The reason for Lean Accounting is to bolster the incline endeavor as a business system. It tries to move from customary bookkeeping strategies to a framework that measures and propels astounding business rehearses in the incline venture.

Introduction

What we now call lean manufacturing was developed by Toyota and other Japanese companies. Toyota executives claim that the famed Toyota Production System was inspired by what they learned during visits to the Ford Motor Company in the 1920s and developed by Toyota leaders such as Taiichi Ohno and consultant Shigeo Shingo after World War II. As pioneer American and European companies embraced lean manufacturing methods in the late 1980s, they discovered that lean thinking must be applied to every aspect of the company including the financial and management accounting processes.

There are two main thrusts for Lean Accounting. The first is the application of lean methods to the company’s accounting, control, and measurement processes. This is no different from applying lean methods to any other processes. The objective is to eliminate waste, free up capacity, speed up the process, eliminate errors and defects, and make the process clear and understandable.

The second (and more important) thrust of Lean Accounting is to fundamentally change the accounting, control, and measurement processes so they motivate lean change and improvement, provide information that is suitable for control and decision-making, provide an understanding of customer value, correctly assess the financial impact of lean improvement, and are themselves simple, visual, and low-waste. Lean Accounting does not require the traditional management accounting methods like standard costing, activity-based costing, variance reporting, cost-plus pricing, complex transactional control systems, and untimely confusing financial reports. These are replaced by

  • lean-focused performance measurements
  • simple summary direct costing of the value streams
  • decision-making and reporting using a box score
  • financial reports that are timely and presented in “plain language” that everyone can understand
  • radical simplification and elimination of transactional control systems by eliminating the need for them
  • driving lean changes from a deep understanding of the value created for the customers
  • eliminating traditional budgeting through monthly sales, operations, and financial planning processes (SOFP)
  • value-based pricing
  • correct understanding of the financial impact of lean change

As an organization becomes more mature with lean thinking and methods, they recognize that the combined methods of Lean Accounting in fact creates a Lean Management System (LMS) designed to provide the planning, the operational and financial reporting, and the motivation for change required to prosper the company’s on-going lean transformation.

Up until 2006, the methods of Lean Accounting were not clearly defined because they had been developed by different people in different companies. A meeting was held at the 2005 Lean Accounting Summit (Lean Accounting Summit) conference including a number of leaders in the field, and a decision was made to develop a document called “The Principles, Practices, and Tools of Lean Accounting” (PPT) (Lean Accounting PPT). While the methods of lean accounting are continually evolving, the PPT lays out the primary methods of Lean Accounting and shows how they fit together into a Lean Management System. The PPT emphasizes not only the tools and methods of Lean Accounting, but also the need for focusing on customer value and the empowerment (or respect) for people. The PPT was published in Target, the Journal of the Association of Manufacturing Excellence (AME) in 2006. (Lean Accounting PPT article)

The Vision for Lean Accounting

Provide accurate, timely, and understandable information to motivate the lean transformation throughout the organization, and for decision-making leading to increased customer value, growth, profitability, and cash flow.

Use lean tools to eliminate waste from the accounting processes while maintaining thorough financial control.

Fully comply with generally accepted accounting principles (GAAP), external reporting regulations, and internal reporting requirements.

Support the lean culture by motivating investment in people, providing information that is relevant and actionable, and empowering continuous improvement at every level of the organization.

Why is lean accounting needed?

There are positive and negative reasons for using Lean Accounting. The positive reasons include the issues addressed in the “Vision for Lean Accounting” shown above. Lean Accounting provides accurate, timely and understandable information that can be used by managers, sales people, operations leaders, accountants, lean improvement teams and others. The information gives clear insight into the company’s performance; both operational and financial. The Lean Accounting reporting motivates people in the organization to move lean improvement forward. It is often stated that “what you measure is what will be improved.” Lean accounting measures the right things for a company that wants to drive forward with lean transformation.

Lean Accounting is also itself lean. The information, reports, and measurements can be provided quickly and easily. It does not require the complex systems and wasteful transactions that are usually used by manufacturing companies. The simplicity of Lean Accounting frees up the time of the financial people and the operational people so that they can become more actively involved in moving the company forward towards its strategic goals. The role of the financial professional moves away from bookkeeper and reporter and towards strategic partnering with the company leaders.

At a deeper level Lean Accounting matches the cultural goals of a lean organization. The simple and timely information empowers people at all levels of the organization. The financial and performance measurement information is organized around value streams and thereby honors the lean principle of value stream management. The emphasis on customer value is also derived from the principles of lean thinking. The way a company accounts and measures its business is deeply rooted in the culture of the organization. Lean Accounting has an important role to play in developing a lean culture within an organization.

Why is traditional accounting not needed?

The negative reasons for using Lean Accounting lie with the inadequacy of traditional accounting systems to support a lean culture. Everybody working seriously on the lean transformation of their company eventually bumps up against their accounting systems. Traditional accounting systems (particularly those using standard costing, activity-based costing, or other full absorption methods) are designed to support traditional management methods. As a company moves to lean thinking, many of the fundamentals of its management system change and traditional accounting, control, and measurement methods become unsuitable. Some examples of this are:

  • Traditional accounting systems are large, complex processes requiring a great deal of non-value work. Lean companies are anxious to eliminate this kind of non-value work.
  • They provide measurements and reports like labor efficiency and overhead absorption that motivate large batch production and high inventory levels. These measurements are suitable for mass production-style organizations but actively harmful to companies with lean aspirations.
  • The traditional accounting systems have no good way to identify the financial impact of the lean improvements taking place throughout the company. On the contrary, the financial reports will often show that bad things are happening when very good lean change is being made. One example of this is that traditional reporting shows a reduction in profitability when inventory is reduced. Lean companies always make significant inventory reductions and the accounting reports show negative results.
  • Traditional accounting reports use technical words and methods like “overhead absorption”, “gross margin”, and many others. These reports are not widely understood within most organizations. This may be acceptable when the financial reports are restricted to senior managers, but a lean company will seek to empower the entire workforce. Clear and understandable reporting is required so that people can readily use the reports for improvement and decision-making.
  • Traditional companies use standard product (or service) costs which can be misleading when making decisions related to quoting, profitability, make/buy, sourcing, product rationalization, and so forth. Lean companies seek to have a clearer understanding of the true costs associated with their processes and value streams.

There are of course traditional methods for overcoming some of these issues and problems. Indeed, few of the methods of Lean Accounting are new ideas. They are mostly adaptations of methods that have been used for many years, and have been codified into a Lean Management System designed to support the needs of lean thinking organizations.

Where does Lean Accounting apply?

As with most lean methods Lean Accounting was developed to support manufacturing companies, and most of the implementation of Lean Accounting has been within manufacturing organizations. Now that lean methods are moving into other industries like financial services, healthcare, government, and education there are some initial examples of the application of Lean Accounting in these industries. There are as yet no published cases of the use of lean accounting outside of manufacturing.

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