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November 29, 2009

Eliminating wasteful accounting transactions

Eliminating wasteful accounting transactions is the most difficult part of lean accounting for us accountants. After all transactions are our comfort blanket, and  some of the first things we do when learning accounting are “T” accounts – transactions.

 

Indeed transactions are part of the alchemy of accountancy. When something looks not quite right with financial reports what do we do ? We take a pile of computer print-outs, shut ourselves in a quiet room, and start ticking off transactions. Hours (or days) later we emerge having traced the cause of the problem, and with a list of journal entries we can make to resolve the issue. Don’t you think HR specialists wish they could solve absence problems with a handful of journal entries ?! Or that engineers wish they could resolve quality problems with a few debit and credit entries ? Transactions are part of the DNA of accountants. Being asked to remove them is like being asked to cut off your left hand !

 

And yet we know that moving towards a lean environment means that we can reduce the number of accounting transactions we need because we have other methods of control and of reducing financial risk. For example lean organisations:

  • produce small batches (sometimes single piece flow) to ensure the impact of operational mistakes will be minimal
  • have visual methods of managing throughput, removing the need for Works Orders and WIP tracking
  • have low inventories to minimise the danger of mistakes in inventory balances
  • have small individual supplier orders (often daily deliveries) reduce the impact of problems with goods or services received
  • ship in smaller quantities reducing the impact of delivery problems

 

 

In a lean environment, the materiality of potential errors is greatly reduced by much smaller batches and inventory; and the risk of significant errors occurring is substantially reduced through visual controls, Standard Work, and use of real-time cell and Value Stream measures.

 

Nonetheless it remains a big step for accountants to take and, as ever, the best way to proceed is one step at a time, learning as you go. Pick your most stable lean process, your most reliable and flexible suppliers, and your most approachable customers, identify the transaction flows, and start eliminating transactions one by one as you become confident in other methods of control.

 

I’d be interested to hear how other people tackle this thorny issue.