Accounting & Control
What is Lean Accounting?
Traditional "standard cost" accounting was developed for mass production where profitability is maximised when labour and machine utilisation are maximised. This paradigm no longer applies in many modern manufacturing settings. In the modern multi-product, high variability environment, profitability is maximised when the rate of "flow" through the production process is maximised. In such highly flexible environments, organisations are now applying the principles of "lean management". Standard costing is not appropriate in this setting and does not support effective decision making. For organisations making the transition to lean management "Lean Accounting" is essential.
In a "lean" environment, the Value Stream Manager has profit and loss responsibility. This often requires significant restructuring in recording and reporting financial information, to achieve the following objectives:
- Clear and relevant Value Stream Profit and Loss reports;
- Development of Value Stream Managers to understand financial reports;
- A co-ordinated set of measures and indicators for Value Stream Managers;
- Cell and Value Stream measures that link to corporate strategy and management reporting;
- Phased reduction of financial transactions including inventory, supplier payments, work orders, purchase orders and so on;
- Application of lean principles to the finance function to reduce complexity and waste;
- Involvement of Value Stream Managers in the financial planning and budgeting processes;
- Training of Value Stream Managers, and others, in financial decision making tools;
- Application of advanced lean accounting tools at the Value Stream level, including target costing and Sales, Operational and Financial Planning.
- Highlighting the financial benefits of lean improvement
Together these elements make up lean accounting.
"Traditional" accounting techniques often encourage inefficient practices, such as building inventory, and may lead to poor management decisions (using standard costs). In addition, traditional accounting reports, such as variance analyses, are too complicated for operational employees to understand easily and are often too late to be useful in shopfloor decision making.
Lean accounting, by contrast, is very much focused on simple visual shopfloor measures for instant decision making; coupled with management accounting tools for longer term planning. Thus, lean accounting is an integral part of the introduction of lean management. At the same time it is a vital tool for strategic decision making. In many ways, lean accounting provides the tools for the strategic management of lean.
The Four Values of Lean Accounting
Lean accounting is driven by four key values:
- It must provide accurate, timely and understandable information to motivate the lean transformation throughout the organisation, and for decision-making leading to increased customer value, growth, profitability and cash flow.
- It must use lean tools to eliminate waste from the accounting processes, while maintaining thorough financial control.
- It must comply with generally accepted accounting principles, external reporting regulations, and internal reporting requirements.
- It must support lean culture by providing information that is relevant and actionable, and empowering continuous improvement at every level of the organisation.
Typical Elements of a Lean Accounting Project
Key elements of a lean accounting project may include:
- Identifying the Value Streams;
- Establishing lean performance indicators and management information;
- Balanced scorecard approaches to link strategic objectives with Value Stream measures;
- Implementing visual performance reporting systems;
- Developing Value Stream Costing;
- Cost analyses to support the lean transformation;
- Sales, Operational and Financial Planning;
- Establishing Target Costing and Opportunity Costing processes;
- Applying lean practices in the finance and support functions;
- Process mapping in the finance and support functions;
- Developing finance and support staff as facilitators of the lean transformation;
- Creating a culture of continuous improvement.
The first step will usually be a diagnostic review of your organisation’s current position in terms of lean accounting and lean management.
Ideas into Action works, in Europe, as part of BMA Inc, the world’s leading lean accounting practice – www.maskell.com and www.bmaeurope.com
As well as expertise in lean accounting we provide related services in lean leadership (transforming the culture and behaviours of the organisation and its leaders to fit the lean philosophy) and lean facilitation (identifying Value Streams, running kaizen events, and establishing a culture of true continuous improvement) to clients in all sectors.
Please contact us to discuss lean accounting further.