Lean Accounting: Alignment of Financial Statements

Lean Accounting: Alignment of Financial Statements

External financial statements must comply with financial accounting regulations, which often times results in a disconnect between operational activities and financial results. Analysis of financial results is a necessary exercise to provide more detailed explanation to the readers of the financial statements  but does not provide much insight into how to change the future, which is what a lean strategy wants to accomplish.

To create alignment between value stream operations and financial results, it is necessary to create value stream income statements for internal use. Value stream income statements provide better insight into the root causes of cost behavior and can be used to create more predictive financial analysis when analyzing business decisions.

The “lean logic” behind a value stream income statement is based on two lean principles:

Value Streams – the definition of a value stream is the sequence of activities from order receipt to shipment that are necessary to create the product or service and deliver either the customer. Lean companies organize, manage & control by value stream. The lean accounting definition of a value stream is it is a profit center. Therefore, internally a company will  want to look at each value stream’s profitability, since each value stream can be considered a separate line of business.

Flow – the definition of flow is to move all orders as fast as possible through a value stream from receipt to shipment by employing lean practices and eliminating waste.  From a lean accounting viewpoint, the reducing the rate of flow maximizes value stream profit. The faster the flow, the more revenue will grow. Eliminating wastes controls total value stream costs. Improving flow impacts both value stream revenue and costs.

A value stream income statement is simply a different way to present the financial accounting information in a company’s general ledger that makes it relevant, timely and actionable to value streams.

Value stream income statements do not attempt assign every cost to a value stream, only the actual costs the value stream can control. Cost allocations or rate-based costs are avoided. Value stream income statements assign costs where the spending decision made or actual operating activity occurs. Value stream income statements avoid using any sort of expense allocation system or rate-based systems.

The value stream organization is the actual people, machines & resources that work in each value stream. Using value stream maps, it should not be difficult for to assign the actual direct costs to each value stream, such a labor, facility and machine costs. Actual value stream material cost is the cost of material consumed during a period, which may not match exactly with the products sold.

These principles of a value stream income statement create alignment between the flow of orders through a value stream, the flow of information through a value stream and the flow of money through a value stream. Improving the flow of money through a value stream will improve the reporting financial results over time.