Lean Accounting is a Misnomer

I have been working with Lean Accounting for many years. I have written books about Lean Accounting (link to books ). I have worked with companies large and small to introduce Lean Accounting into their businesses world wide. But the phrase “Lean Accounting” is a misnomer.

Lean Accounting is not about accounting!!! It about driving lean improvement. Achieving better results. Having better information and better decisions. And freeing up the time of people throughout the business so that lean improvement speeds up and the focus is more strategic than tactical. Everybody wins.

The term “Lean Accounting” makes it sound like it’s about the accounting processes, and is the concern of the company’s accountants. Nothing can be further from the truth. It is true that one aspect of Lean Accounting is to eliminate waste from the accounting processes themselves, and this is sometimes a good place to start. But Lean Accounting is primarily about:

  • controlling and measuring the business processes
  • using operational & financial information to make better decisions
  • empowering everybody to maximize the benefits of lean improvement
  • maximizing growth and profitability within the company’s strategies

If you look from a negative viewpoint, Lean Accounting is about replacing traditional accounting, control, and measurements with methods & processes that drive lean forwards.

Lean Accounting is About Operational Measurements

In many companies accountants are called Controllers. Their primary job is to control the financial outcomes of the business; and an important job it is. But how do you control the financial outcomes? You control the financial outcomes by effectively controlling and improving the operational processes. Sales operations, design operations, purchasing operations, production operations, administrative operations.

Lean Accounting focuses on timely, visual control of every process in each value stream. These control processes are typically operational measures used by the people working in the process. This is how true financial control is achieved. If the processes work well, the financial results will be good. If the processes are improved, the financial outcomes improve.

Lean Accounting is About Empowering People

Most companies (in my experience) do their measurement and improvement in ways that demotivated and alienate most of their employees. The measurements are tracked by complex, transactional computer systems that are designed to measure people’s efficiency. The measurements are usually reported after the fact and they do not provide useable information for the employees. They are more focused on tracking the people than enabling them to improve their processes.

The people working in the process have little involvement in improving their own work. The improvements are selected and implemented by “experts” like managers, CI specialists, or people with colored belts. This not only alienates the people but also ignores their skills and knowledge.

Lean Accounting builds continuous improvement into every process at every level, largely done by the people who do the real work.  This requires eliminating measurements that drive a anti-lean behaviors like people’s efficiency, machine utilization, overhead absorption, etc.. These measurements are replaced by timely (often hourly) tracking by the people in the process. The teams are also expected to initiate local (just-do-it) improvements to their own processes.

This lean methods create better results, more improvement, faster improvement, and improvement that is sustained into the future. Why is this achieved? Because the people are empowered and required to perfect and improve their own processes. In lean parlance this is called “Respect for People”.

Lean Accounting is About Making Lean-Focused Decisions

Lean Accounting provides timely, simple information that everyone can understand and use. The information is presented in different ways according to need. If you give people information that is relevant and understandable, they will be able to make much better decisions, leading to better operational, financial, and  strategic results.

For example, a typical company will require their sales people to only take orders that exceed a minimum “margin” of profit. If the price is $200 and the standard cost is $150, then the sales person will assume that the company is gaining $50 on each sale. What is the problem with this?

  1. The sales person does not know much about the capacity available within the value steam making these products. If there is no capacity available, then the cost of the product will likely be higher than $150. The delivery of the product might be delivered to the customer late owing to capacity problems.
  2. The sales person does not know much about the capacity available within the value steam making these products. If there is no capacity available, then the cost of the product will likely be higher than $150. The delivery of the product might be delivered to the customer late owing to capacity problems.
  3. The sales person will have no information about the value streams’ operational issues that are related to sales of these products; the operational performance, product mix, production volume, materials availability, etc.. All he/she sees is is the price and the profit.
  4. The sales person may turn down business because the customer is not prepared to pay $200 for the item, when the sale might be highly profitable for the company. Why? Because the profit on the product is NOT $50. The $150 standard cost consists of materials costs, labor costs, and overhead costs. These costs are largely fixed. The materials costs are real because we have to buy the materials, but the labor and overhead costs will be paid each week or month irrespective of this particular order.

Lean Accounting provides decision-making tools that give real information about how much money will go into the bank for each of the alternative actions being considered. Lean Accounting also requires standard, visual, cooperative methods for the more significant decisions. When you put real information, cooperative actions, and standard decision-making processes, the results are better growth, profits and cash-flow.

Similarly, decisions related to capital equipment, product development, benefits of lean improvement, make or buy, and other routine decisions use standard, cash-in-the-bank information that everybody can immediately understand and use.

Lean Accounting is a Lot Less Work for the Financial People

Lean Accounting does not require the complex, transactional, and wasteful accounting, control, and measurement systems. The operational information is largely gathered and reported by the people in the processes or from simple IT systems that are required for other purposes. This leads to huge reductions in computer transactions, and a lot less use of large, systems-based  reporting. This in turn leads to fewer meetings, reconciliations, and wasted time giving “reasons” for the results.

The financial reporting is done at the value stream level, not individual products, work-orders, work-centers, or people. The inherent simplicity and timeliness of the reporting enables the value stream teams to control their business better, identify and resolve problems more quickly, and make valid decisions that move the company forward and achieve more lean improvement with less work.

In addition to this, the work required by the controllers and other accountants is greatly reduced. In the companies we work with there have been workload reductions of 20-50% of the people’s time. This is classic lean thinking. Eliminate waste, free-up people’s time so that they can engage in more lean improvement and waste reduction. They can also focus on more strategic activities because the day-to-day processes are under control and systematically improving. These strategic activities will usually drive growth, market share, and profitability.

Conclusion

Lean Accounting is not about accounting!!! It about driving lean improvement. Achieving better results through better information and better decisions. And it frees up the time of people throughout the business so that lean improvement speeds up and the focus is more strategic than tactical. Everybody wins.