Chapter 2 – Lean Thinking for Accounting
The Practicing Lean Accounting Blog Series are excerpts from a new book, Practicing Lean Accounting by Nick Katko and Mike De Luca. For updates on publication and purchase, please sign up for the BMA mailing list at www.maskell.com.
Lean thinking for accounting does not require you to become a lean expert. But it does require you to understand lean from different perspectives, all of which have an impact on both a company and a company’s accounting function.
There are five perspectives of lean thinking which will impact a company’s accounting function:
- Financial performance
- Operating practices
- Management practices
Let’s look at each perspective in detail, and examine their relevance to lean accounting.
Lean as a Strategy
Lean thinking forms the foundation for a comprehensive business strategy. The overall goal of a lean strategy is to strive to serve customers better. Because a lean strategy is principle-based, it takes a long-term view of the business rather than a short-term view. Lean thinking principles also align the entire organization with the strategy. Because there is one overarching, never-changing goal – serving customers better – each business function learns and understands its role in helping the company to achieve that goal.
A lean strategy focuses on people-centered learning and improvement. Successful lean transformations focus on employees identifying the right problems, and then solving those problems using the scientific method. Employees are constantly learning through the use of new practices, tools and methods that develop and deepen their skills. The result of this learning is improvement. Learning and improvement take time, which contributes to the long-term view of a lean strategy.
Financial impact of a lean strategy
Long-term financial improvement is an outcome of a lean strategy. Lean is not a short-term cost-cutting methodology. Although some companies have better financial results as an early by-product of their lean strategy, there is usually a lag between operational improvement and sustained financial improvement. This lag occurs because learning and improvement take time.
The primary outcome of most continuous improvement efforts is creating time, or as we shall call it in this book, capacity.
The economics of lean will impact a company’s income statement and balance sheet. Serving customers better can possibly create a competitive advantage for a company, which will drive sales growth. From a cost perspective, continuous improvement becomes the primary method to manage costs, either by avoiding cost increases or reducing actual costs. On the balance sheet, lean can make a balance sheet stronger by increasing cash, decreasing inventory, and reducing debt.
Operational impact of a Lean strategy
In Lean accounting, the operational impact of a lean strategy will impact accounting in two ways. First, to achieve sustained improvement in accounting processes, those processes must be managed and measured differently on a daily basis. Second, lean operating practices and measurement in value streams can be used by accounting to gain new insight into the true cause-effect relationships between business operating performance and financial performance. These new insights can be used to leverage sustained financial success.
Managerial impact of a lean strategy
Lean organizations recognize that customer value is not created vertically, but horizontally through an organization, in value streams. A value stream is simply all of the actions, completed in the proper sequence, at the proper time, necessary to create value for a customer.
Value streams have a significant impact in lean accounting, from both a financial perspective and an organizational perspective. From a financial perspective, value streams are the profit centers of a lean company – value streams generate revenue. And as profit centers, they also have costs. In lean accounting, value stream teams are accounting’s customers, requiring relevant and reliable information to optimize value stream performance and improvement.
Accounting will gain new and valuable visibility into the links between overall financial performance and value stream performance by partnering with value stream teams in practicing lean financial management.
Impact of Lean Strategy on Company Culture
The foundation of a lean culture is respect for people. Respect for people means lean companies “walk the talk”: they proactively create a psychologically safe, but challenging, environment for their employees.
When modeling respect for people, an organization continually looks at what is getting in the way of employees being successful in their daily processes, and collaborates with them to identify and eliminate those barriers. In this way, an organization ensures the highest and best use of employees’ skills and capabilities in providing products and services to its customers. Respect for people creates empowerment and engagement at all levels of the organization – an “army of problem solvers” working together to deliver customer value.
Respect for people is also about challenging employees to new levels of service. For example, accounting’s traditional focus is on developing the technical skills of the accounting team. In Lean accounting, the goals are to balance the team’s technical expertise with focus on creating ways to better serve accounting’s customers.
A Lean culture impacts lean accounting in these ways:
- Learning – accountants are “doers” by nature, focusing on getting their work done. In Lean accounting, time must be set aside for learning both in daily work and periodic improvement activities.
- Growth – improving technical competence in accounting is the conventional approach to accounting employee growth. In Lean accounting, that is still important, but must be balanced with developing a deeper understanding of the relationships between people, process, and performance in a Lean company.
- Investment – in Lean accounting, the accounting function is not considered an “island of isolated experts.” Accounting must invest time, to incorporate Lean accounting practices into all aspects of their work.
- Collaboration – Improving accounting will require collaboration with the cross-functional business processes of which accounting is a part. Lean financial management will require teamwork between accounting and operations.
The accounting function in any company is much more than doing bookkeeping. Likewise, an accounting team is much more than bean counters. Accounting validates the financial impact of a company’s strategy. Accounting reports and analyzes financial performance at all levels of the company, which has a great deal of influence upon how a company is managed. Accounting influences company culture by serving as a company’s independent, objective, trusted advisors.
For these reasons, lean thinking for accounting requires understanding lean from different perspectives, in order to develop lean accounting practices and transform the accounting function from primarily transaction processing to lean financial leadership.