Chapter 1 – Practicing Lean 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.
The way the accounting function works, and the way accountants think, is very transactional. Accounting must process transactions based on specific time-frames: enter invoices daily, pay employees bi-weekly, pay suppliers weekly, close the books each month, send out monthly reports and analyses. These work routines create thinking patterns which focus on getting the work done to meet the deadlines. There is nothing wrong with this thinking, because it creates reliable and respected accounting functions in companies, which is a good thing.
But to grasp lean accounting, the accounting function must expand its thinking beyond transactions, and into practices. Lean accounting is about continuous improvement, which means that the process of striving to improve never ends. Continuous improvement is not transactional, but must be practiced. The old saying “practice makes perfect” is applicable to lean accounting. The more that these new practices are mastered, the better you get at lean accounting.
Lean accounting, simply defined, is the application of lean thinking to all accounting systems and processes – all of the roles and functions we just mentioned. What is unique about lean accounting, compared to other applications of lean thinking, is how it is applied to the dual roles of accounting.
The overriding purpose and goal of lean thinking, in any industry, is to serve customers better. In financial accounting processes, what customers want is common knowledge, such as paying invoices on-time or closing the books quickly. In lean financial accounting, it’s about how to deliver these products and services in the least wasteful way possible. Lean accounting is about paying invoices on-time without having to get last minute approvals. Lean accounting is closing the books on-time without working punishing overtime.
Management accounting, on the other hand, is responsible for providing information (products) and consultation (services) to many internal users. The value that internal users receive from management accounting is the “decision-usefulness” of its products and services. Internal users want management accounting to provide clear insight into both financial and operational performance to make decisions that help the company achieve better results. Management accounting deals with the financial management of the entire company.
Here is a summary of the practices of lean accounting
Foundational practices – These are standard lean practices which must be learned and mastered for any lean transformation.
- Understanding Value. Accounting needs to think differently about who accounting’s customers are, what their needs are, and how accounting meets those needs.
- Identifying Waste. Accounting needs to think differently about how it performs its work. What activities are really helping accounting serve its customers? What activities get in the way or slow down serving customer? Accounting may have gotten so used to these activities that they consider them to be “normal”.
- Lean Measurement. Accounting needs to think differently about how to measure progress and results in a lean company, beyond the monthly financial statements.
- Using PDCA. Accounting needs to think differently about managing and improving day-to-day work and how to begin eliminating all the activities that don’t serve its customers.
Applied practices. This is how the foundational practices are used to transform an accounting function into a lean accounting function.
- Improving Accounting. Accounting needs to think differently in order to improve accounting processes. Accounting needs to look at its processes from a lean point of view, using all of the foundational practices, rather than simply from a technical point of view. Accounting will also have to collaborate cross-functionally, to drive long-term sustained improvement.
- Lean Financial Management. Accounting needs to think differently about the information and analyses it provides to internal users in a lean company, again using the foundational practices to inform this change in thinking. Accounting needs to lead in terms of aligning information and analytical practices to support a lean strategy.
Sustaining practices. This is how lean accounting can provide leadership for a company’s lean transformation.
- Lean Financial Leadership. Accounting, and companies, both need to think differently about the role that accounting plays in a lean company, with regards to supporting and sustaining improvements, not just in accounting, but across the entire company, to realize the financial benefits from its lean strategy.