The Lean CFO Blog Series #1

The Lean CFO

When I first became a CFO I was amazed at the respect my opinion carried within the company, simply because I was the CFO. I quickly realized that the position of CFO is one of independent, objective financial analysis. People rely on the word of the CFO to validate business decisions, ideas & strategies.

I believe it is vital for the CFO to totally embrace lean for it to be a successful business strategy for a company. You don’t need to be an expert in creating flow or continuous improvement, but you do need to become an expert on the financial impact of a proper implementation of lean practices, tools & methods.

This requires a good understanding of the relationships between numbers, which is what you are very good at doing. But the lean company needs new numbers to measure, which you may not be aware of unless you have worked in a successful lean company.

Most of these new numbers don’t have dollar signs in front of them, so you must use your analytical skills to understand the relationships between these new numbers and financial success

How and why does Lean make a company money? How does a company know how well lean is working? These are questions that often nag executives who look to the CFO for answers. As the CFO, if you focus your efforts on changing 8 paradigms in your business, you will become the Lean CFO and be able to answer these questions.

Over the next few weeks, we will begin looking at these 8 paradigms.  Here are the first two.

The Economics of Lean

Ask people to explain what “Lean” means and you will get many different answers. Lean is one thing – a money making business strategy.  As with any strategy, its success is dependent on the execution of that strategy.

The overall objective of lean is to create more value for a company’s customers, which will result in increasing demand.  Increase demand and revenues & profits will increase. This is accomplished by internally focusing on eliminating waste – which is everything that stands in the way of creating value.

A key to a successful lean strategy is frequent measuring of business processes to determine if value is being created. Unfortunately traditional financial analysis, such as the month-end income statement, actual to budget reports and variances don’t do a good job of measuring how well lean is working. It’s the responsibility of the Lean CFO to change accounting & measurement systems within the company to focus on the real economic drivers of financial success in a lean company.

It’s about Spending, not Costs

Understanding costs is an important part of explaining a company’s financial results. But costs are historical numbers. Costs can be analyzed & understood but nothing can be done to change those costs.

Lean companies recognize that the solution to any problem is to identify its root cause and then implement a solution, which removes the root cause.  This approach to problem solving needs to be applied to managing costs.

Lean companies recognize that the primary root cause of costs is based on spending decisions.  The Lean CFO needs to change the emphasis of financial analysis away from a few accounts analyzing costs to the entire company constantly managing spending. This is accomplished by giving people in the company what they really need – information on how much they are spending. Combining spending reports with lean problem solving practices will lead to lower costs.