The primary benefit of lean accounting is improved financial management practices. Lean accounting creates standard work for organizational financial analysis through the employment of three general principles:
- The financial impact of any decision is based on the impact on total value stream profitability. Value streams are the profit centers of a lean enterprise and all financial analysis should be performed at this level. The dynamic cause and effect relationships between value stream operating performance, capacity and profitability are real and can be modeled financially.
- Using cost allocations is costing you money. Most cost allocations have a level of subjectivity in them, such as product costs in manufacturing companies. Other cost allocations are an attempt to make a fixed cost variable by linking it to units or services produced. It is critical to eliminate cost allocations and understand the relationships between operating performance, capacity and costs using problem-solving practices. This is done by creating an environment in which true root cause analysis can be conducted on cost behavior and operational solutions can be put in place to achieve the desired cost behavior.
- Eliminating waste creates time. Time that was spent on waste is now available to create value (often described as “creating capacity”). Lean accounting incorporates this into financial management practices: the creation of time has no financial impact, but how the business uses that time does. A lean business can use this newly-created capacity to sell more products or services, and the financial impact will be increasing revenue without corresponding increases in costs.
To understand how lean accounting transforms your organization’s approach to process and profit, don’t just take our word for it. Listen to first hand perspectives and insights how lean accounting is benefitting their operations.