Lean Accounting

Lean (go to luv the buzz methodologies that rehash the old with new names) Accounting is the efficient use of technogy that both speeds the process as well as eliminates stovepipes and inefficiencies.

It can be as simple as paying a consultant to create a spreadsheet that links to your financial data and speeds the processing of monthly reporting.

Or the implementation of a new ERP system that enables and empowers uses to access info or to use bar coding or connecting paper to orders so all the info is in one spot.

I've done to some extent all of the above.

Work on getting your closing cycle very short. Too much time is wasted here with no noticeable improvement in the work. Then think of what you have to do and start weeding out those activities that do not help you get those things done. Finally, make sure the rest of the organization understands that you are trying to make do with less resources so you don't get resistance as you begin to drop activities.

I am an advocate of lean accounting to reduce waste and increase productivity.

But I am also an advocate of tracing and assigning resource expenses into costs (e.g., costs of products, services, channels, customers, business sustaining) based on cause-and-effect consumption relationships. This involves activity-based costing (ABC) principles. There can and should be two or more co-existing managerial accounting methods. They serve different purposes for different types of users. Some lean accounting consults are anti-ABC which I interpret as they risk denying managers valuable information to understand sources and level of profit margins.

There is a shift for companies from being product-centric to customer-centric. CFOs are being tasked to report fully-assigned customer profit and loss statements including expenses below the gross product profit margin line (e.g., marketing, selling, customer service) to detect high versus low maintenance customers via non-product “costs-to-serve.” This calculation can only be assign with ABC principles, the method some lean accounting advocates criticize.

Gary … Gary Cokins

Has anyone altered their inventory methodology? Has anyone changed P&L to a fixed vs. variable basis instead of departmentalized? If so I am interested in the pro and con post change?

Much of the above discussion confuses lean accounting (which focuses on supporting organizations who are becoming lean enterprises by implementing some version of the Toyota production system) with generic attempts to make the accounting function less costly. While eliminating non-value added costs is helpful, doing so by itself is not lean accounting.

Lean accounting supports identifying and eliminating the seven wastes or "muda" as part of an overall management philosophy of becoming a lean enterprise. The focus of waste elimination comes from what customers value. This requires both elimination of waste in the accounting functions such as the early examples above as well as dramatic changes in what management accounting does. Your question seems focused on the later.

In this regards, how management accounting is performed changes in many ways. Lean accounting recognizes that traditional management costing sends the wrong signals in the following ways:
1. Traditional standard costing rewards production teams for over producing by giving them "favorable" overhead absorption variances.
2. Traditional budgeting practices are philosophically incompatible as traditional budgeting is based on a financial push approach while lean is based on a customer "pull" approach.
3. Traditional financial statements support a functional view of costs based on cost categories while lean accounting needs a value stream view based on value stream mapping to serving customer needs.
4. The are many other that I do not have time to list....

For more information see the following books from practitioners who have made this transformation:

Who's Counting? A Lean Accounting Business Novel by Jerrold Solomon
Accounting for World Class Operations by Jerrold Solomon and Rosemary Fullerton
Real Numbers: Management Accounting in a Lean Organization by Jean Cunningham and Orest Flume
Practical Lean Accounting by Brian Maskell and Bruce Baggaley

I would also strongly recommend that you attend the Lean Accounting Summit to meet many of these and similar experts and practitioners in person.

I picked up a great quote at the FEI Summit this week about dealing with the Current Reality of our roles as Finance Execs and the ever changing landscape of technology. If something is not your core competency then you need to Eliminate, Automate or Outsource. And if you Automate, make sure you build a team that can Elevate to the new roles after Automation.

We need to be spending time on the things that move the business forward and provide strategic guidance to the CEO and the rest of the Exec Team, everything else is table stakes for being an effective CFO/Sr. Finance Exec at any organization.

I would be careful using other teams lean methodologies to drive lean thinking in your organization. First identify the Key Performance Indicators specific to your company. Then, think continuous improvement; bench mark where you are and then start the journey. For most accounting departments timeliness and accuracy will be one of your KPI's. This means getting close done as soon as possible with no errors. Develop journal entry thresholds $X for Balance Sheet and $X for P&L. Anything under your thresholds should be ignored. Move as much work outside of the close period as possible e.g. reconciliations.

Good luck!