Q 473. Many organizations claim that lot of effort is being put on lean improvements, however the numbers don't reflect the same. How could Lean Accounting practices help organizations track the lean efforts and their benefits? Elaborate its benefits over traditional accounting practices using an example.   

 

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Lean Accounting, refers to the use of Lean thinking in financial practices, followed by a company. Lean Accounting is centred around the idea of improvement in value delivered to clients and waste elimination targeted through better workflow & material management. Core outcome of lean accounting includes improvement in sales, cost reduction, growth in company business and improvement in company’s bottom line operations.

Lean Accounting may be implemented through adaption of key five ideas, as given hereunder:

1) defining value, 2) mapping the value stream, 3) creating flow, 4) using a pull system, and 5) pursuing perfection

1.       Defining Value: Value is benefits associates with product/service that the customer is inclined/willing to pay for. Ensuring that the value is defined as, “the exact benefit”, catering to a defined customer need, is important to establishing value of product/product group. The use of primary market research techniques such as Face-to Face Interview, surveys, customer-polls help in establishing value of product/service for the customer.  The qualitative and quantitative techniques help in estimating the product mix including product, product usage, price and product availability in niche market.

2.       Mapping the value stream: Value stream is sum total of activities that add value for the customer from initiation step to final realization of value by customer. The activities that do not add value to customer are defined as waste. Waste may be further differentiated as

a.       non-valued added but necessary: should be reduced as far as possible.

b.      non-value & unnecessary: should be eliminated.

Different steps and factors in production add to the cost of product and any increment in these register an impact on value stream profit and loss statement in lean accounting.

 

Cause and Effect Diagram: “Value Stream mapping in Lean Accounting”

c.       Creating flow: Generating a flow in production is necessary to streamline production. The use of sequential steps in production, realignment of activities in production, bifurcation of production space into cross-functional departments, generates steady flow in production. The workload levelling by reducing Mura (unevenness) in production (production of intermediate goods at constant rate), mitigates fluctuations in consumer demand & generated flow in production.

d.      Using a pull system: A pull based system is established by maintaining a minimal inventory of stocks of raw material, goods, work in progress items required for production. Thus, Just in Time systems, thus generated, ensure that the product/product group is manufactured at the right time and, in the specified quantities, as defined in customer order. The over-production of goods is eliminated as a consequence of maintaining a minimal inventory of stocks of raw material, goods, work in progress items.

e.       Pursuing perfection: Pursing perfection ensures that company is a learning organization and finds ways to implement little improvements every day, in its operations.

 

Lean Accounting

A Lean Accounting System is believed to initiate changes in Financial Management, Financial Leadership, Accounting methods- variables, target, process and stakeholders, along with use of Shewhart cycle or Deming Cycle or PDCA cycle to improve value delivered to customer sustained through waste reduction. With Lean Accounting, the accounting process is shared with Accountants and Value Stream professionals instead of the controllers. The accounting charts are now differently parameterized from standard cost accounting variables-- product cost, standard cost & variance analysis, to value stream profit and loss. The use of cause-and-effect diagram enables prediction of the likely impact of changes in production variable, to value stream of the production process.

Anchoring Training and Education about value stream for mentoring employees, assessment about current and present state of industrial production, pilot studies to design value stream improvements, & use of PDCA (acronym for Plan, DO, Check, Act or Deming Cycle) in continuous improvement measures, redefines baseline effectiveness, in the entire accounting process.

In PDCA cycle, the alphabet P stands for plan, alphabet D stands for DO, alphabet C stands for Check and alphabet A stands for Act; can be utilized to stream-line the process through examination for weakness and threats, that retard the production. Daily hurdles, visual boards, status checks, Team problem-solving meetings are planned and executed to implement continuous improvement through Shewhart Cycle. Quick wins, are established, that list non-value added and unnecessary activities, which when stopped have no impact on production. Improvement ideas in accounting domain are tested for one to two weeks, before incremental plan is devised in short daily meeting, through continuous monitoring and analysis of the functional data, related to devised improvement idea. The Process improvements are planned in advance to reach specific improvement in performance metrics over a period of time. A process improvement may be discussed and initiated over a period of time to tackle a significant, sudden disruption in process performance. A hypothesis is developed and tested around production and operational parameters, to accept or reject the contribution of baseline performance metrics, towards waste elimination & operational excellence. The results are further scrutinized by experts and organization higher management, to initiate a cycle of activities and schedules, are that repeated periodically in-phase, to improve effectiveness, in industrial production.

An existing lean set up in an organization, is qualifying criteria to proceed ahead with Lean Accounting. Next, a provision for a lean budget or hoshin kanri, is pre-requisite to lean accounting. A continuous improvement focus through Kaizen practices, is essential to identify the performance parameters to be monitored, and, tracked through lean accounting. The performance parameters used in lean accounting are represented with the use of box scores. The box scores are tools used for short term decision making, basis the assumption that, the company costs and company consumption is fixed. In medium-term, decision-making box score are developed, assuming that company costs and company’s cost are not fixed. The use of box score enables value stream to publish a ‘weekly P&L’ in terms of actual costs, actual production units. Additionally, it is possible to plot real cost drivers of conversion margin and conversion cost, which is not possible in case of traditional accounting. The box scores are used to shows the performance of the financial results, operational results, value streams and the capacity usage.

 

Financials:	Capacity:	Operational metrics:	Duration:
Revenue	Available capacity	Average cost	3 days SCO
Return on sales	Productive capacity	Dock to dock days	10 days RUN
Value stream profit	Non productive capacity	Sales per person	3 days Evaluate
Total costs		Stock outs
Material costs		Scrap
Employee costs
Machine costs
Other costs
Utilities
Facility
Inventory value
Cash flow

 

Lean Accounting Metrices

Box Scores

Performance Measure	6/2	6/9	6/16	6/23	6/30	Goal
Operational
Units Per Person	15.10	15.63	14.7	15.91	15.90	20.7
On-Time-Shipment, %	100	100	100	100	100	100
Average Cost, $	343	337	362	338	337	262
Capacity
Productive, %	29	29	29	28	28	40
Non-Productive, %	54	54	54	52	52	33
Available, %	17	17	17	20	20	27
Financial
Revenue, $	471	485	456	490	488	576
Material Cost, $	123	125	129	132	135	139
Fixed Costs, $	120	120	118	116	116	108
Return On Sales, $	38	39	35	38	33	48

 

 

 

 

Types of Box Scores

The data for operational performance in box score is estimated  using value stream visual management boards. The data for the financial performance information is derived from value stream P&Ls and supporting schedules. The data on capacity is developed as link between operational and financial performance. With implementation of lean initiatives, an improvement in capacity is registered, as non productive capacity is aligned as available capacity.

Further the individual estimate of direct cost factors-- labour, material and other factors associated with the industrial production of product/product group. Fixed factors of production-- equipment tool and machinery, insurance, rent, taxes are calibrated to the estimate to reach total costs. The total cost estimated for production of product/product group is then divided by by the number of units to arrive at unit cost for the product/product group in industrial production. Thus a reliable estimate of Direct Cost, Occupancy Cost and Contribution margin and box scores for performance metrices for each product/product group is achieved, that helps in informed decision making, about the product.

Lean Accounting  in nutshell                                          

Actionable                                                                                       Targeted                   Impact                     Level	Create Awareness	Build Desire	Demonstrate	Sustain System
Activities	Training and Education	Assess Current State. Define Future State.	Conduct Pilots	Standardize work.  Practice Routines. P.D.C.A.
Stakeholders	Senior Leaders Finance and Accounting Functional Managers		Core Transition Team	Lean Financial Coaches and Entire Organization
Outcomes	Training onsite or online	Assessment and Design Services	Onsite Consulting	Blended consulting on-site/online

 

Traditional Accounting & Lean Accounting

Traditional accounting practice differs from Lean Accounting on tenants such as inventory management, use of simpler accounting variables, generation of simplified accounting reports, incorporation of value stream & continuous improvement rather than product as accounting objective. Lean accounting encompasses Lean-focused performance measurements to generate correct understanding of the financial impact of lean change. The lean accounting relies up-on direct costing of the value streams & does not support the use of traditional accounting variables such as standard costing, activity-based costing, variance reporting, cost-plus pricing & complex transactional control systems. This in-effect eliminates budgeting through monthly sales, operations and financial planning processes.

Lean Accounting companies are expected to have lesser stock items in inventory, to achieve Just-In-Time specification in production, with specific mention in balance sheets as the total value of all inventory. A noted difference between traditional accounting and lean accounting is compliance to Accounting Standards General Acceptable Accounting Practices GAAP, an established accounting standard in United Kingdom. Lean Accounting, as a practice, is not compliant to GAAP requirements & Enterprise Resource Planning ERP software, that make it less prevalent, at many organizations. Further legal provisions may mandate maintaining accounting books, in both the traditional book-keeping and lean accounting formats.

 

                                      

 

 

 

 

 

 

 

Lean Accounting

The very purpose of accounting in any organization is to collect, analyze and draw a conclusion to make a decision on how to manage a business in good shape and Lean accounting is used to streamlining the process to maximize the profits.

Lean Practices are adopted to optimize the accounting process and are used to eliminate non value added activities as well as waste in the process.

There is always an argument between Lean accounting and conventional accounting practices keeping customer values in mind. A Lean approach to company accounting is a result of continuous improvement, just like all things Lean.

 

Lean Accounting works based on 03 activities:

 

Components of Lean Accounting:

Example of Lean Accounting as follows:

Inventory Valuation can be done either of the methods (Conventional vs Lean Accounting).

Inventory Valuation through the conventional method is being done based on the standard cost which is assigned to each item in inventory whereas Lean accounting is mainly focused with the total value of inventory on the balance sheet instead Standard cost in conventional accounting.

Also lean accounting companies have less pile up of inventory resultant maximize profits margin.

Lean Vs Traditional Accounting

Lean Accounting - Financial Statement

 

Pros and Cons of Lean Accounting:

 

SN	Pros	Cons
1	Cost Control – Minimize Waste and Increase profits	Slow Implementation as done in small steps
2	Streamlining the Value Added Process	Inventory Issue while meeting high demand
3	More and More with Less and Less	High Cost of Implementation
4	Inculcate Lean culture	Difficult to switch from traditional accounting
5	Best Practices in Financial management
6	Detailed and hands on knowledge of business costs and financial decisions

Lean accounting means aligning your lean practices with a value which will help you quantify your success. It not only focuses on cost reduction and control which was followed traditionally but also focused on company performance and overall position. Lean accounting measures performance rather than focusing on transaction-based cost analysis, reduction and control. A box score is a simple one page summary of the key performance metrics for each value stream. Box scores can be created and configurable easily and  simple and easy to understand which requires very low maintenance as well.

 

Benefits of Lean Accounting

• Lean accounting will continue to focus on eliminating waste which is one of the core Lean principles. However along with this it will also assign value like increase profitability, cash flow or enhanced customer value
• Lean accounting helps with real time information like identifying prices, highest selling items, comparing revenue with expenses so that the team can immediately understand the consequences
• Empowers people with better decision-making skills and promotes a culture of Lean and continuous improvements.
• Lean Accounting principles are in line with GAAP and external reporting and regulation which makes it a more reliable practice.

Lean accounting is streamlining accounting processes within an organization to achieve maximum productivity, service, quality and profit.

 

The purpose of Lean accounting is to collect, examine and communicate the entity performance, position, and cash reserves - all types of information utilized to make decisions on how to manage the business well.

 

Lean accounting concentrates on two goals: 1) converting financial statements into “easy and plain English” and 2) eliminating waste by captivating the focus off the minutiae.

 

The advantages of lean accounting:

• Less waste in the financial control practices, removal of cost allocation and more hands-on knowledge of business costs
• A better awareness of how the financial decisions influence the value stream and the client and vice versa: broader admission to business growth opportunities through the fast value-finance connection

Mentioning of the organizations that initiated the implementation of Lean accounting include Toyota, Intel, Ford and Textron etc.

 

Lean accounting vs Traditional accounting:

 

Lean accounting will differ significantly from traditional accounting statements. Lean accounting recommends new approach of looking at numbers and calculating the health of a business.

 

Traditional accounting is time consuming and transaction-driven, estimate cost of goods sold, standard cost accounting uses complex variance accounts such as purchase price variances, labor efficiency variances and overhead spending variances.

 

Whereas lean accounting is relatively simple and flexible. Instead of lumping costs into overhead, lean accounting methods trace costs directly to the manufacturer’s cost of goods sold, typically dividing them into 4 value stream groups:

1.       Materials cost

2.       Procurement cost

3.       Conversion cost (factory wages, equipment depreciation and repairs and scrap)

4.       Occupancy cost

 

Box score reports are frequently used in lean accounting to supplement profit and loss statements. Traditional accounting neglect such as scrap rates, inventory turns, on-time delivery rates, customer satisfaction scores and sales per employee.

 

Traditional accounting frequently does not accurately capture the efficiencies of lean management techniques, where as lean accounting is designed to permit businesses to report financial data as value streams rather than the cost per unit with traditional cost accounting systems. Value streams permits businesses to see and report all the benefits of their modern lean management methods.

 

Benefits of Lean accounting over Traditional accounting:

 

Benefits of applying Lean Accounting right from streamlining the financial operations, increasing the level of understanding of financials and the impact throughout the value streams creating the ways of measuring the performance of financial statements  to support decision-making and improving operational efficiency.

 

Lean accounting is mainly “real-time, generates cost reports on a daily basis rather than historic reports.

 

Lean accounting distinguishes available capacity as an asset not a liability. Traditional cost accounting identifies idle production lines.

 

Traditional accounting compares the actual performance with set of standard variances by design. Lean accounting to support the real financial data with the operating performance.

 

Lean accounting is also associated with the strategic goals of the business and provides improvement insights.

 

Best practices:

 

Lean accounting best practices help to reduce organizational and transactional costs. Most noticeable practices are listed below.

 

•             Mapping the value streams

•             Finding of cost and revenue cycles

•             Applying “box score” reports defining operational and financial results

•             Introducing “certified” vendors to decrease transactional costs

•             Utilizing yearly contracts that cover all expected purchases to reduce the amount of POs

•             Applying Electronic Funds Transfers (EFT) and electronic invoices

 

Example: Let’s have a look at the traditional accounting statement and Lean accounting statement.

 

Traditional accounting statement like the below, very often we will see notes and annexures explaining how costing calculations are distributed and how the variance is established. This limits the number of people that can understand it.

 

 

Lean accounting statement changes this approach and making the report easier to grasp:

 

 

               Lean accounting is the financial reporting practice in organizations that involves Lean thinking: focusing on value creation and on waste elimination through better workflow and material management. Lean accounting aims at aligning financial management with your company’s Lean strategies. 

 

Why use Lean accounting?
               The traditional accounting practices makes accurate cost measurement challenging. Of-late, the focus of cost accounting shifted from information for planning to information for control. Hence the businesses turned away from cost tracking to cost allocation. Lean Accounting is applicable to any company, in any industry, that deploys Lean strategy. Lean accounting helps in streamlining accounting processes within a company to maximize productivity, service, quality, and profit.

 

Lean Accounting can be defined this way:

• Lean Financial Accounting – means applying lean practices to accounting processes
• A Lean Management Accounting System - supports any business that is Lean

Lean Financial Accounting –> Lean for Accounting
Lean Management Accounting -> Accounting for Lean

 

Characteristics of Lean Accounting:
1.    Value Stream oriented thinking
2.    On demand accounting
3.    Delivering what the customer’s value
4.    Process execution before accounting

 

Differences between Traditional Accounting and Lean Accounting:

 

Lean accounting uses a number of concepts and tools to maximize efficiency and profit. Lean accounting focuses on looking at data differently than traditional accounting. One main approach to lean accounting is how the inventory is stored and accounted for. A lean company will generally have less inventory at any given time to maximize short-term profits. Inventory will be captured on the balance sheet as the total value of all inventory, rather than allocating the value based on individual products.

 

Examples :

 

 

Advantages of lean accounting:
1.    Cost control: lean aims at increasing profits and decreasing wasted costs.
2.    Improved company culture: one of the main advantage of lean accounting is a lean culture, which will encourage teamwork, communication, and improved processes.
3.    Less ‘waste’: lean helps to decrease ‘waste’ such as defects, outdated tools, unnecessary costs, and slow processes.
4.    Financial management practices: lean accounting involves management decisions based on total value stream profits rather than cost allocation.

Disadvantages of lean accounting:
1.    Difficult to switch from traditional accounting: Switching to lean accounting will involve lots of new processes which makes it difficult and it slows down the process
2.    High cost of implementation: Even though lean accounting is all about maximizing profits, the cost of implementing lean accounting is high and complex. It has to be done in small steps over a long period of time.
3.    Inventory problems: One approach to lean accounting is keeping low amounts of stock to increase short-term profits. This is helpful in a stable market condition but may prove adverse at changing market conditions.
4.    Having to do 2 sets of financial reports: lean accounting reports cannot replace standard reports, as per countries legal requirements. The accounting department may have to run 2 different sets of reports if lean accounting is implemented. The accounting software will only be able to create standard financial reports.

Lean Accounting can help an organization quantify their improvement efforts. This fact has been highlighted by the example quoted by Anshul Vaidya. Hence his answer has been selected as the best!!

There are a couple of more answers that compare the traditional accounting with lean accounting statement. These are also a good read.