Lean Accounting Concepts

March 29th, 2009

Lean accounting is a mystery to most business people and accountants. They have heard of lean manufacturing but not lean accounting. Lean accounting evolved in the manufacturing environment and hasn’t made much progress into lean thinking applications. There are a number of ways lean accounting can be applied in a variety of situations. It is perfect for managing and measuring results in tough economic times.Initially lean accounting got traction because it had the capability of overcoming the problems associated with standard costing. Standard costing is driven by labor efficiency, machine utilization, and absorption of overhead. These standard cost techniques were traditionally used by managers to build excessive inventories and generate positive variances to improve GAAP profitability leading to higher management incentive bonuses.

The economic recession has created a need for lean accounting. However, since most accountants haven’t use lean tools, the application goes unused. Lean accounting deals with tracking throughput or revenue and the associated variable costs required to generate those sales. Understanding that lean contribution from sales directly improves the bottom line is critical. You don’t spend funds unless it is associated with generating revenue. Since lean accounting provides better information for decision-making it has the impact of increasing sales. In a slower economy, companies need tools like value stream costing and similar lean-decision making applications.

Lean accounting financial statements are easier to understand. Since the focus is on the value stream linked to the voice of the customer, lean encourages measurement of drivers that produce value that customers want. Based on lean thinking, we are only incurring costs to produce customer value. We know the cost of the form and features demanded by customer. Costing techniques include target costing and analysis of the life-cycle of products. These approaches utilize continuous improvement techniques focused on improving our profit margins.

Since most managers relate lean accounting to manufacturing, the tendency is to ignore the concepts of lean and lean accounting for non-manufacturing applications. These areas represent the most lucrative opportunities for lean thinking and lean measurement. There are significant opportunities to lean our administrative and other overhead areas of organizations. Service, health care, and other industry sectors are leaving money on the table by not using lean thinking and lean accounting.

There are plenty of ways to apply lean thinking to accounting and financial operations. The use of simplified financial presentation and measurement can represent significant improvement in time savings and better decision-making. One of the concepts I advocate is sales and operational planning linked to rolling forecasts that virtually eliminates the need for annual budgets. This is a process of getting the entire organization to commit to a regular process of monitoring and communicating the most up to date information available and converting it to meaningful and actionable information. Rolling forecasts provide a simplified lean measurement of the organization and where it is going on a timely basis. It becomes a real-time basis decision making tool.

These concepts are discussed and explained in my book, Dynamics of Profit Focused Accounting. A lean front office is no different than a lean shop floor manufacturing operation. It is all about process flow and eliminating the waste from the value stream. The problem lies in the lack of education and inability to shift paradigms to a new lean way of thinking.