LEAN ACCOUNTING V. TRADITIONAL ACCOUNTING

in Blog 

By Chuck Intrieri & Jesús Galindo de la Torre

Lean Accounting is the export of the Lean philosophy to the accounts of a business entity. The essence of the Lean philosophy is getting increasingly better results through the application of tools and approaches for the elimination of waste that is not strictly necessary to provide added value to the customer.

This is a concept designed to better reflect the financial performance of a company that has implemented lean manufacturing processes. These may include organizing costs by value stream, changing inventory valuation techniques and modifying financial statements to include nonfinancial information.

Accounting is one area that hasbeen analyzed more than was anticipated.Many financial reports are generated that are not used effectively for Lean implementations.

Of course, accounting and financial control are essential for efficientoperations. The major goal of lean is to eliminate all wastes from any organization to increase velocity and throughput to bring value to your customers, to go beyond their expectations.

Here is a look at traditional versus Lean financial statements:

Traditional vs. Lean Financial Statements:

Traditional Statement                                         Lean Statement

Source: Adapted from Real Numbers: Management Accounting in a Lean Organization by Jean Cunningham and Orest J. FiumeThere a different in approach:

-Traditional Accounting:
• Productive capacity as idle production lines.
• Existence of inventory as an asset.
• Extract reports and information with large time intervals (monthly, weekly)
• It focuses on the cost of goods sold (Cogs).This includes, for example, the cost of kick off meetings, catering services, annual Convention.

-Lean Accounting:
• Once structured and defined, Lean Accounting provides cost analysisin real time…
• Lean accounting reviews the costs and benefits of the value chain, providing an accurate picture of the cost and benefit of each step in the provision of value to the client.• Productive capacity is considered to be an asset, not as a liability.
• Existence of inventory as an obligation or waste, if excessive, that has to be stored, maintained, and monitored.

Applying Lean Accounting means saving time.  Accountants serve as quality controllers, and provide useful reports, such as increased costs that are part of the specific steps of the value chain. They find opportunities for cost reduction in transportation, which is one of the seven major wastes…

The main benefit of Lean Accounting is that it is less complex and less expensive than the traditional accounting statements. Iteliminates unnecessary reports and reflects what is actually happening in the shop floor…

Implementing this Lean Accounting system is not easy for a company. In the eyes of those who are not immersed in day-to-day Lean, the reductionof inventory means a reduction of benefit in accounting terms. This is a financial culture change for accountants and top management.

When a company moves to Lean Accounting, CPAs usually will want to continue to supplement the company’s standard financial statements with the additional information that captures the related improvements rather than eliminate the statements outright. In this transition from Traditional accounting to Lean Accounting, you can’t turn off the standard reporting immediately. It is best, in the transition, to take it apartpiece by piece as the underlying operations change.

In the meanwhile, prepare lean format financial statements on a parallel basis. This will illustrate results both ways. It’s like going with a new software system from an old software system. It takes time, and a transition has to take place. It is a culture change or paradigm shift. CPAs create accounting policies to better reflect the positive impact lean typically has in any company.

If this transition doesn’t take place, businesses that implement Lean won’t be able to judge the bottom line result and know for sure whether the change is good for the business.

As in any process of implementation, Lean Accounting requires analyzing, assessing, establishing, and implementing these procedures and constantly measuring the key performance indicators to insure that the effort is moving in the right direction. It takes the entire company to implement Lean. Lean Accounting takes top management and finance/accounting in concert with operations to insure it works effectively. Lean, overall, is a culture change and a new way of doing business for any company. Everyone from top to bottom has to be committed to Lean to make it work effectively for them and to bring value to their customers.

 

 

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