By Brian Maskell
This article is from the Superfactory Archives, an archive of content from the Superfactory website that existed from 1997 to 2012.
This article is the first in a series about lean accounting methods. The series will be based on the newest book, published in October 2007, The Lean Business Management System; Lean Accounting Principles & Practices Toolkit.
In our practice at BMA Inc., when we first introduce lean accounting to companies, questions always arise, something along the lines of: "Well, that all makes sense, but how do you do it?" or "How do you get this past your auditors?" or "Is this really GAAP compliant?" and the like. This series of articles will examine details or "how to's" of this evolving discipline and show you how to put it to work in your company as a business management system that supports your lean manufacturing efforts seamlessly. .
Some Background
The first national Lean Accounting Summit conference opened its doors in Dearborn, MI in September 2005. The day before the conference began, a group of people with lean accounting knowledge and experience came together . Their purpose: to discuss lean accounting issues and to share their ideas and vision.
This group concluded that while there was generally good understanding of the problems, there was not widespread understanding of the solutions. What was needed was a comprehensive framework that would pull together the principles of lean accounting with the practices that support them and the tools and methods that lean companies can apply to the task. After three months of work, the team of lean learning leaders was able to define the principles, practices, and tools that comprise the "state of the art" as it exists, and to chart a path for how it needs to evolve in accordance with a comprehensive lean vision.
| PRINCIPLES | PRACTICES | TOOLS OF LEAN ACCOUNTING |
|---|---|---|
| A. Lean and simple business accounting. | 1. Continuously eliminate waste from the transactions processes, reports and other accounting methods. | a. Value-stream mapping; current and future state. b. Kaizen (lean continuous improvement). c. PDCA problem solving. |
| B. Accounting processes that support lean transformation. | 1. Management control and continuous improvement. | a. Performance Measurement Linkage Chart; linking metrics for cell/process, value streams, plant and corporate reporting to the business strategy, target costs and lean improvement. b. Value-stream performance boards containing break-through and continuous-improvement projects. c. Box scores showing value stream performance. |
| 2. Cost management. | a. Value-stream costing b. Value-stream income statements | |
| 3. Customer and supplier value and cost management. | a. Target costing | |
| C. Clear and timely communication of information | 1. Financial reporting. | a. "Plain English" financial statements b. Simple, largely cash-based accounting |
| 2. Visual reporting of financial and non-financial performance measurements. | a. Primary reporting using visual performance boards; division, plant, value stream, cell/process in production, product design, sales/marketing, administration, etc. | |
| 3. Decision-making | a. Incremental cost and profitability analysis using value-stream costing and box scores. | |
| D. Planning from a lean perspective. | 1. Planning and budgeting | a. Hoshin policy deployment b. Sales, operations and financial planning (SOFP) |
| 2. Impact of lean improvement | a. Value-stream cost and capacity analysis b. Current state and future-state value stream maps. c. Box scores showing operational, financial, and capacity changes from lean improvement. Plan for financial benefit from the lean changes. | |
| 3. Capital planning | a. Incremental impact of capital expenditure on value stream box-score. Often used with 3P approaches. | |
| 4. Invest in people | a. Performance measurements tracking continuous improvement participation, employee satisfaction and cross-training. b. Profit sharing | |
| E. Strengthen internal accounting control | 1. Internal control based on lean operational controls | a. Transaction elimination matrix. b. Process maps showing controls and SOX risks. |
| 2. Inventory valuation | a. Simple methods to value inventory without the requirement for perpetual inventory records and product costs can be used when the inventory is low and under visual control. |
Figures 1 and 2 show the results of this work. At BMA we then organized the five principles of lean accounting into a matrix that ties specific lean practices to the necessary lean tools companies need to master if they want to put a truly lean business management system into place.
Lean Accounting: a System for Lean Management
Lean manufacturing is a tightly integrated system for delivering value to customers in a continuous flow, from order to delivery, while working continuously to improve the process. The organized value stream is the structure that underlies lean.
Because it is integrated, a lean system will resist a piecemeal approach to making improvements if they are made without considering the impact of changes on the system as a whole. In fact, attempting to implement lean approaches on a piecemeal basis (such as cell-by-cell) without an over-all understanding of how the changes fit into planned system performance usually will undermine rather than improve business results of the lean system.
We maintain that lean manufacturing cannot be sustained long term without lean accounting. Simply put: lean accounting is a discipline that applies lean thinking to accounting control and measurement of the value stream. Lean accounting embodies an approach that takes a "lean system view" to measuring and managing the financial performance of the lean business. Lean accounting is itself lean.
There are many methods (we call them "tools") that have proven useful in managing value stream financial performance. Just as the lean manufacturing system resists piecemeal approaches to improvement, so a lean accounting system demands an integrated approach. Lean accounting tools need to be designed with feedback loops so lean operations can continuously adapt to continuous changes in the business environment: within the company, among the competition, and in the market as a whole.
Figure 3 shows how the lean accounting tools provide continuous feedback and foster adaptation.
Lean accounting tools in Figure 3 are shown in the context of normal management functions: planning, measuring, costing and reporting (a special case of measuring), managing and improving. The over-all management system links business policy and decision making to external environmental changes through hoshin kanri and target costing. These in turn affect what should be measured and improved (measuring and improving) and reported in the financial results (costing and reporting.) Improvements then feed back on the planning and measurement functions.
We cannot overemphasize the importance of implementing the tools we are presenting as a system, and not in a piecemeal fashion. For this reason, we believe the accountant belongs on the lean team from the outset.
In future articles we will cover specific tools in detail. For each tool we will tell you why you should use it, what it is supposed to do for you, and how you will go about using it. We will tackle tough issues like "what to do about standard costing?" or "Just exactly how do we reconcile a lean financial statement to GAAP?" or "How should we value inventory?" Our intention is to put the tools in your hands so you can create lean business management systems that support and sustain your company's lean implementation.
Look for our next article: Lean Problem Solving and Continuous Improvement of Accounting Processes.
The book was a collaboration by BMA's team of experts, including Brian Maskell, Bruce Baggaley, Nick Katko, and David Paino. Much of the book is based on their hands-on experiences with BMA clients.
You can order this book from the BMA Inc. The Lean Accounting Leaders web site. Here's that link: http://www.maskell.com/Books.htm
The friends and colleagues comprising the Lean Accounting Learning Leaders group at the Dearborn summit include: Orry Fiume, Jean Cunningham, Jim Huntzinger, Norman Bodek, Robin Cooper, Fred Garbinski, Jerry Solomon, Mark Delusio, Bill Waddel, Bob Emiliani, David Cochran, Doc Hall, Jamie Flinchbaugh, John Coomes, Larry Grasso, Michael Bremer, Bruce Baggaley, and Brian Maskell.