Lean Accounting for a Lean Organization

Traditional use of accounting systems has been to… account.  Essentially, accounting tools collect, manage and track financials, assets, inventory, and so on.  But there’s a growing opportunity to mine accounting’s data for areas of improvement, for areas of prioritization, and to expose the resultant success or lack thereof.  In other words, we can leverage accounting as a decision-making tool and as an expository mechanism regarding adjustments and progressions for the organization’s benefit.

This is where Lean accounting comes in.  Typical cost accounting and activity-based methods can fail to glean the true cost of producing goods and services.  A Lean system of accounting helps to avoid the misallocation of resources by showing lack of ROI or inefficient and expensive expenditure of effort.  Too, whole projects and their related exposures can yield areas for tuning or possibly expose those projects as being wholly unproductive.

Consider some dismal statistics:  25% of projects are cancelled before completion; 49% suffer budget overruns; 41% fail to deliver the expected ROI and business value; 47% have higher than expected maintenance costs; and 62% fail to meet their schedules.  A Lean system of accounting can uncover early exposures, leading to early fixes and course corrections. Even more, the entire accounting process provides a learning crucible for future, better planning.

One of Lean accounting’s main principles is that before any section of a system can be assessed (and improved), the system’s “global” goal must be defined.  Therefore, what is forced is the establishment of metrics to measure any piece of the system and its impact (good or bad) to the global goal.  This is counter to many cost models that focus on parsed areas of a system, such as departments or local procedures, with no context for how these practices and measures affect the overall system, and thus, the bottom line.

Lean accounting takes into account the specific areas of Contribution Margin, Inventory, and Operating Expense, helping stakeholders to see the big picture and make “local” decisions that are favorable to the whole (as well as locally).  Lean accounting directly contributes to better decision making, thus better results, yielding ever-better business practices, a better competitive position, and higher profitability.

When one considers that any business’ goal is, primarily, to make money (without profit, business ultimately evaporates), we can easily see the benefits in not just typical accounting, but the use of a Lean manner of accounting in supporting optimal results and progressions.

About the Author: Ron Chandler has over 29 years experience in serving in an executive capacity in Sales, Engineering, Program Management, Product Development and Operations. Since 1988, Ron has been a student and practitioner of Lean Enterprise Principles, first in his own businesses and then as a consultant. He has applied Lean Methodologies to implement significant financial and operational turnarounds since 1994.

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