By Jean Cunningham, President, Jean Cunningham Consulting

A lean financial statement is one of the elements of lean accounting. Adopting lean accounting has two broad goals. First, it uses lean concepts and tools to improve the accounting operations: paying bills, collecting money, closing the books, etc. Second, applying lean accounting creates an accounting and reporting structure that supports and strengthens the effectiveness of the operational lean transformation. Lean financial statements span both of these lean accounting goals. A main reason that people are interested in adopting lean financial statements is to eliminate the use of standard cost accounting for evaluating manufacturing performance. By eliminating standard cost accounting:

1) Information provided to operations is no longer confusing and often indecipherable (i.e. useless).

2) The wasteful and costly non-lean behavior of building excess WIP and finished goods inventory is no longer numerically supported. (Even buying excess raw material can be supported by traditional financial statements if raw material is burdened upon receipt!)

3) Accounting operations are simplified and less time- consuming since variances are eliminated, and thereby, are not analyzed, scrutinized, allocated and capitalized.

In addition, there are many other elements that can be used to evaluate a financial statement to see if it is utilizing lean concepts and/or supporting lean improvement efforts. First, who is the customer of the statement and what information do they need? Don’t assume. Do a fact finding activity, and you will be surprised. Are they using the information to improve decision making? Is the information at the level of precision that the customer needs? For instance, if the customer wants information at the $1000 level of accuracy, is the accounting team working at the $10 level of accuracy? When does the customer need the information? If information is only available monthly, is that frequent enough? Is there some information needed more frequently (daily or hourly) and/or some that is needed far less frequently (quarterly or annually)? Have you created the flow that matches the need?

Next, does the financial information use terminology understood by the customer or terminology understood by the accounting department? If the words or phrases used to describe the information are vague or confusing to customers, they might not know what actions they should take to positively affect the outcome results. And, if the financial information does not enable the customer to make better decisions, it is of no value. A great way to test if you have well understood terminology on metrics or reports is to ask five different people the basis of the calculation for a selected metric. If you get 5 different answers, it is too complicated.

There are many other questions to ask when evaluating your statement. Is the information organized into meaningful value streams or is it “siloed” by manager? Can we see the value created by the value streams? Is there any connection to your outputs? Is it aligned with how you have changed to manage the lean company? Are there lots of allocations? Who needs this info? What effort does it take to allocate? If you do want to allocate, is it easy to tell that it is allocated versus direct information? Who has the responsibility for allocated activities? What would happen if it was not allocated?

Are you looking for the 8 wastes in the creation of the lean statements? Are there Defects? Are you Over producing reports? Are your customers Waiting too long? Are you Neglecting to provide meaningful feedback? Is the information electronically transported from system to system or entered manually? Is there a valuable Inventory of knowledge sitting in one department that another department needs? Is there excess Motion to get the reports created and stored because of paper documents? And is there Excess processing by doing tasks and calculations no one really uses or at a time consuming level of precision not needed? All these wastes lead to DOWNTIME in supporting the drive for excellence in the accounting department and the overall enterprise.

These are a few of the many inefficient and waste areas you will eliminate by building towards and using lean financial statements. Go for it.

Jean Cunningham, Instructor for upcoming Lean Accounting course.

Jean Cunningham is President of Jean Cunningham Consulting and former CFO of two manufacturing companies. She is co-author of Real Numbers: Management Accounting in a Lean Organization, as well as other books.

Side note: NWIRC will host a Lean Accounting course with instructor, Jean Cunningham, on October 24th in Erie. Find more details here.