by Nick Katko, President, BMA
Lean accounting, simply defined, is the application of lean thinking to all accounting systems and processes, both financial accounting and management accounting. What is unique about lean accounting, compared to other applications of lean thinking, is how it is applied to the dual roles of accounting.
The overriding purpose and goal of lean thinking, in any industry, is to serve customers better. In financial accounting processes, what customers want is common knowledge, such as paying invoices on-time or closing the books quickly. In lean financial accounting, it’s about how to deliver these products and services in the least wasteful way possible. Lean accounting is about paying invoices on-time without having to get last minute approvals. Lean accounting is closing the books on-time without working punishing overtime.
Management accounting, on the other hand, is responsible for providing information (products) and consultation (services) to many internal users. The value that internal users receive from management accounting is the “decision-usefulness” of its products and services. Internal users want management accounting to provide clear insight into both financial and operational performance to make decisions that help the company achieve better results. Management accounting deals with the financial management of the entire company. In order to align the accounting function with a company’s lean strategy, it is first necessary for accounting to master four foundational practices:
- Understanding Value. Accounting needs to think differently about who accounting’s customers are, what their needs are, and how accounting meets those needs. Accounting needs to focus its efforts on serving all its customers better beyond transaction processing.
- Identifying Waste. Accounting needs to think differently about how it performs its work. What activities are really helping accounting serve its customers? What activities get in the way or slow down serving customer? Accounting may have gotten so used to performing nonproductive activities that they consider them to be “normal”.
- Lean Measurement. Accounting needs to think differently about how to measure progress and results in a lean company, beyond the monthly financial statements. Improving quality, delivery, inventory, lead times, cost, safety and morale are what is important in lean companies.
- Using PDCA. Accounting needs to think differently about managing and improving day-to-day work and how to begin eliminating all the activities that don’t serve its customers. Incorporating daily lean management practices in accounting processes serves as a “lean classroom” to identify and solve problems.
These four foundational practices are applied to all aspects of accounting’s work to drive improvement and serve customers better:
Improving Accounting. Accounting needs to look at its processes from a lean point of view rather than simply from a technical point of view. Serving customers better is much more about completing accounting transactions, it’s about creating a delightful experience anytime one of accounting’s customers must deal with the accounting function. Eliminating waste in accounting processes also creates capacity in the accounting function and improves the work environment for accountants.
Lean Financial Management. Accounting needs to provide useful and understandable information to internal users in a lean company. Accounting needs to lead in terms of aligning information and analytical practices to support a lean strategy and give decision makers the quality information to leverage lean for financial success.
Side Note: Nick Katko will present a virtual Lean Accounting training on December 18 & 19. See more details and register here.