Lean Accounting: Supporting Growth, Improvement Initiatives

by Robert E. Pozesky | Nov 28, 2016

Pennsylvania CPA Journal It has been more than 20 years since Lean Six Sigma (lean) gained traction as a strategy to reduce waste, improve customer service, and drive organizational growth. Initially adopted by manufacturers, lean concepts are now widely applied across nearly every industry. Lean has helped many companies generate significant improvements in profitability, customer satisfaction, and revenue growth. Lean has also been used to lay the foundation for successful enterprise resource planning software implementations and acquisition integrations, as well as to generate higher valuations in anticipation of succession events.

The lean methodology, like any widely adopted management principle, has had its fair share of failures in meeting expectations despite the potential benefit it offers. This is not a measure of the efficacy of lean itself, but rather how an organization structures and executes the strategy. Major shortcomings include limiting lean to the operations side only and not bringing the finance team to the table as stakeholders. There are several ways finance personnel can adopt “lean accounting” in support of organizational improvements and transformation.

Apply Lean to Accounting Functions

Accounting teams should attend lean training early on and work to apply those tools and techniques to eliminate waste in the financial processes. Initial improvements typically reduce delays, hand-offs, and redundancies in the daily accounting work flow, cut down on unnecessary reporting, and allow the month-end to close sooner. While this work does generate short-term payback, it more importantly frees up time to perform value-added analysis in support of the organization’s overall lean goals. Hands-on experience with lean provides the accounting team with the skills needed to actively participate in lean improvements in other areas of the organization. Each sizable improvement project should have a lean-thinking financial team member involved.

Align Reporting with Value Streams

The lean methodology targets operational improvements that drive competitive advantage and growth. It does this by taking a value stream view of the delivery of products or services from work cells all the way to customers. Standard department-based reporting and financial statement structure does not align well with the value streams associated with delivering products and services. It is difficult for nonfinancial managers to identify lean improvement opportunities and make managerial decisions based on commonly used reporting formats. Organizing reports around these value streams helps direct conversations to “What is this telling us to do?” rather than “What does this number mean?”

Expand Beyond Financial Results

Successful lean strategies avoid a narrow focus on cost-cutting in favor of a broader view of performance. Financial numbers are not the only outcomes important to a company. Oftentimes, however, the reporting of other key performance indicators (KPIs) falls short of what is required to support lean improvements.

One of the significant benefits of lean is the ability to drive new revenue opportunities by leveraging improvements realized in customer service and available operational capacity. Traditional financial reporting does not highlight all KPIs to management, preventing them from recognizing and capitalizing on opportunities. It is critical to expand reporting to include KPIs related to operational performance and capacity analysis, including sales per employee, lead-time days, inventory turns, first-pass quality (or yield), on-time shipments, and utilization analysis. When managers have KPI data broken out by primary value streams, they can determine how to best use this freed up capacity.

Distributing KPIs on a weekly basis instead of monthly helps managers to better monitor the progress of their improvements by giving them more timely information. Using the established lean goals as targets instead of typical variance reporting based on standard costs provides a more accurate sense of performance. This manner of reporting also helps identify and prioritize new improvement opportunities and shifts focus from “where the organization has been” to “where the organization is going” – a necessary change in mind-set to position the company to meet its goals.

There may be initial concerns that this reporting structure will require additional accounting work. But once the KPIs for each value stream are identified, the amount of ad hoc reporting and unused reports usually drops off, allowing more than enough time for new value-added reporting.

An organization cannot achieve its full lean potential without the participation of the finance team. The rewards and investment are too great to not execute the right lean strategy. Implementing some of these concepts can help finance personnel play an important role in lean’s success. 

Robert E. Pozesky is a manager in the business consulting services group of RKL LLP, specializing in operational consulting. He can be reached at rpozesky@rklcpa.com.
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