Lean accounting has grown in popularity in the first decade of the 21st century as an increasing number of companies have embraced lean production and lean processes.
- What is lean accounting?
- How does lean accounting work?
- 1. Simplifying financial reporting
- 2. Tracking financial data that matters and removing waste
- 3. Understanding what creates the most value for customers and making constant improvements
- 4. The decision-making process, the “box score” and the value stream
- Why use lean accounting?
In a nutshell, lean accounting offers a way to gauge the success of the implementation of lean thinking.
As business leaders can see how lean management affects operations, this form of accounting assigns a number to this change.
Let’s take a closer look in this article at what lean accounting is and how to implement it for a successful management analysis and performance measurement.
What is lean accounting?
Lean accounting aims to streamline accounting processes across a business to maximize productivity, service, quality and profit.
Lean accounting comprises a number of “lean practices” and administrative processes that are put to use to reduce waste of time and resources.
These practices do not relate to reporting requirements, tax regulations and compliance, instead they concern internal processes that aim to improve the overall accounting department.
Lean accounting differs significantly from traditional accounting, and because of this, it is a somewhat controversial topic in the world of finance.
Generally speaking, lean accounting does not replace generally established accounting practices, thus, ideally, it should be used alongside traditional reporting methods.
How does lean accounting work?
The purpose of adopting lean principles for accounting is to make financial information easier to understand and more relevant.
To close the existing gap between the accounting domain and other business activities, lean accounting can be adopted via the following steps:
1. Simplifying financial reporting
To deliver value and optimize work processes, you need a shift to a new way of thinking, lean thinking.
At its core lies respect for people, one of the two cornerstones of lean philosophy.
In accounting, respect for people is about preparing and delivering financial information in a way that those who do not deal with finances on a daily basis can digest it more easily.
By doing so, all departments can understand what the numbers are about and can feel more involved.
2. Tracking financial data that matters and removing waste
Lean production seeks to improve business by regularly and continually getting rid of anything that does not bring value to the end product and to the customer.
By applying this approach to the accounting field, it involves removing all redundant and unnecessary information and simplifying data to present meaningful insights allowing for better decision making.
3. Understanding what creates the most value for customers and making constant improvements
What sets lean methodology apart is how value flows within a business, the so-called “value stream.”
This involves pinpointing what brings real value to the customer, mapping the workflow around value generation and establishing a pull system in which only the required work is carried out.
This process can be applied to any business operation, including the financial domain.
The only condition is that this lean transformation is not a stand-alone, static event, but must be viewed as an ongoing effort and a ultimate drive for improvement.
4. The decision-making process, the “box score” and the value stream
A popular tool used in lean accounting is the so-called “box score,” a term borrowed from baseball.
Here the overview of both the performance indicators and the operational and financial performance of the value stream is reported.
The box score is very powerful because it allows informed decisions to be made based on value stream.
Why use lean accounting?
The application of lean philosophy principles to an organization’s accounting and financial operations aims to bring profits and revenues in line with actual value streams and strategic business goals.
The purpose of lean accounting is to generate value by minimizing waste, redundant and unnecessary work. Consequently, inducing true organizational agility.
The concept of lean accounting requires reliable and simple financial reporting.
There are a number of benefits to applying lean accounting across organizations; here are some of them:
- Accounting that everyone can understand and use right away.
- Accounting that supports and drives lean progress.
- Effective operational and financial checks.
- Reports and information that empower people for continuous improvement.
- Eliminating a great part of waste in accounting systems.
- Successfully calculating the financial impact of implementing lean management.
- Better decisions that lead to better deals, which lead to better profits.
To recapitulate, the general purpose of lean accounting is to gather, analyze, and report the performance and cash reserves of a company; information that is used to take informed management decisions.
Instead of completely removing standard reporting overnight, the accounting department can phase in the lean processes of lean accounting.
Accountants generally need to be open to new processes and change their perspective to embrace lean accounting.
Lean accounting is a journey packed with continuous improvements that strives for the perfection of the entire organization.
Lean methodology applied to accounting also means that waste in financial processes must be removed, such as shortening the forecasting and budgeting cycle, closing the books faster, etc.
Sudden changes are hard to embrace, yet slowly shifting to the approach will encourage accounting staff to gradually acquire new habits that are necessary for success.
In all this, having good project management software can help manage change and implement lean accounting processes in a quicker and easier way.