Lean accounting is a term that describes the application of the Lean philosophy principles, such as a focus on delivering value to the customer and striving to waste elimination to managing financial practices and processes. The holistic approach allows companies to streamline accounting operational activities, but more importantly, to align them with the strategic goals of the organization.
The drive towards continuous improvement intrinsic to the Lean culture does not only contribute to the better synchronization of the financial management with the company’s objectives, but it also allows the reduction of wasteful activities and optimization of the ways accounting work is done. The Just In Time (JIT) production approach, for instance, helps to establish a pull system in the work process where only the work that needs to be done is in progress. This way, waste is eliminated from the workflow.
How does Lean Accounting Work?
The goal of applying the Lean principles to accounting is to make financial information easier to understand more relevant across an organization’s teams and departments. To close down this disconnect between the accounting domain and the rest of the business activities, Lean can be adopted to accounting through the steps below.
- Make financial reporting easier to understand. Respect for people.
- Track the financial data that matters. Remove the waste.
- Understand what creates the most value for customers. Improve continuously.
Step 1. Make financial reporting easier to understand. Respect for people.
To deliver value and optimize the work processes, Lean requires a shift towards a new way of Lean thinking. At its core lies the respect for the people – one of the two pillars of the Lean philosophy. That calls for establishing cross-organizational transparency of the work in progress and how it affects the grander company goals. In the accounting domain, respecting people aims at “packaging” financial information into a more relatable way. This way, team members from all departments can see their contribution and associate with it. Lean accounting provides better motivation and improves employee engagement.
Step 2. Track the financial data that matters. Remove the waste.
Lean strives to improve the way people do business by continuously eliminating anything that does not bring value to the end product and the customer. Applying this principle to the accounting field means eliminating all unnecessary transactional information, control systems, traditional budgeting, and instead of simplifying the information to present meaningful insights and to enable decision-making.
Step 3. Understand what creates the most value for customers. Improve continuously.
What distinguishes an organization from a Lean enterprise is the way the value streams across the company. That includes identifying what brings real value to the customer, mapping the workflow around the generation of value, and establishing a pull system where only work in demand is executed. This process can be applied to the financial field as well as to any other business operation with the sole premise that this lean transformation is not an isolated event and static event. It has to be perceived as continuous efforts and drive towards improvement.
What is the Importance of Using Lean Accounting?
Applying the principles of the Lean philosophy to organizational financial operations aims to align profits and revenues around the actual organizational value streams and strategic goals. The alternative approach seeks to create a system of meaningful business practices that revolves around creating value while minimizing waste and, by that, induing true organizational agility. The Lean accounting concept calls for simplicity, visualization, and trustworthy financial statements. Just as Lean Management principles promote the reduction of waste where possible, Lean accounting aims to reduce redundant and avoidable burdens of work.
What are the Components of Lean Accounting?
Lean accounting has four main building blocks.
- Lean culture
- Lean concepts
- Lean tools
- Lean planning
1. Lean Culture
Lean culture’s primary focus is on continuously improving processes while showing respect for the people. True Lean culture is one that is driven by customer focus and committed to continuous improvement. Following the Lean philosophy, Lean accounting seeks the transformation of the thinking model towards value and creating value streams or product lines around the work that brings actual value to customers.
2. Lean Concepts
Lean concepts refer to the ideas and methods applied to business processes to instill a Lean culture and transform the traditional way of business operations. Focusing on understanding and creating value for the customers, putting people before processes, and eliminating various wastes from the workflows represent the core Lean concepts. They can be translated into Lean accounting as cross-team collaboration, seeking knowledge exchange, mentoring people in continuous improvement, and more.
3. Lean Tools
The Lean tools include the methods for achieving transformation of the organizational thinking towards the Lean philosophy. To embrace the Lean culture into the financial field, Lean accounting implements principles of the Just in Time (JIT) Manufacturing concept, the Kanban method, Kaizen, 5S, and more, as a means to save time, improve the quality of work, and increase value.
4. Lean Planning
Lean planning refers to the process of streamlining work processes to include only the necessary steps required that would lead to creating value. This type of planning is focused on a continuous flow of feedback and improvement to eliminate any waste from the work process. The application of Lean planning is essential to the Lean accounting concept as it lays the foundation for simplifying financial reporting and making it easy to understand by everyone.
What are the Benefits of Lean Accounting?
There are a number of benefits of applying Lean to accounting in your organization. From streamlining the way, financial operations are done, increasing the level of understanding of financials and their impact throughout the value streams, to creating a means of measuring the performance of financial statements in a way to support decision-making, and improving operational efficiency by aligning day-to-day operations with strategic goals.
What Companies Use Lean Accounting?
Originally adopted in the manufacturing domain, the Lean philosophy is now firmly adapted to a number of industries and business entities of all sizes. Some of the organizations that pioneered the implementation of the Lean principles include Toyota, Intel, Ford, Textron, etc.
What are the Lean Accounting Best Practices?
The best practices applied to Lean accounting help to reduce organizational and transactional costs. Some of the most prominent practices are listed below.
- Mapping all the value streams
- Identification of cost and revenue cycles.
- Application of “box score” reports determining operational and financial results.
- Introducing “certified” vendors to reduce transactional costs
- Using yearly contracts that cover all expected purchases to reduce the amount of POs
- Implementing Electronic Funds Transfers (EFT) and electronic invoices
- Implementing Enterprise Resource Planning (ERP) systems
Is there any Lean Accounting Software?
Yes, there are software solutions that can be used to implement the Lean accounting concept across an organization. Enterprise resource planning systems such as Microsoft Dynamics AX, NetSuite ERP, or financial accounting management software like QuickBooks Enterprise.
What is Value Stream Costing in Lean Accounting?
A value stream costing system maps and tracks the revenue and expenditures for the entire value stream instead of on a product-by-product basis as with standard costing. This system allows companies to reduce waste from the accounting operations, simplify financial information processing and drive continuous improvement.
What are the Differences between Lean Accounting and Traditional Accounting?
Unlike traditional and short-term financial business mindsets, the financial impact of implementing Lean accounting is not immediate. A lean transformation puts the focus on the people as the critical asset, so shifting the employees’ thinking of how to optimize resources to deliver value to customers takes time and dedication. The measurement system used in traditional accounting usually compares the actual performance with a set of standard variances by design. On the other hand, Lean accounting aims to align the real financial data with the operating performance. The Lean accounting measures are not disconnected from the operations. Furthermore, all financial information in Lean accounting does not simply provide an explanation of the financial results. It is also aligned with the strategic goals of the organization and provides improvement insights.