Can Your Company Benefit from Lean Accounting?
What is Lean Accounting?
Every business needs a finance department behind it, whether that department is made up of one person or a team of professionals. The finance department is what gives company leaders the solid knowledge of whether they are failing or succeeding, and in which areas. Today, many startups choose to use the lean accounting methodology instead of traditional accounting to do so.
What is lean accounting? What are its advantages? And what should one consider when contemplating a shift to lean? All the answers and a little more follow.
What Is Lean Accounting
Lean accounting is a practice that stems from the lean manufacturing philosophy and enables finance departments to get rid of redundant activities and increase activities that add value. The result is a simplification of the way the finance department operates, and equally important, in the way it relays information to the rest of the team. Lean accounting places a large emphasis on making finances relevant to the entire company, not to the finance department alone.
Lean Accounting vs. Traditional Accounting
Traditional accounting requires businesses to report their financial affairs through a codified set of principles. These are called Generally Accepted Accounting Principles, commonly known as GAAP, and they are quite complex. GAAP compliance is important as it ensures accuracy, consistency, and comparability. It’s an acceptable and meaningful way to track and present your startup’s financial activities. You need that, especially when seeking investment.
However, GAAP also means that some data, that is not necessarily useful, is reported in a way that only very few people can understand. Reporting data in this way can decrease efficiency and create a disconnect between the finance department and the rest of the company. This disconnect is a problem because all departments are part of the same organism. Product people need to understand the company’s finance to do their job well and vice versa.
Lean accounting, as opposed to traditional accounting, is more about the big picture than the details. It is designed to increase efficiency, improve internal financial communication, and enable any team member to look at a financial report and understand it.
Cost per Unit vs. Value Stream
Standard accounting will usually use a cost per unit calculation — fixed cost plus variable cost divided by the number of units produced during a specific time period. This perspective can put the product department and the financial department on opposing sides, because product people are focused on providing maximum value for customers, while finance people are focused on minimizing costs for the company.
In Lean accounting, on the other hand, financial data is reported as part of a value stream, which is the full sequence of steps taken to produce value for the customer. Value streams are high level, simple and linear. They provide clear information that the whole company can understand and place everyone on the same side, eyeing the same goal.
Of course, any business that practices lean accounting must still comply with GAAP requirements, but its reports are much easier for the layman to understand.
The Challenges of Lean Accounting
While the advantages of lean accounting are crystal clear, it does come with some challenges. In some cases, it can be difficult to accurately price products and determine profitability using lean accounting. The use of value streams can make it harder to pinpoint the details of each specific product/service. While value streams can be broken down, accountants often need to make some adjustments to achieve the sought-after information.
Furthermore, if it isn’t done correctly, the implementation of lean accounting can shift the company’s focus away from its business ecosystem. The entire idea of lean accounting is to streamline company operations, which can lead to a lot of introspection. While looking inward isn’t necessarily a bad thing, company leaders can sometimes get so wrapped up in making the company run efficiently that they neglect other aspects of the business, like forming valuable partnerships.
If these obstacles are tackled correctly, one can enjoy the main advantage of lean accounting — getting the finance department to run in a highly efficient manner that is clear to all and streamlined with company objectives. As a result, companies can see an increase in employee motivation and productivity, a reduction in lead time for processing and payments, a decrease in expenses, and an increase in profits.
The Transition to Lean
It’s important to remember that switching to lean is not just a change in accounting method, but a total overhaul of the way a company operates. Lean accounting is a comprehensive strategy that often comes as part of a larger, lean-business model. It’s a process that includes the whole company and its culture, not something that you can start doing overnight.
Here are some practices to take on if you decide to go the lean route:
- Employee training — switching to lean will require proper training for all employees. Remember that you are all in this together from the get-go.
- Outsourcing — consider moving the most basic accounting processing to a shared or outsourced service provider, ultimately increasing the efficiency of the in-house finance department.
- Automation — automate routine procedures so that your people can spend their time on the important stuff. Automation also improves efficiency and reduces the potential for error.
- A centralized point of contact for customers — designate one employee to be in charge of supply management, including shipping, amounts, communication, etc.
- Exploiting chain reactions — lean accounting practices will help you identify the source of various issues. You will find that once the source is identified many symptomatic issues will resolve themselves.
To Sum Things Up
If you feel that there is a lot of frustration in your finance department, and not enough inter department communication going on, making the switch to a lean mindset may be a good and interesting path to investigate. However, unless you’re an expert on lean, don’t make the switch alone. Many companies that choose to go lean do so under the guidance of financial advisors that specialize in this area and some even consult with change management experts to ensure the shift goes smoothly.