Lean Accounting: Focus On The Meaning Of Numbers

Jan. 4, 2007
Reluctant executives might "get" Lean Accounting when it is explained as a visual system.

One of the challenges facing people who want to implement Lean Accounting at their companies is getting buy-in from senior executives. After all, the conventional budgeting process has defined how most for-profit organizations have operated for decades. In the minds of many business leaders, it works.

What is Lean Accounting? It is a movement supported by manufacturers and non-manufacturers to completely restructure how accounting is done. This is a byproduct of the lean movement. Many companies, public and private, that have become deeply steeped in lean culture have realized that traditional cost accounting is wasteful and, even worse, focuses on the wrong things. Those who live in a truly lean work environment, for instance, know that a fixation on per-unit labor costs (which is extremely common in the manufacturing community) is pointless. Has your customer ever asked what your per-unit labor costs are? Or how much you allocate on a monthly basis for capital costs? Probably not. Yet, the impetus for much action and decision at manufacturing companies is the annual budgeting process followed by re-forecasting throughout the year based on numbers that are time-consuming to reach, rarely reflective of reality, and completely worthless to customers.

Enlightened companies using Lean Accounting have tapped many methods to refocus their accounting systems on creating customer value and collapsing them to reduce waste, such as using rolling forecasts and aligning operations by value stream. (For more information on these, see www.leanaccountingnews.com or www.leanaccountingsummit.com.)

No company, however, can start down this path without some executive support. This challenge surfaced again and again in conversations I had with presenters and attendees at the second Lean Accounting Summit held in Orlando in September. It just so happened that while attending this sold-out summit, I was reading Gwendolyn D. Galsworth's excellent book Visual Workplace, Visual Thinking (2005, Visual-Lean Enterprise Press). Although Galsworth does not specifically address Lean Accounting in this book, the similarities between visual thinking and accounting struck me. After all, aren't numbers merely symbols? And what good are they unless they contribute to and support process excellence? As Galsworth writes:

"A visual workplace is a self-ordering, self-explaining, self-regulating, and self-improving work environment -- where what is supposed to happen does happen, on time, every time, day or night -- because of visual solutions."

Shouldn't an accounting system be these things -- self-ordering (simple, consistent and not wasteful); self-explaining (so everyone can understand); self-regulating (contributing to/supporting standard process); and self-improving (contributing to/supporting ongoing process improvement)?

This led me to this thought: If an executive understands lean culture, then he or she likely understands the value of symbols in that culture. As Lean Accounting Summit presenter and author Jean Cunningham said during her presentation, "Once we understood, red bins became much more than just a hard cost that needed to be justified with a return." The bins, which at Cunnigham's former company stored parts, were the fuel of a kanban-based parts-replenishment system that kept inventory low, sent signals vital to pull and flow (which in turn improved flexibility), contributed to level production, made real-time visibility of material flow possible, etc. The invoice that documented the purchase of the bins documented none of these, their most valuable ROI. What if the bins just went away? Perhaps replaced by the replenishment system from before? All of that cost-lowing, customer-value-adding activity would stop. Flexibility would decrease. Inventory would build. Bottlenecks would become more common because visibility would be clouded. Yet, armed with the wrong number (hard costs only), an accountant might make a bad decision not to buy the bins.

This point could be an opener to a meaningful discuss about conventional accounting versus Lean Accounting because, as I said, numbers are really just symbols. If you don't have the right symbols, you will make bad decisions or worse yet, pass on opportunities to better serve customers through process improvement.

Try this activity. Look at the following list of numbers:

  • 16
  • 1 in 10
  • 1,770
  • $2.13

These numbers mean nothing alone. Now consider:

  • 16: The number of women who will serve in the U.S. Senate starting in January 2007.
  • 1 in 10: How many people have congenital heart defects, according to the American Heart Association.
  • 1,770: The estimated number of people executed in China last year, which performed 81% of the world's executions.
  • $2.13: The cost of a gallon of unleaded gas in the metropolitan area where I live.

Did the numbers themselves tell the story? No, they are symbols for other information that has the power to influence decisions: Should I vote? Should I have my child screened for a heart defect? Should I invest in a politically corrupt country? Should I buy gas here or in the next town?

Likewise, reviewing your business, which numbers are the most meaningful in terms of giving managers the information that they need to make decisions based on what's happening now to directly please customers? Look at the two things I have emphasized in the last sentence. Because the metrics you choose should meet these two criteria, they will quash the argument that Lean Accounting reduces accountability. If anything, it increases accountability because it shifts the focus to reality and to customers, which erases room to wiggle, hide, fudge and game. If things aren't happening as they should, and customers aren't getting what they want, flags go up a lot sooner in a Lean Accounting environment than in a conventional accounting environment.

Which brings us back to the reluctant executives. It's entirely possible that these executives don't want the truth to be told. The old system may be serving their personal interests well. This is a difficult situation for sure. The only solace I can offer is that companies that are following the wrong metrics eventually will suffer, and the flags that fly over those mistakes will be hoisted high. This is not hard to see. Just look at what is happening in the auto sector and the increasing interest in Lean Accounting in the health care, defense, and even financial sectors. The fever is spreading, just as lean manufacturing started to 20 years ago.

So it is worth it to at least try to start a Lean Accounting discussion at your company or group. Start with the symbol discussion, which is easy to convey and understand. If it goes nowhere, then start your own effort to determine what metrics should be followed. Then, when warning flags start to fly, you'll be in a good position to jump in with a solution.

Tonya Vinas is editor of Lean Accounting News. You can reach her at [email protected].

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