Lean accounting

The purpose of Lean Accounting is to support the lean enterprise as a business strategy. It seeks to move from traditional accounting methods to a system that measures and motivates excellent business practices in the lean enterprise.
Introduction

What we now call lean manufacturing was developed by Toyota and other Japanese companies. Toyota executives claim that the famed Toyota Production System was inspired by what they learned during visits to the Ford Motor Company in the 1920s and developed by Toyota leaders such as Taiichi Ohno and consultant Shigeo Shingo after World War II. As pioneer American and European companies embraced lean manufacturing methods in the late 1980s, they discovered that lean thinking must be applied to every aspect of the company including the financial and management accounting processes.[1] (See also, William Deming.)

There are two main thrusts for Lean Accounting. The first is the application of lean methods to the company's accounting, control, and measurement processes. This is no different than applying lean methods to any other processes. The objective is to eliminate waste, free up capacity, speed up the process, eliminate errors and defects, and make the process clear and understandable.

The second (and more important) thrust of Lean Accounting is to fundamentally change the accounting, control, and measurement processes so they motivate lean change and improvement, provide information that is suitable for control and decision-making, provide an understanding of customer value, correctly assess the financial impact of lean improvement, and are themselves simple, visual, and low-waste. Lean Accounting does not require the traditional management accounting methods like standard costing, activity-based costing, variance reporting, cost-plus pricing, complex transactional control systems, and untimely and confusing financial reports. These are replaced by

lean-focused performance measurements
simple summary direct costing of the value streams
decision-making and reporting using a box score
financial reports that are timely and presented in "plain language" that everyone can understand
radical simplification and elimination of transactional control systems by eliminating the need for them
driving lean changes from a deep understanding of the value created for the customers
eliminating traditional budgeting through monthly sales, operations, and financial planning processes (SOFP)
value-based pricing
correct understanding of the financial impact of lean change

As an organization becomes more mature with lean thinking and methods, they recognize that the combined methods of Lean Accounting in fact creates a Lean Management System (LMS) designed to provide the planning, the operational and financial reporting, and the motivation for change required to prosper the company's on-going lean transformation.[2]

Up until 2006, the methods of Lean Accounting were not clearly defined because they had been developed by different people in different companies. A meeting was held at the 2005 Lean Accounting Summit (Lean Accounting Summit) conference including a number of leaders in the field, and a decision was made to develop a document called "The Principles, Practices, and Tools of Lean Accounting" (PPT) (Lean Accounting PPT). While the methods of lean accounting are continually evolving, the PPT lays out the primary methods of Lean Accounting and shows how they fit together into a Lean Management System. The PPT emphasizes not only the tools and methods of Lean Accounting, but also the need for focusing on customer value and the empowerment (or respect) for people. The PPT was published in Target, the Journal of the Association of Manufacturing Excellence (AME) in 2006. (Lean Accounting PPT article)
[edit] The Vision for Lean Accounting

Provide accurate, timely, and understandable information to motivate the lean transformation throughout the organization, and for decision-making leading to increased customer value, growth, profitability, and cash flow.
Use lean tools to eliminate waste from the accounting processes while maintaining thorough financial control.
Fully comply with generally accepted accounting principles (GAAP), external reporting regulations, and internal reporting requirements.
Support the lean culture by motivating investment in people, providing information that is relevant and actionable, and empowering continuous improvement at every level of the organization.

[edit] Why is lean accounting needed?

There are positive and negative reasons for using Lean Accounting. The positive reasons include the issues addressed in the "Vision for Lean Accounting" shown above. Lean Accounting provides accurate, timely and understandable information that can be used by managers, sales people, operations leaders, accountants, lean improvement teams and others. The information gives clear insight into the company's performance; both operational and financial. The Lean Accounting reporting motivates people in the organization to move lean improvement forward. It is often stated that "what you measure is what will be improved." Lean accounting measures the right things for a company that wants to drive forward with lean transformation.

Lean Accounting is also itself lean. The information, reports, and measurements can be provided quickly and easily. It does not require the complex systems and wasteful transactions that are usually used by manufacturing companies. The simplicity of Lean Accounting frees up the time of the financial people and the operational people so that they can become more actively involved in moving the company forward towards its strategic goals. The role of the financial professional moves from bookkeeper and reporter, towards strategic partnering with the company leaders.

At a deeper level Lean Accounting matches the cultural goals of a lean organization. The simple and timely information empowers people at all levels of the organization. The financial and performance measurement information is organized around value streams and thereby honors the lean principle of value stream management. The emphasis on customer value is also derived from the principles of lean thinking. The way a company accounts and measures its business is deeply rooted in the culture of the organization. Lean Accounting has an important role to play in developing a lean culture within an organization.