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Understanding Customer Value: How Accounting Applies this Foundational Lean Concept to its Work

by Mike De Luca & Nick Katko
February 18, 2021

Understanding Customer Value: How Accounting Applies this Foundational Lean Concept to its Work

by Mike De Luca & Nick Katko
February 18, 2021 | Comments (0)

Why does Accounting need to understand customer value?

Accounting is a highly specialized, technical function in a business. Becoming proficient in accounting requires education and practice. Accountants focus on being good accounting professionals, running an efficient accounting department, and getting work done in compliance with their company’s accounting policies and reporting requirements.

Excerpted and adapted from the upcoming book Practicing Lean Accounting by Nick Katko and Mike De Luca, to be published in early 2021.

Sometimes, though, accounting can focus too heavily on compliance reporting, a very narrow definition of customer value and requirements. When that happens, it blinds accounting to what their other customers value. Accounting can be so focused on the monthly reporting cycle, along with the applicable controls and policies, that accounting assumes this information also satisfies what its other customers want. This assumption can lead to accounting appearing to be out of touch, isolated, or difficult to work with and lead to accounting having a poor reputation inside a business.

The nature of accounting’s work and interaction with others tends to create transactional relationships. In lean accounting, the goal is to put the entire customer experience first in thinking, not just the transaction. To better understand customer needs and requirements beyond the transactions, accounting may need to develop better relationships with their various customers.

Understanding customer value will also allow accounting to better determine if the quality of the information or service it provides meets its customer's needs. This is not to say that accounting does not already have some understanding of this, which it does from a financial reporting viewpoint and typical financial transactions such as paying invoices. Diving deeper into understanding value will prevent accounting from making assumptions about the quality of the information it supplies to its internal customers.

Another important benefit to accounting in understanding customer value occurs when accounting begins to study and improve its processes. The principle of flow and pull means that accounting’s goal, like any other function, is to flow value to customers at their rate of demand. To understand if you are making progress toward achieving a goal, you must measure it. Understanding value will allow accounting to develop the proper performance measurements to know in real time if value is being created and delivered.

Making improvements is not a haphazard, random process. It’s a disciplined, continuous learning activity requiring the ability to distinguish between the process steps that create value and those that do not. When customer value is understood, it becomes possible to differentiate between process steps that create value and those that do not. Focusing more effort on the value-creating activities and eliminating or reducing nonvalue-added activities results in a better customer experience and, ultimately, increased customer satisfaction.

Customer Value for Accounting’s Customers

Accounting has a variety of customers, both internal and external. Rather than address each type of customer specifically, let’s look at the broader categories of customers based on their primary interaction with accounting, what defines quality, and what informs their experience.

Customer category

Quality

Experience

Users of external reporting information (senior leaders, shareholders, investors, boards, etc.)

Compliant with reporting requirements

Rational explanations to make informed decisions, evaluations, and assessments

Recipients of financial transactions (company customers, suppliers, employees)

Right the first time

Timeliness; ease of interacting with accounting to understand the process and get support as needed

Users of internal reporting information (all levels of management)

Relevant and reliable information

A clear understanding of performance to make better-informed decisions and take appropriate action

Users of external reporting information

This group of accounting’s customers includes internal customers, such as senior leaders or owners; stakeholders, such as investors, shareholders, and banks; governing bodies, such as boards and trustees, government, or other regulatory agencies. These users value information that meets reporting compliance requirements and allows them to make informed decisions about a company and evaluate its performance.

As most accountants know, meeting compliance reporting requirements is one of the essential responsibilities for an accounting function. It is the fiduciary responsibility of the accounting function to a business. Accounting professionals are trained in compliance. Because compliance is so important, accounting processes, controls, and procedures are put in place to ensure compliance is achieved before the information is distributed to these customers. Unreliability – or the perception of unreliability in accuracy or timeliness – in externally reported financial information can have grave consequences for a company.

Because accounting understands value to these customers quite well, there is an opportunity  to develop a better understanding of the processes that create this value. Improving these processes through the elimination of waste will create more capacity (time), allow the work to flow faster and error-free, and possibly relieve overburdening of the employees who perform these activities.

 

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Recipients of financial transactions

Accounting processes financial transactions between a company and other parties related to cash receipts and disbursements. The recipients of these transactions are another group of accounting’s customers and include a company’s customers, suppliers, and employees. What these customers value from accounting are  financial transactions completed “right the first time,” in a timely fashion, and for accounting to be easy to work with.

-Company’s Customers

Accounting’s primary interaction with a company’s customers is through the invoicing or billing process. A company’s customers expect all the information on the invoices they receive from accounting to be accurate. Inaccuracies become especially annoying to customers if they sent the company a purchase order specifying all terms and conditions but received an inaccurate invoice.

Although accounting doesn’t provide the product or service that the customer is purchasing, it can shape the customer’s experience and impact customer loyalty through how easy and seamless billings and payments are.

Another thing to consider when determining value is to evaluate how easy it is for a company’s customers to interact with accounts receivable. Are invoices easy to understand? Are payment methods straightforward? If a customer has a question about an invoice, does accounting have a quick response time to an inquiry, and is the resolution process simple, friendly, and customer-focused? It’s situations like this, when the quality of an invoice is in question, that understanding customer value, in the eyes of the customer, is most important. Although accounting doesn’t provide the product or service that the customer is purchasing, it can shape the customer’s experience and impact customer loyalty through how easy and seamless billings and payments are.

-Suppliers

The mirror image of a company’s relationship with its customers is its relationships with its suppliers. Many companies do everything possible to please their customers but treat their suppliers poorly. For example, under the guise of “cash management,” a company may set payment terms to suppliers beyond the standard 30 days and require their suppliers to accept these terms or not do business with the company.

Suppliers are an essential part of a company’s supply chain. A well-functioning supply chain in a lean organization is necessary to support the value streams which produce the company’s goods and services that drive revenue generation. From the suppliers’ point of view, the overall experience between suppliers and accounting must create value. Yes, suppliers must perform, and those performance criteria must be clearly spelled out. The same is true for accounting.

-Employees

The value to employees of accurate, timely paychecks and other reimbursements is well understood by accounting. Like customers and suppliers, it’s the overall experience employees have with accounting that matters. The process steps employees may have to perform to be paid or resolve a discrepancy can be cumbersome to an employee and contain unnecessary activities. These activities take up employees’ time, so developing minimal-waste lean processes for employees to record time or expenses creates value in the eyes of employees.

Users of internal reporting

One of accounting’s largest and most customer groups is the business managers (including senior leaders and owners). These managers get a combination of financial and operating information from a company’s management accounting system (of which accounting is the steward) and direct analytical support from accounting to measure performance, perform analysis and make decisions.

Management accounting is the link between a company’s strategy and its operating practices and ensures alignment between the two. Management accounting information and analytical practices also support the customer-facing value streams in a company that produces the goods and services that drive revenue growth.

The value to users of internal reporting information is that it helps them make good business decisions. For any decision-maker, information must be both relevant and reliable. Relevant information improves decision-makers’ capabilities to predict future outcomes or provide more accurate feedback on performance. For information to be relevant, it also needs to be delivered in a timely fashion. Reliable information represents reality at the time an analysis is performed, and that the quality (accuracy) and lack of bias in the analysis can be counted on.

Lean transformation changes what managers value

In any company embarking on a lean transformation, in any industry, the definition of relevant and reliable information will change in some form or fashion. A lean transformation also has an impact on the types and frequencies of analytical practices and accompanying decisions. Another way to say this is that a lean transformation changes what accounting’s internal customers value from accounting. It is very important for accounting to recognize this and be proactive about developing their lean accounting vision.

A helpful context for understanding and prioritizing what information is valuable to accounting’s internal customers is to compare value from the perspective of the company’s customers to what accounting understands to be the relevant and reliable information to its internal customers. It’s important to keep these two perspectives of value aligned so that the work accounting does to improve value to its internal customers will ultimately improve the company’s delivery of value to its customers, the ultimate purchasers of the company’s products or services.

 

Keywords:  accounting,  customer focus,  finance,  Purpose,  service
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