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An Accountant’s Guide to Understanding Lean Accounting

Nick Katko
5/12/2020

I think one of the difficulties accountants face in understanding Lean Accounting is that we are trained to be “doers” of accounting. Our training and education is about how to perform accounting tasks and functions, from learning the basics of journal entries in Accounting 101 to how to close the month in the company we work at. We want to master how to execute, and the better we are at executing, the better accountants we are.

To understand Lean Accounting, accountants need to adjust their perspective from “doing” to “practicing.” And the first step to begin practicing Lean Accounting is to change the way we think as accountants.

Lean Accounting is like Lean – it is a journey towards a destination. Our journey is practicing Lean Accounting and the destination is organizational improvement. Our journey never ends because the destination is not final. This is the first change in perspective for accountants – changing the way we think about accounting in a Lean organization. It’s not about us (the accounting function); it’s about the organization as a whole and the customers the organization serves.

The second change in perspective for accountants is understanding and accepting continuous improvement. All business processes can improve in a Lean organization, including accounting processes. It’s not that the accounting processes are bad, it’s simply that they can get better. It’s important for accountants to change the way we think about the processes we “own.” Accounting is not exempt from improvement.

The final change in perspective for accountants is creating value for our internal customers. Accountants are very good at understanding and delivering value to external customers because the quality of our work is based on GAAP/IFRS, tax laws and other regulations. Internal customers in Lean organizations value specific, relevant, timely, actionable information and data which support Lean practices. Accountants need to listen to what their internal customers value and deliver on that value by making the necessary adjustments to accounting processes to deliver the exact value desired.

“Practice makes perfect” is an old wise saying, and it applies to Lean Accounting. The first step to practicing anything new is always mental, whether it be a musical instrument, a sport or a new skill. Once someone opens up their mind, it becomes easier to learn how to do something through regular practicing. If you are new to Lean Accounting, spend time opening up your mind, before diving into the “how to” of Lean Accounting.

Lean Accounting is applicable to any company, in any industry, that commits to a Lean strategy.

I like to define Lean Accounting this way:

  • Lean Financial Accounting – applying lean practices to accounting processes
  • A Lean Management Accounting System to support any business that is Lean

I’ve also heard Lean Accounting experts such as Jean Cunningham, Jerry Solomon, Brian Maskell and Orry Fiume explain it this way:  Lean Financial Accounting as “Lean for Accounting” and a Lean Management Accounting System as “Accounting for Lean.”

It doesn’t really matter exactly what terms or phrases are used, what is important is to understand the distinctions. Let’s look at both in more detail.

Lean Financial Accounting is applying lean practices in all accounting processes to improve productivity, delivery, quality and service. Eliminate waste in accounting processes. A simple example is applying lean practices to eliminate waste in the month-end close process to have a shorter close cycle.

Any accounting department can begin applying lean practices to its accounting processes, even if your company has not yet committed to beginning its lean journey.

Applying lean practices to accounting processes in no way compromises meeting financial reporting requirements, maintaining compliance with tax laws or other regulations or the internal controls to maintain compliance. In fact, from a lean point of view, maintaining compliance is the quality standard of accounting processes.

Management accounting systems are used by management to control and measure the operations of a business and provide a decision-making framework for all types of business decisions. Management accounting systems are for inside the business and not intended for external stakeholders. What we are really talking about here is financial analysis, operational analysis, measurements and other information required to run the business. Management accounting systems do not have to comply with any external regulations.

When a company commits to a Lean strategy, the fundamentals of how the business operates will change as Lean practices are put in place. How the business is controlled, what needs to be measured and the criteria for business decisions will be different than “before Lean.” Internal financial reports, financial analysis, measurements, data used to control the business and decision-making criteria all must support “Lean Thinking.”

Lean Thinking requires the creation of a Lean Management Accounting System. This is a journey, much like Lean is a journey. Without a Lean Management Accounting System, there is a disconnect between Lean practices and the information that Management will be receiving to understand how well the Lean business is running. Because Management Accounting Systems are not externally regulated, they can be changed by companies. And changing Management Accounting Systems in no way compromises external financial reporting.

The accounting function must assume leadership in creating a Lean Management Accounting System. It’s vital to every Lean company that this is created, maintained and improved, as it will provide all levels of management the relevant, timely financial and operational information needed to drive a Lean Business Strategy forward to financial success.

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