Excerpted from the upcoming book Practicing Lean Accounting by Nick Katko and Mike De Luca.
We’ve been asked many times, “How do you get started with lean accounting?” Our answer is always the same: “It begins with thinking.” This response usually confuses people because they are typically eager to begin “doing lean accounting.” But lean accounting is not something that is “done.” That would imply that there is an endpoint to be reached. Lean accounting is not a single task that can be performed in a straightforward manner. Rather, lean accounting is a collection of new and different practices that change how accounting approaches its work, its relationships with its customers, and its role in a lean company. Understanding and mastering these lean accounting practices require
s thinking differently — so that is the starting point of a lean accounting transformation.
Lean accounting is a collection of new and different practices that change how accounting approaches its work, its relationships with its customers, and its role in a lean company.
The way the accounting function works, and the way accountants think, is very transactional. Accounting must process transactions based on specific time frames: enter invoices daily, pay employees bi-weekly, pay suppliers weekly, close the books each month, send out monthly reports and analyses. These work routines create thinking patterns that focus on getting the work done to meet the deadlines. There is nothing wrong with this thinking
, because it creates reliable and respected accounting functions in companies, which is a good thing.
But to grasp lean accounting, the accounting function must expand its thinking beyond transactions and into practices. Lean accounting is about continuous improvement, which means that the process of striving to improve never ends. Continuous improvement is not transactional, but must be practiced. The old saying “practice makes perfect” is applicable to lean accounting. The more that you master these new practices, the better you get at lean accounting.
What is Lean Accounting?
In the business world, when people hear the word “accounting,” it can conjure up images of “bean counters” pouring over spreadsheets and magically producing financial statements. Others may recognize accounting as a specific field in business — a key support function like human resources or information technology. If you work in finance and accounting, then you understand that the accounting function has a dual role in companies:
- Financial accounting – the systematic processing and recording of financial transactions and preparation of financial reports.
- Management accounting – the production and use of financial and non-financial information to manage a company and enable decision-making.
Within these broadly defined roles, there are diverse functions and specializations, such as billing, accounts payable, payroll, financial planning, and decision support. Each of the functions and specializations has principles that must be followed, reporting and compliance requirements that must be met, and a great deal of analysis and decision making that must be done. Accounting work is also heavily dependent on software systems. All of these factors can make the accounting function complex.
Lean accounting, simply defined, is the application of lean thinking to all accounting systems and processes — all of the roles and functions we just mentioned. What is unique about lean accounting, compared to other applications of lean thinking, is how it is applied to the dual roles of accounting.
The overriding purpose and goal of lean thinking, in any industry, is to serve customers better.
The overriding purpose and goal of lean thinking, in any industry, is to serve customers better. In financial accounting processes, what customers want is common knowledge, such as paying invoices on time or closing the books quickly. In lean financial accounting, it’s about how to deliver these products and services in the least wasteful way possible. Lean accounting is about paying invoices on time without having to get last-minute approvals. Lean accounting is closing the books on time without working punishing overtime.
Management accounting, on the other hand, is responsible for providing information (products) and consultation (services) to many internal users. The value that internal users receive from management accounting is the “decision-usefulness” of its products and services. Internal users want management accounting to provide clear insight into both financial and operational performance to make decisions that help the company achieve better results. Management accounting deals with the financial management of the entire company.
In lean companies, an internal user’s definition of “useful information” must change because it has to be aligned with lean thinking to help a lean company achieve better results. In lean accounting, this means management accounting must provide quality products (relevant to lean thinking) and quality services (analysis and recommendations aligned with lean thinking).
To accomplish this, it is necessary to understand lean accounting from a practice perspective. A lean accounting transformation is simply developing a standard set of practices that are deployed in all accounting processes, and over time the entire accounting team masters these practices. Here is a summary of these practices, which we’ve organized into foundational, applied, and sustaining practices, and the thinking that they require:
Lean accounting foundational practices:
- UnderstandingCustomer Accounting needs to think differently about who accounting’s customers are, their needs, and how accounting meets those needs.
- Identifying Waste Accounting needs to think differently about how it performs its work. What activities are really helping accounting serve its customers? What activities get in the way or slow down serving customers? Accounting may have gotten so used to the activities that they perform that they consider all of them to be “normal.”
- UsingLean Measures Accounting needs to think differently about how to measure progress and results in a lean company beyond the monthly financial statements.
- Practicing Accounting needs to think differently about managing and improving day-to-day work and how to begin eliminating all the activities that don’t serve its customers.
Lean accounting applied practices (applying the foundational practices to accounting’s dual role):
- Improving Accounting Accounting needs to think differently in order to improve accounting processes. Accounting needs to look at its processes from a lean point of view, using all of the foundational practices rather than simply from a technical point of view. Accounting will also have to collaborate cross-functionally to drive long-term sustained improvement.
- Lean Financial Management Accounting needs to think differently about the information and analyses it provides to internal users in a lean company, again using the foundational practices to inform this change in thinking. Accounting needs to lead in terms of aligning information and analytical practices to support a lean strategy.
Lean accounting sustaining practices:
- Lean Financial Leadership Accounting, and companies, both need to think differently about the role that accounting plays in a lean company, with regards to supporting and sustainingimprovements, not just in accounting, but across the entire company, to realize the financial benefits from its lean strategy.
Think of a time when you have had to learn something new and became proficient at it, whether it be a subject in school, playing a sport, taking up a musical instrument, or any other activity that requires new skills. First, you learned certain basic, repetitive fundamentals which were designed to open new pathways of thinking. As these fundamentals became habits, you were then able to progress to more advanced skills. Finally, repetition of the advanced skills built proficiency.
Lean accounting isn’t “hard,” it just requires a dedication to practice.
Watch a free webinar with Nick Katko and Mike De Luca to learn How to Use Lean Accounting to Help Design Profitable Value Streams: watch it here.