Wednesday, May 16, 2012

Another Sworn Enemy of Lean: Cost Accounting

In  lean companies, many standard cost accounting practices make no sense. The big payoff in doing lean is a huge increase in capacity (we make more with the same), and cash flow (more money in the bank). Other major measures are decreased lead time, less scrap and higher on-time delivery. Where exactly do these improvements show up on a conventional financial statement?  In fact, one CFO I worked with argued that the only way he would consider LEAN working was if we could eliminate people (definitely didn't understand).

Lean companies view inventory as one of the 8 wastes, as a hider of problems. In conventional accounting, inventory is considered an asset (it allows a company to match its cost against revenue, as cost of goods sold when it sells the product). In lean companies, the goal is to produce to demand, so inventory becomes insignificant. 

Another way that conventional accounting principles don't work in lean companies is that overproduction is often considered a really good thing! The cost of a part can be optimized by making tons of them. In lean, we teach that sometimes the best business decision is to stop producing and reassign people temporarily to other tasks.

Lean accounting is very easy for everyone to understand. Good lean dashboards communicate exactly what is important right now. Therefore, it is very easy to communicate goals that fuel improvements. And every individual begins to understand how they can move the needle in the right direction. Try handing out your monthly financial statement and see if people can make heads or tails of what's important NOW.

Finally, traditional accounting systems (and departments) are often large, complex processes chock full of non-value work themselves.  Apply the tools to reduce the time to close the month, pay the bills, collect your money, do payroll and process expense reports! 

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