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Lean Accounting

You are a cost conscious company. You have understood cost plus profit pricing is no more acceptable by the market. Wise Customers have decided the price of the product .Now it is you who has to decide if you can sell at this price or below this price and still make the profit .The lower your cost the higher will be your profit.

So if it yes then we have to look at all the costs, which are incurred inside the company. You have to look at the right costs. Then only you will be able to reduce it.

Lean Accounting is not for the Accountants and Finance Managers. It is for all the Managers in the company irrespective of their functions. You should be able to link your all activities-Value Adding and Non Value Adding activities to the Dollar/Re value. If you are not able to do then the managers do not understand the implications. Cost of the product is related to how fast it flows through the plant.

Purchase department primary function is make the material available so that the flow is not disrupted .The secondary function is to buy at the cheapest price per piece. There function is never to buy the products in bulk to get cheaper prices for the items, which are not runner. Lower Labor rate per piece or very high machine utilization is not important. What is important is quick changeovers and maintaining the ‘flow’.
Your record room need not be bigger than your conference room.
Why regular stock taking is so sacrosanct. Instead why have stock at all. Why not have calculated level of stocks. (Kanban).

Why will you rob a bank? Because the money is there. Similarly why Accountants can't spend more time in the plant on the gemba where value addition takes place.

Traditional companies build control through company information system. In lean companies it is built into operations.

Technical and other Functional Managers do not understand the yearly and monthly financial figures presented by the Finance dept. People who are preparing these figures don’t understand what is happening inside the plant. Plant people don’t understand the finance figures .For both of them each other’s area looks Greek. How can you achieve your lean results under these circumstances?

Look at the parameters, which the Financial Accountant focus on –

  • Financial Forecasting.
  • Budgeting.
  • Standard Costing.
  • Overhead Allocation.
  • Variance Analysis.

Production people dread when the monthly financial pictures are presented by Management Accountants. They feel they have worked so hard during the month putting in extra hours and overtime by their staff and associates and look at Management Accountants who are telling you have made the loss and you have deviated from the standard costing and you have to explain the variances to the budget to the Top Management. You have made the loss because you were working on the forecasting model and you could not sell what you were told by marketing to make. So there will be long meetings and you will be discussing there all the non-issues with no outcome for corrective action. The root cause is not known to anybody. Converse is also true you had a long weekends and holidays during the month and you could not produce to your budget but you could do lot of dispatches of materials lying in the inventory so the profit figures for that month is high. Production people wonder on this?. Whether the system is generating true picture

If the situation is like this month on month how can you improve if you don’t know what to improve? What is the real picture?

Let us again look at the traditional scenario. You get the Profit and Loss statement. Read the statement from the top. Sales value is for the items, which are dispatched this month. The dispatch may be less or much more than what may have been actually produced that month on the shop floor.  There will be some items, which are dispatched out of inventory that were made few months/weeks back (there is a possibility as you are on MRP mode). Come to the second row of material cost – you are taking the value for the materials which have entered the plant this month .You may be using only a small percentage of this material for this month dispatch as your lead time is higher than 30 days. Now you get the contribution Value that is not the true picture of the month. So profit figure will also be not realistic.
So there is confusion galore.

Lean Accounting has answers to all this.

Think of a scenario where you only produce on pull by customers. What you produce that month or finish producing that month the Profit and Loss statement is made for that. Sales values of all these items are added up and you take into account only the material costs of these items and not the items, which were procured that month. You deduct this and you get your contribution. This is the true contribution. This is the real picture. Minus the variable costs and fixed costs of that month and interest long term and short term for that month and you get profit before tax .Is this figure real?  Yes it is .All the company functional people will agree to this as to what happened whether they have got the profit or loss for that month .The memory is still fresh. If you do this exercise across all value streams or for the individual plants or across all plants separately for a large group then you will know which plant made the profit and who is subsidizing which plant.

The average accountant spends 80% of his time in book keeping and hardly any time on the shop floor where the value addition is taking place. That is why we say Financial Accounting is a non-value adding activity.

What is difference between the Financial Accounting and Management Accounting (Cost Accounting)? The definition of Management Accounting (Cost Accounting) has also changed in last many years as the companies are implementing the Lean. Financial Accounting has to take care of the Government regulations and GAAP and produce results in standard formats by scheduled dates. Why this cannot be automated? This is possible and feasible. Management (cost) Accounting is for internal use. Why there is need for numerous manual journal entries, complex allocations, 3 way matching of work orders, purchase orders and invoices and complex month end closing. By reducing and elimination of unnecessary task and automating the financial accounting the time of the Accountant can be freed to do activities that will help other functional Managers perform their Lean Activities.

Another reason for ineffective Financial Accounting figures is that it comes too late to be of any value for correction. If a report is generated 2-3-4 weeks after the month closes or if you have quarterly review meetings, there is post mortem and hence less relevance .If you generate reports 12 times a year you have the opportunity to correct 12 times or if you generate report every week you have the opportunity to correct 52 times a year. If the Accountants are working with Production, Design, R&D, Quality, there will be more meaning to the lean improvement being done or corrective action taken in real time. This will be more meaning full.

We traditionally believe that in order to control the business you need to track and check everything in details in the accounting system. This is not correct. A lean company puts control within the organization by bringing in processes under control. Checks are put where the value addition is taking place. What value addition Quality department will add if the production is not able to produce right first time? The Accountants feel that it is their duty and responsibility to check everything if every thing is going right. This is being done as if everything is out of control.

Accountants have been brought up the way. They have been taught that way. There is now a need to shift their current paradigm to an environment, which is changing to Lean, Less of Man, Material, and Machine etc. A traditional company had long production cycle time and large inventories in Raw material, WIP and FG.A lean company on the other hand has short lead time, Low inventory. Many traditional measures to control these are not required in a lean company.

Accountants have to therefore change their roles and provide support to other functions real time with information which is more important from the lean points of view keeping ‘Customer’ in the focus and every one working in a team to reach Product/Services ON time to Customer.

Accountant role will therefore be providing, coordinating, tracking following parameters-

  • Value Stream Costing.
  • Operational Parameters.
  • Capacity available in machines.
  • Capacity Available in Manpower.
  • Sales Operations and Financial Planning.
  • Inventory Valuation.
  • Plain English Financial Tracking.
  • Balance Scorecard.
  • Financial Parameters.
  • Lean Decision Making.
  • Lean Capital Planning.
  • Target Costing.
  • Value Analysis.

Financial parameters will get better if operational parameters are getting better .If Operational score card is achieved, financial score card will be better .If NOT –operation card parameters selected measures are wrong. Revisit the process.

It is easy and it can be done.
It is easy to make things difficult. It is difficult to make the things easy.

Lean Kaizen Business Consulting has experts who come from manufacturing and Lean Accounting background and have intensive experience. These experts work with the clients teams.

Lean Kaizen Business Consulting focuses on imparting training and certifying the Managers, Staff and Associates so that these gains are sustained and become a habits and culture of the organization

Lean Kaizen Business Consulting   offers the highest quality training and consulting services available anywhere; and we feel strongly about implementing Lean Accounting simultaneously with the implementation of the Lean /Toyota Production System and produce results in your plant, with your people, addressing your problems and opportunities.

To get started Contact Lean Kaizen Business Consulting.