Do You Practice Lean Processes and Finance? – Part 1

See What Lean Accounting and Finance Can Do for Your Company

We’ve heard the buzzword “Lean” as it pertains to an organization's transformation into a more efficient set of operations for a while now. Often perceived as radical, it promises great results and endless opportunities for incremental improvements.

The concepts originated in Japan, led by an extraordinary transformation at Toyota Motor Corporation, with its Toyota Production System (TPS), started in the mid-to-late sixties and perfected in the seventies. The premise of TPS is continual improvement in all areas of the enterprise with the goal of increasing efficiencies and reducing waste while always maintaining respect for workers in all areas and on all organizational levels.

Lean Beyond Manufacturing

While the Lean transformation lends itself best to manufacturing operations, its concepts apply to non-manufacturing industries as well. So if you aren't a manufacturer, please don’t stop reading here. The reality is that most companies in the US don't practice Lean, at least not yet. The main reason is a lack of discipline and proper direction from upper management, even though many US companies that implemented Lean report remarkable changes in all areas of the company, evidenced by improved financial statements and cash flow.

Sustaining Lean Efforts

Another reason Lean transformations aren't as popular as they should be is that it really only works if you sustain the effort. Many of the failed attempts at Lean are attributed to not being able to maintain the Lean mindset and make it work consistently across the entire enterprise.

A popular goal sought with first Lean implementations is inventory reduction. The idea is to reduce inventory on hand and only bring in material and parts that are needed for customers’ orders or for a specific forecast if the company makes products to stock. The result is higher inventory turns (I’ve heard of manufacturers achieving 15-20 inventory turns a year) and noticeable improvement in cash flow.

Transforming Accounting and Finance

To make a Lean transformation effective, companies should also transform other areas in the organization, particularly their accounting and finance departments. Borrowing concepts from manufacturing, accounting and finance departments can also eliminate a lot of waste and focus only on value-added activities.

Each company should evaluate its own accounting and finance workflow. When activities that don’t add value are reduced or eliminated, accounting and finance personnel can focus on collecting and translating data into highly informative and useful reports that managers can really use—instead of the monthly or quarterly report packets (more like stacks of paper) that managers hardly even skim through without getting confused.

Lean Practices in Action

Of the many opportunities to transform accounting into a Lean organization, some companies find that doing away with vendor invoices for inventory purchases results in great savings in time and other resources. They simply rely on internal control over the purchase order process, and by using blanket POs with agreed-upon prices and release dates driven by true demand, they depend on the receiving process that automatically vouchers these receipts, which creates AP transactions that are paid according to vendor terms. The three-way match, vouchering, and posting to AP of individual invoices are eliminated. Similarly, other areas in accounting can be streamlined in a Lean environment.

Lean Budgeting

It's hard to discuss Lean accounting and finance without mentioning the planning, budgeting, and analysis processes, a core set of functions usually owned by finance. What is a Lean budget? Can that work even if the rest of the organization isn't Lean? Can the process be called Lean Budgeting?

Erroneously, to the uninitiated in Lean concepts, when thinking of Lean Budgeting, the first thing that may come to mind is taking shortcuts in strategic and operational planning or perhaps reducing the number of budget iterations and their approval process. The truth, however, is that Lean Budgeting means only to reduce or eliminate wasted time and resources in the budget preparation and approval process. Of course, with reduced waste, certain pieces of the budget can be reduced while improving profitability and overall financial results.

Reducing Waste in Budgeting

Strategic and operational planning is the most important phase in the budget process and should never be compromised, even when transforming the company to a Lean environment. However, many existing planning and budgeting processes and their reliance on traditional technology promote much waste and complexity that can be eliminated or greatly reduced with a proper Lean implementation.

Waste in planning, budgeting, and analytics processes may include:

• Spending an inordinate number of hours developing a model that requires programming of formulas, functions, and links to other worksheets or workbooks files.
• Endless troubleshooting of budget models for errors resulting from bad or missing formulas, broken links, or other issues which stem from unsuccessful changes or additions to the model.
• Excessive time spent by finance to create modified versions of the base budget or “what-if” versions in response to requests by management.
• Unnecessary wasted time in analytics, especially the monthly analysis of actual results against the approved budget for the period.
• Use of a “Zero-Based Budget” except for rare occasions where required and justified.
• Limited collaboration among budget participants using traditional, cumbersome solutions where consolidating the budget is extremely inefficient and time-consuming.

If every iteration of the budget requires many hours or even days of work to recompile the budget and its derived forecasted reports and financial statements, you are not practicing Lean Budgeting!

Looking Forward

In the next installment in this series, we'll learn how a company can achieve true Lean Budgeting while supporting manufacturing and other areas of the enterprise and providing real insight to management. Stay tuned to discover practical steps to implement Lean principles in your accounting and finance departments to streamline processes, reduce waste, and improve overall efficiency.

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