Contemporary Management Technique: Lean Accounting

Contemporary Management Technique: Lean Accounting

According to Alhosban and Alsharairi, 2019), lean Accounting is the control system for lean manufacturing and lean enterprise transformation. Lean Accounting provides a set of principles and practices that support lean practices by accounting and finance organizations. Lean accounting also provides the methods for quantifying the value created by lean initiatives and communicating it to stakeholders both inside and outside the firm. In management, lean accounting is an approach that focuses on the flow of value and eliminates waste. It is in direct contrast to traditional cost accounting practices that focus on product costs and batch processing. Lean accounting differs from traditional cost accounting based on mass production methods. While traditional cost accounting focuses on improving efficiency and lowering costs, lean accounting focuses on avoiding waste and aligning with customer demand. This paper seeks to discuss the implementation of the lean accounting process, common wastes and defects, the principles which enable the smooth running of an organization, and the application of lean accounting in various organizations.

The Common Types of Waste

Lean accounting is a new method of accounting for Lean initiatives. It's based on the eight types of waste that are most common in a business environment:

Defects: Mistakes and errors result from poor quality control and the need to fix them.

Overproduction: Making more products than customers want ties up resources, including inventory, money, and warehouse space (Bellisario and Pavlov, 2018).

Waiting: Items are waiting to be processed or shipped because they're stuck in the queue or unable to be handled at that moment.

Transportation: Moving things around, like raw materials or finished goods, to warehouses or customers (Soliman, 2020).

Inventory: This includes raw materials, parts, finished goods or anything else not needed at the moment but will be used later.

Motion: People move around to do their jobs, or machines move unnecessarily as they do their work.

Over-processing: When something is more complicated than it needs, like using special features that no one wants or needs.

Extra-processing labor: Unnecessary steps related to production, such as unnecessary paperwork or duplicated work efforts

Principles of Lean Accounting

Focus on cash flow

In lean accounting, cash flow is more important than profits based on historical performance. Cash flow reflects operational performance and shows how well a company can generate cash in real-time. To improve cash flow, companies must reduce costs while improving productivity simultaneously.

Manage by exception

The idea behind this principle is that managers should respond only to situations that require action, and they should not waste time with items that are working well. This requires managers to understand their processes and key performance indicators (KPIs) (Alhosban, and  Alsharairi, 2019).

Use standards to measure progress toward goals.

Setting measurable goals helps organizations understand when things are going off track and fix them before problems get out of hand. Standards help managers monitor KPIs to know when deviations have occurred and implement corrective measures. Other principles include the following:

• Lean accounting applies only to repetitive, high-volume processes that support the business’s core functions and are directly affected by the company’s operating philosophy and strategy. A lean accounting system is based on standard costs updated frequently as business conditions change.
• Lean accounting uses cost drivers and changes points to calculate variable and standard costs, compared with actual results in management reports that include detailed analysis at the process level (Ameen, Ahmed, and Abd Hafez, 2018).
• Lean accounting eliminates waste in the finance function, generates timely financial information, and streamlines administrative processes while emphasizing employee development and engagement.

How Lean Accounting Works

Value stream-oriented thinking

This contrasts with product-based thinking, which means that people start with an existing product and work to improve it. With value stream-oriented thinking, people work backward from the customer to design a new value stream, starting with a blank sheet of paper.

Transparent, on-demand reporting.

Lean Accounting provides just-in-time reporting to keep everyone focused on what matters most. For example, instead of sending a monthly report on sales and finances to everyone in the company and expecting them to read through it, managers only send it to the people who need that information. That way, no one has time for anything irrelevant or unimportant.

Delivering customer value.

Lean Accounting is about delivering customer value more effectively than your competitors do. It's not about making more profit or reducing costs by laying off employees; it is about helping your customers receive better value for their money.

Lean Performance Measurements

There are five basic lean performance measurements. These are designed to focus on the customer, eliminate waste and increase value.

Flow: The idea of flow concerning lean is that one task should lead immediately to the next without any unnecessary delays. This means that the items needed for each task should be available as soon as they are needed to prevent any delays.

Quality: One of the key ideas with lean is having a quality product or service at a lower cost. To achieve this, you must inspect your product or service at every step in the process and fix any problems as soon as possible. This will prevent repeated mistakes and help reduce costs by eliminating lost time and materials due to mistakes  (Bellisario and Pavlov, 2018).

Delivery: With lean, you need to have products available when customers want them. The time between placing an order and receiving the product should be minimal, if not non-existent. This can help keep customers coming back because they won't have to wait long for their orders to arrive or become frustrated by delays in receiving their products.

Productivity: Lean can help improve productivity by eliminating waste and allowing employees more time to perform productive tasks. Productivity can also be improved by reducing errors and rework because of increased quality checks throughout the production process.

Order fulfillment lead times: Order fulfillment lead times are the average time required to fulfill an order from receipt of a request to delivery at dock door for shipment to the customer.

Areas of Lean Organization

Alignment with Lean Strategy

Lean strategy is a business strategy that focuses on eliminating waste from the entire value stream from order to cash. Waste is anything that does not have any significance the commodity or process, such as excess inventory and overproduction. The goal of lean manufacturing is to create a culture of continuous improvement.

Alignment of the Accounting function

Accounting functions must be aligned and automated to provide timely and accurate information in the right format to support lean operations. This alignment and automation help achieve faster closing, ease of analysis and reporting, and high-quality data  (Bellisario and Pavlov, 2018).

Alignment of performance measurements

Performance measures such as inventory turns and days sales outstanding may be derived from accounting systems but should be focused on customer satisfaction, responsiveness, and flexibility rather than on productivity or efficiency in operations. Performance measurements help an organization track its progress. Aligning these measurements with lean objectives is critical. Performance measurements include cost per unit, cycle time, inventory turns, on-time delivery, and quality ratings.

Alignment of financial information

Companies need accurate financial information for decision-making. Financial managers must align accounting systems to promptly provide relevant data for all decisions. The alignment process involves identifying key financial information streams needed for specific decisions and designing processes to ensure this information is available when needed. Examples of decisions that benefit from alignment include pricing strategies and the supply chain.

Alignment with financial management practices

The finance and accounting functions should be designed to support the company’s business processes and goals (Ostaev et al., 2019). There should be a clear understanding regarding how these processes contribute to the company’s strategic objectives and how they should be measured, when they should occur, and who should be involved.

Steps in Lean Accounting Implementation

Identify Value

The second step in pursuing Lean accounting is identifying value defined by the customer. It's important to recognize that customers may be internal or external to the organization. For example, a company may have an internal customer such as a sales department that relies on the products they produce or a service they provide. Also, it's important to recognize that a single customer may have multiple suppliers.

Map

The third step in pursuing Lean accounting is mapping processes. The basic concept behind process mapping is developing visuals for business operations that exist in an organization. Many process maps, such as value stream maps, spaghetti diagrams, swim lane diagrams and more (Ameen, Ahmed, and Abd Hafez, 2018). The type of map used will depend on creating it and who will use it.

Flow

The fourth step in pursuing Lean accounting is creating flow by eliminating waste and creating smooth continuous processes. This requires identifying areas for improvement within existing processes and working collaboratively with employees to implement solutions that eliminate waste.

Perfection

The company adopts a formalized process mapping to identify where value is added, or non-value-added waste can be eliminated. The mapping process must be done at the most detailed level possible to ensure accuracy. Inventory levels are reduced to reflect only those required for immediate use.

Establish Pull

Once perfection has been achieved in the first step, the company must establish pull signals for all orders and requisitions for materials and services (Dana, Rounaghi, Enayati, and Researcher, 2021).  Only what is needed when needed will be produced or provided. This ensures that inventory levels do not get out of line with demand again. This also allows for just-in-time production, which reduces lead times.

Application of Lean by Other Organizations

There are more applications of lean accounting in several industries.

Retail

The retail industry is highly competitive. There are many players in the market, and competition is based on various factors such as price, variety, quality, location and service. To compete successfully, retailers must have a superior operational model to realize value from their customers (Dana, Rounaghi, Enayati, and Researcher, 2021).  Lean accounting principles can help retailers create this value by identifying the true cost of a product or service and cutting waste.

Automotive

In the automotive industry, lean accounting helps manufacturers identify and reduce waste in the production process. By tracking inventory levels and addressing bottlenecks, manufacturers can reduce costs and increase productivity while maintaining quality.

Distribution

The distribution industry is one of the most complex industries that exist today. Distributors must know how to produce a product quickly, move it when needed and make sure that it is delivered on time, all while keeping costs low (Alves, et al., 2021). By controlling stock levels and improving the flow of information through the supply chain, lean accounting helps distributors improve supply chain efficiency.

Biotechnology

Biotechnology companies focus on innovation, creating new products that provide true value to customers in both ethical and cost-effective ways. Lean accounting helps biotechnology companies reduce waste in research development processes.

Telecommunications

The telecom industry has observed many changes over the past few years due to technological changes, increased competition, and deregulation over the past few years (Alhosban, and Alsharairi, 2019). The telecommunication companies that apply the concept of lean accounting have become more profitable than those that do not apply it.

Application of Lean Accounting My Organization

Healthcare organizations are increasingly adopting lean management methods for them to manage their quality of operations. This is because lean management techniques have proven to be effective in terms of decreasing expenses and increasing efficiency.

Analysis and Interpretation of Data

Accounting involves taking, analyzing and interpreting financial data within an organization. Accounting departments in health facilities deal with several functions such as accounts payable, accounts receivable, treasury and budgeting and forecasting (Samad, Shu, and Ogar, 2017). Each of these functions has its own set of processes that must be followed to succeed. These processes often involve different departments, such as finance and supply chain management, making them inefficient due to time delays and redundant activities.

Elimination of Medical Errors and Wastes

Lean management techniques can be applied to these processes to eliminate waste and make them more efficient. For example, reports from various departments often have errors that the accounting department must correct before being analyzed. Applying lean methods would reduce errors by ensuring that each report was checked for accuracy before being sent to accounting for analysis and interpretation (Sugianto, and Pontjoharyo, 2020).

Measurable Results

Lean accounting helps us focus on measurable results rather than theoretical possibilities. The traditional approach has been to set improvement goals based on historical performance, but lean accounting gives a new way to measure performance by making it much easier to quantify the impact of improvements. Lean accounting also improves accountability because it allows you to identify exactly who has achieved a goal and what specific changes have contributed to its success.

The Rationale for Lean Manufacturing

Lean manufacturing is a management philosophy that uses an integrated set of business practices to reduce waste and maximize value from the customer’s perspective. The three pillars of lean are: creating value for customers, optimizing flow and never-ending improvement (Bellisario, and Pavlov, 2018).  Lean manufacturing has been widely adopted, and there are many reasons why. Here are various benefits of lean manufacturing:

Lower Costs

Lean manufacturing helps companies reduce costs because it focuses on improving efficiency. By reducing waste and making processes more efficient, companies can reduce costs associated with production. This might mean less wasted raw materials or less time spent on unnecessary steps in a process.

Improved Product Quality

When companies waste fewer resources, it's easier to improve product quality. This means; companies can spend more time and effort perfecting their products rather than worrying about unnecessary procedures involving the production or wasted materials (Sugianto, and Pontjoharyo, 2020).  This is particularly important for manufacturers who want to minimize variation in their processes so that every product comes out the same way.

Higher Profits

Lean manufacturing improves a company's bottom line by reducing costs and improving product quality and productivity. By increasing efficiency, lean manufacturing allows companies to produce more with fewer resources, which increases profits over time.

Improve Customer Satisfaction

Lean manufacturing can help you make products that better meet your customers' needs by improving processes. This will reduce customer complaints, minimize returns and increase customer satisfaction overall. It also improves employee satisfaction by making the workplace more efficient and productive (Soliman, 2020).

More Flexible Manufacturing Processes

Lean manufacturing helps companies become more flexible, and speed increases because less time is spent waiting for materials or information to move through the system.

Increases competitiveness

Lean manufacturing can improve your company's competitiveness by allowing it to produce high-quality products at low prices. This can be particularly helpful in the global economy because it allows your company to compete in foreign markets that it might not be able to compete in otherwise.

Drawbacks of Lean Manufacturing

While lean manufacturing has many advantages, the disadvantages of this approach are also important to understand. The disadvantages arise when companies do not comprehensively implement lean manufacturing in many cases. They may focus on certain elements, such as cutting costs, without realizing that a comprehensive approach is necessary (Samad, Shu, and Ogar, 2017).

Less Flexibility

Lean manufacturing requires organizations to standardize their processes before they can begin to eliminate waste. This can be beneficial because it helps companies achieve scale, but it can also create issues when those standardized processes are inappropriate for certain jobs (Ostaev, et al., 2019). Generally, lean manufacturing will be more beneficial if an organization does not have a wide variety of product lines or services.

Inefficient Processes May Be Missed

Lean manufacturing requires companies to analyze their processes and identify where waste occurs. If a company has an already efficient process, then this process may not be identified as wasteful and will not improve. Additionally, suppose a company has inefficient processes that cannot be improved because it would cause too much disruption in production. In that case, these processes may also not be eliminated as part of lean manufacturing efforts (Amusawi, Almagtome, and Shaker, 2019).

High Upfront Costs

Because lean manufacturing requires an organization to analyze its entire production process before implementing changes, the initial implementation costs for lean manufacturing can be high.

Reduced Inventory

A major advantage to lean manufacturing is inventory reduction. A company using lean manufacturing methods produces only what they need when they need it. This reduces wasted space, raw materials and labor costs in storing excess products on-site or off-site. (Dana, Rounaghi, Enayati, and Researcher, 2021). When the demand for a commodity increases, there will be no extra inventory on hand to meet this demand unless you have anticipated this increase and are already producing more than you need. This can lead to your customers going elsewhere for their products if you cannot meet their needs quickly enough.

Barriers to Implementation of Lean Accounting

The biggest barrier to implementing lean accounting in manufacturing companies is a lack of knowledge about lean accounting. This was consistent with findings from the previous studies that lack of knowledge about lean accounting was a major barrier to its implementation. The second most important barrier is resistance to change by senior management. Successful implementation of any new concept commitment from top management is essential. However, some senior managers only make changes on the factory floor without getting involved themselves; this causes resistance to change by other employees and ultimately leads to failure of the entire process (Ameen, Ahmed, and Abd Hafez, 2018). Poor communication between employees and their seniors emerged as another important barrier. Some employees feel left in the dark when they are told certain tasks are part of lean accounting but are not given enough data and guidelines on how to go about it (Alves, et al., 2021). They have no idea who would be responsible for the tasks or whether training or additional skills would be necessary.

Therefore, to overcome these barriers, companies should invest in training their employees on lean accounting systems; adopt strategies to alleviate the fear of employees that their jobs may be lost due to the implementation of lean accounting systems, and invent new plans aimed at countering the expenditures with lean accounting implementation (Bellisario, and Pavlov, 2018).

Conclusion

Lean accounting is a strategy that seeks to eliminate wastes of time, money, effort, and resources by streamlining processes and increasing efficiency. The first step in pursuing Lean accounting is understanding the purpose and objectives of implementing Lean. Identifying the purpose, objectives, and goals for implementing Lean will help ensure that all elements of Lean accounting implementation are aligned with the organization's strategic objectives. Lean accounting can help with planning, budgeting, forecasting, and analysis by improving the speed of information delivery throughout an organization. It also helps health care facility managers see opportunities for continuous improvement in their departments by reducing waste through better processes and operational efficiency. Applying lean accounting in my organization will help us become more efficient and effective. Lean is a strategy that focuses on creating more value for customers with fewer resources, thus achieving a competitive advantage. The findings indicated that lack of skilled employees capable of handling lean accounting system, fear of losing jobs among employees whose jobs were made redundant due to lean accounting system and adverse effects on profits resulting from increased operational costs were identified as the major barriers to the implementation of lean accounting. It is recommended that all manufacturing companies embrace lean accounting. It helps them save money by reducing unnecessary costs, increasing productivity through value-added activities, reducing waste, improving service delivery, increasing revenues, and improving quality products and services.

References

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Samad, M. A., Shu, Y., & Ogar, K. (2017). Value creation with lean accounting.

Soliman, M. (2020). Lean Accounting VS Financial Management: Awareness and Overview. Available at SSRN 3534862.

Sugianto, A., & Pontjoharyo, W. (2020). Lean Accounting in Transforming Organizational Culture in PT. A. IJRDO-Journal of Business Management, 6(9), 1-17.