Transforming Your Organization? Start with Accounting

Before the lean enterprise paradigm swept across the manufacturing industry, I doubt many business people would have considered accounting as a serious tool for changing the mindset of decisions makers and how businesses operate. It turns out, however, that there’s more than one way to do accounting, and the accounting approach an organization uses can have a significant impact on a business’s direction.

Let’s take a look at three specific areas of accounting and how traditional practices lead to inefficiencies and delayed decision making. Although the conventional approach may appear to be rock solid, it can be revised to support alternative principles to better address current business challenges.
• Work-in-progress inventory. Any accountant will tell you that work in progress (WIP) is a company’s asset. A company spent significant money to purchase or produce its inventory, and theoretically that inventory can, in the case of a shift in demand or other conditions, be sold or reworked. Sounds reasonable, doesn’t it? In real life, this is the accounting standard that managers point to when they fearlessly pile up stocks in the form of economic batch size or start producing items per forecasted demand.

In contrast, lean principles view any unnecessary inventory—including excessive WIP stocks—as a waste, to be minimized or eliminated. Lean accounting therefore stimulates the prevention of unnecessary inventory, or at least its minimization, and WIP is stated as a liability in financial reports.

• Labor expenses. Traditional accounting models treat employees as a variable expense that should be minimized in the same way as other costs, such as purchased materials or delivery charges. This attitude has had widespread and dramatic economic and political repercussions, with the United States and other developed countries outsourcing much manufacturing activity to lower-wage regions. Within the paradigm of conventional accounting, outsourcing makes perfect sense.

The lean accounting model offers a simple but influential response: employees are a company’s asset and labor expenses should be accounted accordingly. The potential effect of this shift in accounting is huge. It motivates management to retain and continuously improve the company’s major asset—its personnel—instead of cutting and hiring people according to current market conditions. Of course, this lean principle cannot be adopted in isolation, but must be aligned with strategic workforce management (career development initiatives, performance improvements, etc.) and business process reorientation across the entire enterprise.

• Financial reports. Historically, the purpose of an accounting department has been to gather financial information from all a company’s divisions, store and maintain that information, and prepare time-phased financial statements and other reports (i.e, monthly, quarterly, annually, etc.) to supply data to multiple parties (top management, investors, government agencies, etc.). However, these reports—and the time that goes into preparing them—may not actually make much sense for the company. 

  1. The format of these reports often reflects the primary requirements of financial institutions or government authorities instead of a company’s own needs. 

  2. The reports are prepared post mortem, which is way too late to be useful in making timely and reasonable managerial decisions. 

  3. The logic of these reports is based on conventional accounting assumptions regarding assets and expenses and may not reflect the real-world business situation of a company.

Today’s technology is capable of supporting alternative approaches to accounting reporting (in addition to those that required by the law) and allows many ways of delivering real-time financial information to users, produced on demand to suit immediate, specific business requirements. Businesses today can track financial and other parameters of a business as data becomes available, in real time. There is no good reason to straggle in darkness between enlightening monthly or quarterly reports. Additionally, lean-based accounting changes the focus of accounting from cost-profit coordinated reports to total value stream live tracking and produces another long-term effect: the company obtains a tool that enables real-time assessment of business activities and which can point out real performance gaps, instead of relying on cost cutting to “fix” a financial report.

Certainly, the three given examples of accounting impact points are not the whole story. The review and reassessment of an entire accounting framework will inevitably lead to changes in an organization’s other business processes as well.

When accounting practices are aligned with an organization’s processes and goals, the financial statements they produce enable better attuned managerial decisions, improving long-term business results. So it may not be a bad idea for an organization to start with accounting when evaluating its business, since it has serious potential for improving a company’s overall business performance.
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