Lean accounting methods make sense

I'm no accountant. I did well to pass accounting in college. I hated it -- and perhaps I have figured out why. In an environment based on continuous improvement, traditional accounting does not work.

Now before I get all the accountants mad at me -- including my daughter and son-inlaw, who both are practicing accountants -- let me clarify. Companies are driven by the bottom line. More income than expense equals success. That makes sense, and moreover, that is largely true. However, in a lean environment, success is driven by the ability to meet customer demand. This, I am beginning to believe, is where traditional accounting and financial reporting comes into a rub with the lean production process. Traditional accounting and financial reporting really does not provide an accurate way to measure the benefits of operating as a Lean Enterprise and let management quickly see the progress. 

Our fourth annual "Accounting For a Lean Enterprise" workshop is currently in day #2. Our instructors, Dr. DeWayne Searcy from the Auburn University College of Business and Dr. Frances Kennedy of the accounting program at Clemson University, have teamed up to serve as this year's workshop instructors. I've gotta say, they make me almost (almost is the qualifier) like accounting. Seriously, they make it make sense.

Not to spill the full candy jar, 'cause we really want you to attend our workshop to get the whole menu -- and we are already setting the stage for next year's event here at Pensacola Beach, Florida -- but here is a sampling of the kind of "sense making" lessons being taught:

Traditional financial reporting supported traditional manufacturing quite well, but these process assumptions give rise to seven significant accounting myths:

Myth #1: Inventory is an asset – Reality – Profits are earned by selling products.

Myth #2: Holding managers accountable for optimizing their department’s performance equates with the delivery of optimal customer value – Reality – Value streams deliver customer satisfaction.

Myth #3: Accountants drive improvement by seeking explanations for variances – Reality – Non-financial operational data helps line workers manage business processes.

Myth #4: The monthly financial accounting cycle should define the time frame for reporting data to decision makers – Reality – Real-time data is needed to enable process improvement.

Myth #5: Idle time is a sign of inefficiency – Reality – Idle time is OK isfthere are no customer orders to till at the moment.

Myth #6: Companies succeed by comparing their actual performance to internally generated (an often stagnant) standards of performance. – Reality – Companies succeed by improving actual performance at a faster rate than competitors.

Myth #7: Profits are maximized by reducing expenses (the largest being labor) – Reality – Workers are an asset that should be cross-trained and highly skilled.

I invite you to visit our Facebook and Twitter pages to follow along with the highlights of our ongoing three-day lean accounting workshop. Post your comments and let us hear what you think, what you agree with, or what you argue against.