You’re getting your financial statements today. You pour yourself an extra large coffee and amble into the office, wondering how long this will take. The accountant walks you through the line items. As he does, you get the same nagging thought that you wished you know more about what’s behind these numbers. The nagging goes away; after all, these statements are about things that happened months ago. You sign them approved, eager to stop looking at history you already know and get on with managing your business.

Does this sound familiar? It’s shocking how many executives know almost nothing about what really goes into their financials. Statements have evolved to be so complex that it makes the accountants wielding them look like magicians (which is probably why they’re so complex in the  first place) and the executives feel like toddlers asking silly questions.

Let’s stop this. The people who run their businesses should know how their dollars are being used as it’s happening (not 2 months after when nothing can be done about it). The accountant’s job should be to empower clients, not baffle them. If the first paragraph reminded you of your accountant meetings, you’re in good company with most executives out there.

We’re going to turn your financial statements on their heads so that you feel empowered to take action when you read them. Let’s find out how…

Lean vs. Traditional Accounting 

The first thing to know about your traditional accounting statements is that they aren’t neutral: what they show and what they conceal actively affects the way you think about your business’s financial performance.

Lean is about creating a customer-driven production model, improving processes over time, and generating actionable data. Traditional statements don’t just not show you these things, they will work against you trying to implement lean. They are, to quote lean accounting guru Brian Maskell, “anti-lean.” Here’s how:

1) Traditional statements class inventory on hand as an asset, even if you have no customers. You pay for the labour, the materials, and the overhead to build your widget, and at the moment when you have spent the most money, it becomes an asset, even as it collects dust in the back warehouse.

By this logic, the more inventory we have (even if none of it has sold) the better profit we’re going to show. Lean recognizes that high inventory levels are one of wastes’ favourite hiding places. Excess inventory can be a business killer, and it’s lean’s constant nemesis.

2) Traditional statements measure outcomes and not processes. Focusing on outcomes denies the opportunity to eliminate waste from processes. It also encourages us to increase our outcomes (which are usually assets), even if the process is direly wasteful.

3) By the time your financial statements come along, it’s too late to do anything with them. They’re historical, static documents. Even if they were still actionable when they come out, they’ve evolved to be so complex that they overwhelm more than they empower.

What is Lean Accounting? 

Lean accounting motivates lean action. It drives continuous improvement by measuring processes over outcomes and it presents numbers in simple, clear formats so they drive you to do better.

Lean manufacturing pivots production from the company “pushing” the process to the customer “pulling” it. The accounting side of lean operates the same way. It reverses your financials from being about your company to being about the customer (who is, after all, the reason your company exists).

A lean accountant will wade into your traditional statements and reorganize costs into “value-added” and “non value-added.” Value-added is every cost that the custom is willing to pay for (raw materials, necessary labour, etc). Non value-added expenses are costs that customers aren’t willing to pay for. The can include expense accounts, excessive travel (consider online conferencing, instead), and legal fees among many, many others.

Why it’s Essential 

Whether you’re retail, service, manufacturing, or government, it’s going to be very difficult to implement lean in your business without switching to lean accounting. Your traditional  statements will discourage any progress you’re making. It will be like trying to quit smoking while in a house full of smokers.

Lean accounting not only creates a system that makes waste visible, it acts as a motivator for all other processes. Once a lean accounting system is set up, it acts as a neon sign of what is wasteful and a reminder/ motivator for management to commit consistently to lean.

Lean accounting statements are like business coaches in your ear, challenging you to act on the waste that has been made visible in front of you. The accounting meetings I described in the first paragraph will be replaced with meetings that you walk out of motivated and excited about the changes you’re making and will continue to make.