Lean Accounting is applicable to any company, in any industry, that commits to a Lean strategy. I like to define Lean Accounting this way:
- Lean Financial Accounting: applying lean practices to accounting processes
- A Lean Management Accounting System to support any business that is Lean.
I’ve also heard Lean Accounting experts such as Jean Cunningham, Jerry Solomon, Brian Maskell & Orie Fiume explain it this way:
Lean Financial Accounting as “Lean for Accounting” and a Lean Management Accounting System as “Accounting for Lean.”
It doesn’t really matter exactly what terms or phrases are used, what is important is to understand the distinctions. Let’s look at both in more detail. Lean Financial Accounting is applying lean practices in all accounting processes to improve productivity, delivery, quality and service. Eliminate waste in accounting processes. A simple example is applying lean practices to eliminate waste in the month-end close process to have a shorter close cycle.
Any accounting department can begin applying lean practices to its accounting processes, even if your company has not yet committed to beginning its lean journey. Applying lean practices to accounting processes in no way compromises meeting financial reporting requirements, maintaining compliance with tax laws or other regulations or the internal controls to maintain compliance. In fact, from a lean point of view, maintaining compliance is the quality standard of accounting processes.
Management accounting systems are used by management to control and measure the operations of a business and provide a decision making framework for all types of business decisions. Management accounting systems are for inside the business and not intended to external stakeholders. What we are really talking about here is financial analysis, operational analysis, measurements and other information required to run the business. Management accounting systems do not have to comply with any external regulations.
When a company commits to a Lean strategy, the fundamentals of how the business operates will change as Lean practices are put in place. How the business is controlled, what needs to be measured and the criteria for business decisions will be different than “before Lean.” Internal financial reports, financial analysis, measurements, data used to control the business and decision making criteria all must support “Lean Thinking.”
So a Lean Management Accounting System must be created. This is a journey, much like Lean is a journey. Without a Lean Management Accounting System, there is a disconnect between Lean practices and the information management will be receiving to understand how well the Lean business is running.
Because Management Accounting Systems are not externally regulated, they can be changed by companies. And changing Management Accounting Systems in no way compromises external financial reporting.
The accounting function of any Lean company must lead the transition to a Lean Management Accounting System. The needs and requirements of customers of a Management Accounting system, the management of a company, have changed because of Lean practices. It’s important for the accounting function to make the changes to the output of the Management Accounting system to meet its customers’ needs.