Lean Accounting

Accounting is a necessary part of any business. It is critical to know if the actions a company is taking are making it profitable, or if they are causing the business to bleed cash. Accounting in the best of situations has its challenges. But the advent of Lean has made for some tricky situations in which traditional accounting methods may actually show Lean efforts as having a negative impact on financial performance.

This is most pronounced in the methods traditional accounting uses to account for inventory and for standard costs. For example, traditional accounting shows that lower standard costs mean more profit. Lean accounting, however, understands that creating flow through setup reduction and running smaller batches will increase standard costs, but reduce overall costs of production.

Traditional accounting also shows a reduction in profit that Lean accounting does not when inventory is reduced. The issue comes from the way expenses are recorded as the inventory account is reduced. Even though inventory goes down and cash is freed up, traditional accounting views it as a bad thing.

The goal of Lean accounting is to change the way actions are measured to match the good behaviors of Lean on the shop floor and to eliminate behaviors that make accounting sense, but don’t make sense in the real world.