MaRS Library Lean practices for startups: Lean accounting
As technology improves and global competition for business increases, lean practices are gaining popularity and are applicable to all businesses. For startups, lean practices are relevant for those innovating or creating new products and services.
Lean accounting refers to the financial information accumulated and reported in support of lean practices, as well as the implementation of lean practices in the accounting department.
Implement lean practices company-wide—this includes lean accounting
The use of lean strategies can have significant rewards both financially and in terms of the speed with which your business operates. However, if the lean practices are not properly implemented or if all of the departments, including the accounting department, do not actively engage in them, the benefits will not be fully realized.
Lean accounting is not a separate type of accounting standards or Generally Accepted Accounting Principles (GAAP). Its use is intended to comply with the valuation methods allowed by GAAP (although it may lead to a different policy choice where there are options). Lean accounting is largely a change in the processes that are used in the accounting department to record and report the financial results produced through lean practices.
Eliminate unnecessary reporting with lean accounting
Lean practices focus on creating efficient or lean operations that eliminate non-value-added work and unnecessary costs, which in turn result in more timely decision making. In a manufacturing process, for example, this would involve decreasing the inventory and the costs of carrying a large inventory.
In a lean accounting department, bookkeeping processes are streamlined to provide financial information in support of the lean practices, and to remove unnecessary reporting or measurements. Lean accounting also means reporting in a more straightforward manner. Complex performance measures such as standard costing, which require a significant increase in the accounting processes and reconciliations, are eliminated and replaced by real-time financial reports. In a lean startup, this approach also requires continuous validation of market acceptance of the product or solution.
Making the accounting processes lean means that both the accounting personnel and operations personnel (who may be involved in accounting reports) can focus more on business operations and financial planning, and provide information to operations personnel that is relevant in support of lean practices.
Lean accounting supports other business areas
Lean practices, such as a just-in-time (JIT) strategy for inventory, created significant savings when they were first implemented in the manufacturing industry. However, to succeed, they require planning, both before their implementation and on an ongoing basis. All of the organization’s departments as well as the company’s suppliers need to work together to effect these strategies.
If your business is operates with decreased inventory levels, it is vital that orders are received just in time for them to be incorporated into the manufacturing process. If financial information is not aligned with lean practices, it can be misleading and result in poor decision making. This could cause the timing of purchases to be improperly managed, which in turn could affect production lines, slowing them or forcing them to stop entirely until deliveries arrive. If production is too tightly scheduled, it can further result in key deliveries to your customers being missed.
A lean accounting department is meant to support these lean practices by providing accurate and timely information to assist the rest of the company. As a result of having more relevant information, other departments can make better decisions in the pursuit of their operational objectives.
Additionally, businesses often find that when they continue to use standard measurement techniques rather than lean accounting measures, it is difficult to evaluate the benefits of having implemented the lean business practices. By adapting lean practices in the accounting department as well in the operational departments, the accounting department can better support the analysis of these strategies.