Manufacturing has changed and thrived over the last 15 years under several proven production and performance theories. From total quality management (TQM) to just-in-time production, there is likely no corner of the factory floor that hasn’t been introduced to lean-manufacturing concepts.

But when lean plant efforts fail to synchronize with the accounting function, companies can end up with a false reflection of operational improvements. On the other hand, the same lean objectives that work on the floor -- to drive out waste or introduce just-in-time production, for example -- can also be applied to a manufacturer’s finance department.

From physical supply chain to fiscal supply chain

Lean accounting is a logical step for any manufacturer that wants its improvement commitment reflected in its finance functions. A lean accounting approach challenges conventional accounting systems and replaces them with an overriding philosophy of continuous improvement. While it often doesn’t require costly new software or extensive plan implementation, lean thinking in finance does require an entirely different perspective, one that starts with a stronger understanding of the factory floor.

In order to create lean-reflective financials, accounting teams should participate fully in a plant’s lean initiatives. Individuals responsible for a manufacturer’s financial functions must also frequently shadow the line. Only by following the complex manufacturing process can an accounting team recognize the true impact of labor routines, materials management, and overhead. By witnessing the various efforts to eliminate waste within the organization, they can then more accurately reflect the benefit of those activities in the financial statements.

With this valuable insight, finance teams can adopt accounting methods more suitable to a lean operation. They can appropriately revamp their accounting language and retool their systems, making them more relevant and more accessible to factory personnel.

Leaning past old ways

The first of the old finance ways to go is batch accounting. If an organization has foregone batch manufacturing in favor of lean, then why not abandon the old system of processing payables and receivables monthly?

Batch accounting can be a hindrance to a lean organization. It delays payments and closes and conceals errors for lengthy periods, which can adversely affect the cash conversion cycle. 

Traditional cost accounting can also distort the financial realities and advantages of a just-in-time environment. For instance, inventory is slashed to support lean efforts but the system continues to calculate labor and overhead, deferring those costs (material, labor, overhead) to the profit-and-loss statement. Overhead costs are thus spread across lower production volumes, creating a short-term negative snapshot of profits, when the reality is that the cash-flow picture looks good.

Therefore, the numbers in a cost-based system can’t properly reflect the actual benefits of lean, which include increased cash flow, reduced floor space and inventory, and freed-up capacity.

Instead of conventionally calculating a cost per unit, manufacturers might do well to consider a cost management approach. Such an approach better reflects the business by calculating the costs of meeting customer demand.

As manufacturers do reduce their inventory order sizes and increase the frequency of deliveries to meet just-in-time demands, traditional accounting will likewise need to address the inevitable time wasters that will result. Because inventory turns are increased, accounting must simplify its bill-paying activities and tracking, or else become buried in an avalanche of purchase orders and invoices. Reducing the excess paper trail also opens up possibilities for more value-added accounting activities.

Improvements take time

Transitioning to lean accounting methods calls for patience and a new understanding of financial metrics. Just as introducing lean concepts to the factory floor can take a considerable investment of time and resources, likewise applying lean concepts to accounting requires a long-term perspective. But the switch will result in improvements and provide a more realistic indication of lean manufacturing’s benefits.