Lean accounting - What is lean accounting?
Lean accounting is streamlining accounting processes within a company to maximise productivity, service, quality, and profit.
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Lean accounting involves several ‘lean practices’ which are used to reduce wasted time and resources. Lean practices are not related to reporting requirements, tax regulations, and compliance, but rather to internal processes that are improving your overall accounting department.
Lean accounting is very different from the standard accounting methods and is somewhat controversial in the world of finance. It does not replace the generally accepted accounting practices, so it should be used alongside the conventional methods of reporting.
Components of lean accounting
Lean accounting includes making financial statements easier to understand and relevant to specific activities within a business. It also involves applying lean principles to the accounting department to ensure that processes are completed consistently in an easier to understand way.
Here are some key elements of lean accounting:
- Lean concepts: ideas for improving accounting processes, the flow of information, and financial documentation.
- Lean culture: encouraging a productive work environment by streamlining communication and teamwork.
- Lean planning: connecting the business goals with lean practices that will help achieve these goals.
- Lean tools: the methods used to decrease waste within the company and to make the organisation ‘leaner’.
Lean accounting example
Lean accounting uses a variety of different concepts and tools to maximise efficiency and profit. Lean accounting involves looking at numbers differently than traditional accounting.
One main approach to lean accounting is how inventory is stored and recorded. A lean company will generally have less stock at any given time to maximise short-term profits.
Inventory will also be recorded on the balance sheet as the total value of all inventory, rather than allocating the value based on individual products.
Lean accounting vs traditional accounting
Several companies have adopted lean principles alongside their standard accounting methods. Lean accounting, however, usually cannot replace traditional accounting and financial reporting methods.
Lean accounting financial statements may differ significantly from traditional accounting statements. This is because lean accounting suggests new ways of looking at numbers and calculating the health of a business.
In traditional cost accounting, overhead costs are assigned to specific products, whereas lean accounting uses value streams to report financial data. Value streams identify all steps from the creation of a product to the delivery to the customer.
The reason that lean accounting reports may not be able to completely replace traditional accounting reports is due to the Generally Accepted Accounting Practices which are a set of reporting standards in the UK that establish how financial statements need to be prepared.
The advantages and disadvantages of lean accounting
As with most accounting methods, lean accounting has its benefits and downsides. Here are some benefits of lean accounting:
- Cost control: lean approaches are all about increasing profits and decreasing wasted costs.
- Improved company culture: one of the main components of lean accounting is a lean culture, which will encourage teamwork, communication, and improved processes.
- Less ‘waste’: lean approaches are used to decrease ‘waste’ such as defects, outdated tools, unnecessary costs, and slow processes.
- Financial management practices: lean accounting includes management decisions based on total value stream profits rather than cost allocation.
Here are some disadvantages of lean accounting:
- Difficult to switch from traditional accounting: switching to lean accounting will involve lots of new processes and may be difficult and slow to implement for everyone to be on the same page.
- High cost of implementation: although lean accounting is all about maximising profits, the cost of implementing lean accounting is high and complex. It will usually need to be done in small steps over a long period of time.
- Inventory problems: one approach to lean accounting is keeping low amounts of stock to increase short-term profits. This may cause issues if orders increase drastically.
- Having to do 2 sets of financial reports: lean accounting reports usually cannot replace standard reports under your countries legal requirements. Your accounting department may have to run 2 different sets of reports if lean accounting is implemented. Most accounting software will only be able to create standard financial reports.