An Introduction to Lean Accounting

Nick KatkoBMA

Timely information for predictive value

Verifiable and valid

information

Plan – Do – Check -- Act

Standardized Work

Goal: Quality Decision Making

Relevance Reliability

Two views of Accounting

Conventional

•measuring financial results

Lean

•measuring the progress to achieve improved future financial results

Lean is a Financial Growth Strategy

1. Eliminate Waste

2. Create Capacity

3. Create competitive advantage

4. Sell more products or

services

5. Revenue Growth

Lean Strategy: Financial Benefits are not direct nor immediate

Commitment to Lean Strategy

Learn & Solve

Problems

CreateCapacity

(time)

Use capacity to create value

Achieve Financial Success

Management Accounting for the Lean Organization

•

Lean StrategyPeople, Value,

Process

Lean Management Accounting System

Lean Business ModelThinking, Learning, Flow/Pull,

Improvement

The Box ScoreRelevant and reliable information for quality decision making

What is a Box Score?

5-7 lean measurements to assess value stream operations.

Actual financial results for the period, based on operations

Measures resource usage in terms of value added and non-value added time.

Integrated Lean Performance Measurements

•Strategic Measures

Strategic Objectives

Monthly

•Value Stream Measures

Value Stream Goals &

Objectives

Weekly

•Cell Measures

CellGoals &

Objectives

Daily

Measures drive Transformation

• Improve 15-20% every yearProductivity: • 100% Delivery: • Turns double every yearInventory:• Reduce defects 50% every yearQuality:• 5-10% improvement in gross marginCost:• Reduce from weeks to days, or days to hoursLead Time:• Sales grow at an increasing rateGrowth:

Value Stream Income Statement

Standard Work: Value Stream Income Statement

Measure Value Stream Profitability

Using Actual, Direct Costs

Minimize allocations

Measure the Flow of Money

Operational Accuracy For Internal Use

Value Stream Cost Definitions

Direct Costs

Value stream controls through

operations & decisions

Can be easily charged to 1

value stream in GL

Shared Costs

Resource or consumption

shared by value streams

Each value stream can

possibly influence the total

cost

Business Support (SG&A)

Other organizational

functional costsDo not assign or

allocate

Value Stream Direct Costs

Labor

Materials

Machine or Equipment

Costs

Other Direct

Value Stream Shared Costs

• Rent, interest, utilities, repairs, maintenance, depreciation

Facility & warehouse

• Value-added process step shared by value streams

• Materials, labor, machine/equipment, other

Production monument

• Purchasing, planning, engineering, quality, receiving, material management, etc.

• Primarily labor, but can have other costs

Operational Support

Value Stream Income Statement

Motors Systems Spare Parts

New Product Design

Support Costs

TOTAL DIVISION

Sales $326,240 $748,894 $453,215 $1,528,349Additional Revenue $0 $0 $12,422 $12,422

Material Costs $111,431 $232,774 $149,561 $87,909 $12,764 $594,439Conversion Costs $57,628 $70,406 $81,579 $203,769 $37,645 $451,027

Outside Process Costs $32,433 $22,991 $22,661 $7,531 $85,616Other Costs $16,040 $57,816 $29,459 $72,721 $176,036

Tooling Costs $4,843 $12,544 $6,588 $23,975

Value Stream Profit $103,865 $352,363 $175,789 ($364,399) ($57,940) $209,678ROS 31.8% 47.1% 38.8% -23.7% -3.8% 13.7%

$925,314$918,807($6,507)

$51,147

$152,0249.9%Division ROS

Corporate Overhead

Division Profit

VALUE STREAMS

Opening InventoryClosing InventoryInventory Change

1. Value Stream Format

2. Operating profit of thevalue streams

5. Financial adjustmentsfor financial reporting

4. All costsnot controlled by

Value Stream teams

3. Actual Costs of Value Stream

Value Stream Capacity

Value Stream Capacity: Quantify the Waste

Productive

• Cycle time X Customer Demand

Nonproductive

• Quality/Rework• Downtime• Overproduction• Inspection• Meetings• Change over

Available

• Total Capacity• - Productive• - Nonproductive• = Available

AvailableCapacity

Sell more

Direct Re-deploy resources

Indirect re-deploy resources

VS Profitability

Link Operational Improvement to Financial Improvement

Lean Financial Management

Value Streams –Profit Centers

Financial Planning

Cost Control & Management

Financial Impact of Improvement

Value Stream Financial Management

Box Score: Standard Work for all financial and operational analysis

VALUE STREAM MAPPING WEEKLY PERFORMANCE REPORTING

USED IN KAIZEN & IMPROVEMENT EVENTS

USED IN ALL FINANCIAL MANAGEMENT & ANALYSIS

BOX SCORE FOR MAJOR LONG TERM PROJECTS

INTEGRATED INTO ANNUAL & MONTHLY PLANNING

Dynamic Relationships in Changing Contexts

Operating Performance

CapacityFinancial Performance

Box Score shows the Impact of Kaizen

Productive Capacity 51% 43%Non-Productive Capacity 30% 19%

Available Capacity 19% 37%Productive Capacity 53% 53%

Non-Productive Capacity 32% 17%Available Capacity 15% 29%

CA

PAC

ITY

Empl

oyee

Mac

hine

s

Sales per Person $7,472 $7,472On-Time Shipment 92% 94%First Time Through 71% 78%Dock-to-Dock Days 33.0 18.5

Average Cost $419.46 $413.97Accounts Receivable Days 54.0 50.0O

PER

ATI

ON

AL

CURRENT STATE

FUTURE STATE

Revenue $332,569 $332,569Material Costs $111,431 $108,446

Conversion Costs $116,753 $116,753Total Costs $228,184 $225,199

Value Stream Profit $104,385 $107,370Return on Sales 31% 32%Inventory Value $209,336 $113,026

Cash Flow $123,117 $288,926

FIN

AN

CIA

L

Measures reflect improvements as waste is eliminated

Elimination of waste changes non-productive capacity into available capacity

The cost of capacity remains the same

Scenario 1:Transfer Excess Capacity

Sales per Person $7,472 $7,472On-Time Shipment 92% 94%First Time Through 71% 78%Dock-to-Dock Days 33.0 18.5

Average Cost $419.46 $413.97Accounts Receivable Days 54.0 50.0

Productive Capacity 51% 43%Non-Productive Capacity 30% 19%

Available Capacity 19% 37%Productive Capacity 53% 53%

Non-Productive Capacity 32% 17%Available Capacity 15% 29%

Revenue $332,569 $332,569Material Costs $111,431 $108,446

Conversion Costs $116,753 $116,753Total Costs $228,184 $225,199

Value Stream Profit $104,385 $107,370Return on Sales 31% 32%Inventory Value $209,336 $113,026

Cash Flow $123,117 $288,926

OPE

RA

TIO

NA

L

CURRENT STATE

FUTURE STATE

FIN

AN

CIA

LC

APA

CIT

Y

Empl

oyee

Mac

hine

s

$8,49394%78%8.5

$399.1754.064%27%9%59%19%22%

$332,569$108,446$108,704$217,151$115,418

35%$51,557$125,984

REMOVE UNNEEDED

Scenario 2: Increase Sales

Sales per Person $7,472 $7,472On-Time Shipment 92% 94%First Time Through 71% 78%Dock-to-Dock Days 33.0 18.5

Average Cost $419.46 $413.97Accounts Receivable Days 54.0 50.0

Productive Capacity 51% 43%Non-Productive Capacity 30% 19%

Available Capacity 19% 37%Productive Capacity 53% 53%

Non-Productive Capacity 32% 17%Available Capacity 15% 29%

Revenue $332,569 $332,569Material Costs $111,431 $108,446

Conversion Costs $116,753 $116,753Total Costs $228,184 $225,199

Value Stream Profit $104,385 $107,370Return on Sales 31% 32%Inventory Value $209,336 $113,026

Cash Flow $123,117 $288,926

OPE

RA

TIO

NA

L

CURRENT STATE

FUTURE STATE

FIN

AN

CIA

LC

APA

CIT

Y

Empl

oyee

Mac

hine

s

$8,49394%78%8.5

$399.1754.064%27%9%59%19%22%

$332,569$108,446$108,704$217,151$115,418

35%$51,557$125,984

REMOVE UNNEEDED

$9,90494%78%8.5

$364.4354.060%24%16%69%20%12%

$427,938$139,545$115,557$255,102$172,836

40%$62,086$156,921

INCREASE SALES

Scenario 3: Bring Outsourced Production In-House

Sales per Person $7,472 $7,472On-Time Shipment 92% 94%First Time Through 71% 78%Dock-to-Dock Days 33.0 18.5

Average Cost $419.46 $413.97Accounts Receivable Days 54.0 50.0

Productive Capacity 51% 43%Non-Productive Capacity 30% 19%

Available Capacity 19% 37%Productive Capacity 53% 53%

Non-Productive Capacity 32% 17%Available Capacity 15% 29%

Revenue $332,569 $332,569Material Costs $111,431 $108,446

Conversion Costs $116,753 $116,753Total Costs $228,184 $225,199

Value Stream Profit $104,385 $107,370Return on Sales 31% 32%Inventory Value $209,336 $113,026

Cash Flow $123,117 $288,926

OPE

RA

TIO

NA

L

CURRENT STATE

FUTURE STATE

FIN

AN

CIA

LC

APA

CIT

Y

Empl

oyee

Mac

hine

s

$9,90494%78%8.5

$364.4354.060%24%16%69%20%12%

$427,938$139,545$115,557$255,102$172,836

40%$62,086$156,921

INCREASE SALES

$7,47295%78%13.5

$384.0750.052%22%26%69%20%11%

$332,569$92,179$116,755$208,934$123,635

37%$71,131$184,263

INSOURCE SUB-ASSY

Planning for a Transformation

Pilot: Develop Lean Financial CoachesLocation: where Lean Thinking is established• One or two value streams or one location• 3-6 month time frame• Cross functional team: Initial set of lean financial coaches

Rapid Implementation by Kaizen • Develop the tools – Box Scores• Team practices using tools in business situations to develop coaching

skills• Develop Starter Kata plan

Starter Kata • Functional deployment with practice routines•Meet regularly to:• evaluate/reflect on deployment: obstacles, problems, issues•adjust if necessary

•Evaluate development of next set of coaches

Lean Financial Coach Role

• in all practice routines during pilot phase

Presence

• Articulating actions related to lean financial principlesListen

• Competing assumptions & thinkingReveal

• Growth mindset• Learning new habitsSeeking

Daily Cell & Weekly Value Stream Practice Routines

Financial impact of not reaching

goals

Potential financial impact

of obstacles

Root cause analysis: of persistent financial problems

Testing operational solutions & measuring

financial impact

Establish Operational –

Financial cause and effect

Improvement Event Practice Routines

Improvement Events

Measure Operational

Impact

Actual Cost Reductions

Measure Impact on Capacity

Financial impact of

changes to capacity

Decision Making & Analytical Practice Routines

Decision Making

or Analysis

Team-based

Kaizen methodology

Standard work: Box Score and

A-3

Coaching cycle

questions

Wrap Up

Numbers drive

thinking

Thinking drives

behavior

Behavior drives

decisions

Decisions drive the numbers

Lean Financial Thinking Principles Create

Economic Value

Customer Value

Maximize Value Stream Profitability

Value Streams

Relevant to Improving

FlowFlow & Pull

Support Continuous

ImprovementContinuous Improvement

Financial Learning System

Empower Employees

Timely information for predictive value

Verifiable and valid

information

Standard Work

Objective Insight

Goal: Quality Decision Making

Relevance Reliability

PLAN

DOCHECK

ACT

Want To Learn More?

Blogs, articles, books etc. BMA Lean Accounting group

www.maskell.com nkatko@maskell.com LinkedIn

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