You may have noticed that the pace of my writing slowed over the last few weeks as the demand for my one day assessments took me to North Carolina, Tennessee, Ohio and Michigan, giving me a chance to get a pretty good look at 11 different manufacturers across a good range of industries. The experience convinced me that companies pursuing lean can be divided into two distinct categories – those that have embraced Lean Accounting, and those that haven't. The lean accounting companies are in the big leagues – they are making improvements at a much greater rate and they have a keener grasp of where their improvement efforts will bear the most fruit. Those that aren't are doing a lot of lean things, but bringing far less to the bottom line, and making fewer improvements in ares critical to achieving their strategic objectives.
The reason for the divide between the high achievers and the rest of the pack is pretty simple. If your company is using a standard cost system, you don't really know what your costs are. You're using bad data based on flawed assumptions and illogical ideas of allocations, as well as assumptions about fixed and variability that make little or no sense. When you are trying to reduce your costs – but your cost data is as bad as that – your improvements are pretty much a crap shoot. It is a stroke of luck when you actually do something to make a meaningful improvement to an significant cost area. For the most part, your improvement efforts are fighting against the cost system. On the other hand, if you are driven by lean accounting principles you are using "real numbers", as my friend Jean Cunningham puts it, so you don't suffer through all of the muck previously described.
Lean accounting is driven by a couple of key principles, but perhaps the most important in the current economy is that the 'real numbers' are based on cash. Traditional accounting – GAAP accounting – has things so screwed up that profits and money almost cease to have any relation to each other. Lean companies view cash flow and profitability as just about one and the same. That is why the traditional companies are way up a creek without a paddle and are laying off in droves in the current tight credit economy, while lean companies are relatively unfazed. Taiichi Ohno summed up the Toyota Production System rather succinctly when he said, "All we are doing is looking at the time line, from the moment the customer gives us an order to the point when we collect the cash. And we are reducing the time line by reducing the non-value adding wastes" Do that and you will have a lot of money in the bank. Chase after some convoluted concept of theoretical book profits based on matching principles and fully absorbed overhead inventory valuations and you will find yourself standing hat in hand in some bankers office begging for help, or hiring lawyers to file your bankruptcy petition.
Every member of your management team has to read Practical Lean Accounting – no ifs, ands or buts if you are going to get lean. It really is the most important lean book you will ever read. Then your CEO and your CFO have to get to Orlando for the Lean Accounting Summit. It's the difference between playing in the lean major leagues or fooling around in the minors. And for many companies, it is apt to mean the difference between being in business a year or two from now … or not.