Business Automation and Software Blog

Finalize Your Move to Lean Accounting (part II)

Posted by Robert Baran on Wed, Sep 04, 2019 @ 11:00 AM

No one likes road construction. Between the traffic and the rerouting, slowdowns occur and headaches ensue. But perhaps worst of all are roadblocks, where we thought we had a clear path only to find our planned route blocked.

Last month we talked about some of the perceived roadblocks of moving to lean accounting. Perhaps you scanned those and none of them seemed to apply to your situation, yet you’re still struggling to move to lean accounting. It should be easy to move to a simpler accounting process, right? But sometimes, the bigger the business, the harder it is to just keep focus on the cash flow. If you’re still pushing for lean accounting, there could be a few more orange construction cones in the way.

Don’t remember the first few roadblocks? Refresh your memory here.

Roadblock 5: Precision Does Not Always Equal Accuracy

This actually hearkens back to the time-to-close roadblock. Businesses want their data to be accurate before they close the books. That, in and of itself, is not a bad thing; but even if your business software allows for costs that go down to the hundredth or thousandth decimal place, looks can be deceiving. A number that long can be precise without being accurate.

Fortunately, GAAP (Generally Accepted Accounting Principles) don’t require a number that precise. They do, however, want accuracy. GAAP wants to ensure that financial information helps leadership make decisions. Cash flow—the focus of lean accounting—does that. Knowing your overhead costs down to the most minute percentage of a cent? Not as much.

Roadblock 6: Financial Reports Drive Decisions

This one might seem contradictory to the previous roadblock. After all, didn’t we just say that financial information should help make decisions? Absolutely. What you don’t want, however, is for your reports to cause someone to create a “win” that really isn’t there.

How many times have you heard a sales leader remark that numbers are down and sales needs to make a push for the end of the month/quarter/year? Magically, sales makes the numbers by the deadline, and you might be tempted to think their dedication and hard work paid off. It may not be new orders: It may actually be some accounting tweaks that moved a large order from next month over to this month instead. Voilà, the numbers are suddenly where they needed to be. Until next month, where you have to make up for what you pushed to last month to make those numbers … and the spiral grows.

It’s natural to want to do whatever it takes to make numbers that you’re held accountable for making. As much as possible, resist the urge to let those numbers drive your actions and put you in a numbers hole month after month. Lean accounting’s focus on cash flow reduces the creation of inefficient production that in the end, will cost you more.

Roadblock 7: The Accuracy of Financial Data

Financial data should, of course, be as accurate as possible. As it concerns cash, it typically is. Dollars and cents are absolutely measurable. But other data? That can get a little fuzzier.

Setup costs and inventory carrying costs are part of the economic order quantity (EOQ) metric. This metric is based on logic that says when volume rises, setup and inventory carrying costs both go down, and the EOQ is that perfect intersection between the two that results in the lowest per-unit cost. Unfortunately, this concept doesn’t work quite the way it’s promised.

While most companies estimate inventory carrying costs around 3 percent, depending on the business it could actually be as high as 40 percent. Not to mention that overhead ends up figured into setup costs, resulting in overstated numbers there, too.

To run lean, go back to that small business basic: Focus on the cash flow. And resist the urge to make decisions based on EOQ data.

Roadblock 8: Believing You Can Control Costs With Budgeting

Anyone who’s ever put together a budget knows the long and tedious process it becomes, and how teams might spend more time putting a budget together than they do sticking to it. Believe it or not, detailed budget forecasting might cause you more harm than good in the long run.

Financial analysis looks at—you guessed it—cash flow. What’s coming in? What’s going out? What will a necessary piece of equipment cost us? And as we’ve determined, anything based purely on cash flow will only help you move to lean accounting. Detailed budgets, however, often result in robbing Peter to pay Paul: In order to keep to an exact budget number, finance may determine to put an important equipment purchase on hold, not realizing that having that machinery could actually save the company money in the long run.

Smooth Sailing With Lean Accounting and PositiveVision

Each of these roadblocks to lean accounting can be solved by focusing on the exact thing that lean accounting focuses on: cash flow. Keep it simple by watching what comes in and what goes out. Additional data is not bad to track, but when it comes to accounting, make sure you stick to counting on what really counts.

Ready to make the switch to lean accounting? Having the right partner in place can help you blast through those roadblocks to make a swift and successful change. With PositiveVision, you have access to a top consultant that is committed to making sure its customers have the best software solutions for accurate—and lean—accounting. Set the stage now for your future success by switching to lean accounting with solutions from PositiveVision. Let’s get started now!


Topics: lean accounting