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Lean Accounting Lessons 1 – Create stability first

by Chris Cooley

In other articles, I have talked about the whole process of implementing lean in finance. The fundamentals of the continuous improvement cycle apply in any lean implementation. Lean QCD have undertaken a recent improvement project to use lean techniques to improve the Finance, Sales Order Processing and Purchasing systems of a MBO manufacturing company in the West Midlands.

Case Study – Background

– Management buy out Sept 2010 with rapid expansion plans
– Sales deflated – operating at 20% of equipment capacity
– Management already bought into lean philosophy
– Manual systems and processes
– State of the art manufacturing equipment
– Poor Finance, Sales Order and Purchase processes

Stage 1 – Stabilise

The stabilisation phase is about removing the big waste. This is defined as the ability to produce consistent results over time.

In the context of this case study it was also defined as protecting the business by conserving cash and giving management a basic level of information in order to make considered decisions.

Steps to achieve stability

  1. Map the current processes
  2. Map the future state processes
  3. Identify big waste
  4. Take action to remove big waste

What did this mean for the Finance area of the business ?

Get the basics right first

  • Ensure that bank transactions are recorded on at least a weekly basis, rather than waiting for the period end – this then provided a basis for the essential need to always know the true cash position
  • Ensure that sales were recorded in the correct period – i.e. when did the goods leave the company and therefore when will we get paid for them. Unsurprisingly goods would be invoiced in the last days of each period without being delivered and without a hope of being paid on time – the company was fooling itself !
  • Reduce processing batch sizes – update the ledgers daily, ensure that the latest system position is the latest position.
  • This linked to the most important lean lesson of all – STOP TO FIX PROBLEMS – a small company mentality with each person having several different jobs to do means that the inclination is to half-finish jobs and leave issues to one side. The failure to stop and fix problems in any area leads to contunued and repeated issues. This mentality resulted in claims against the company, on stop for essential materials and services and customers dis-satisfied.

How did I feel during the stability phase ?

In short – incredibly frustrated !
Here I was 10 years Managing Director experience running companies 10-20 the size of this company, and a further 10 years Financial Director experience, setting up accounting systems, running weekly payrolls and completing bank reconciliations.

I was desperate to add more value – but this stage was completely necessary and the improvements planned from now will succeed because the company systems are stabilised (nearly there anyway).

Where are the company systems now ?

  • Cash is under control – checked daily, reported weekly, forecast accurately
  • Sales are monitored daily against the latest sales forecasts
  • Payroll is reported weekly
  • Relationships with banks and other debt providers are improved
  • Monthly accounts are on time and infinitely more accurate

Still a million miles away from the full benefits of lean accounting, but the basics in place and stability achieved. Now for adding real value ……….

If you are interested in exploring the lessons learned from this case study please feel free to contact us for a no-charge diagnostic review and improvement proposal.

Alternatively please look at some of our other articles on this topic.

The Lean Finance Department

Lean and the Accountant

Lean and the Accountant 2

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