Why is lean accounting necessary in the supply chain?

Knowing how to manage your finances is important for any business. If you aren't sure how much money you have in your accounts, you won't be able to pay your bills. Overseeing cash flow is crucial for keeping your finances in order. However, the processes in the supply chain are changing, and you'll need an accounting method that will accommodate those switches.

What accounting methods are currently used?
Traditionally, there are two main techniques for overseeing the money coming in and going out of a company: accrual and cash. Both methods have their advantages and disadvantages. However, one may benefit the business more than the other depending on the size and income of the company.

With cash accounting, you don't count any transactions until you receive payments or the bills are taken out of your account, explained NOLO, an online legal resource for consumers and businesses. This method is used primarily by smaller businesses and may offer a more accurate account of your finances. Because you don't record any payments coming in or going out of the company until they're actually received, you'll always know how much money you have in the bank. However, this may provide an inaccurate statement of your successes and struggles because sales cannot be recorded until payments are received.

Accrual accounting is the opposite. Revenue and expenses are included in your budget when the services are completed or the products are delivered, according to NOLO. This allows you to keep a more accurate record of your cash flow, as you'll see your sales as they happen. However, this may give the appearance that you have more or less money than is actually in your accounts.

How does the supply chain affect accounting?
In today's society, more emphasis has been placed on conserving resources and protecting the environment. However, with traditional manufacturing methods, that cannot always happen. Both materials and money can go to waste, as companies are thinking in terms of mass production, explained BMA Inc., a lean manufacturing consulting company. This can lead to excess inventory for businesses and higher costs for consumers.

A new workflow has made its way to the market to reduce these results. Lean manufacturing works to reduce waste, meet demand, lower prices and create a more efficient supply chain, the Journal of Accountancy claimed. Processes in production are moved near each other so that the products can switch stations with ease. This cuts lead-time and lowers prices because companies are able to create products when their customers want them. However, this manufacturing process requires a special type of accounting to take these changes into consideration.

Lean accounting allows people to make real-time decisions based on weekly reports and production expenses, Luis Socconini, the founder and director of the Lean Six Sigma Institute, explained to IndustryWeek contributor Michele Nash-Hoff. The method can improve accounts payable and receivable, payroll, inventory and budgets. Lean accounting may even be able to help determine prices and see which products are successful.

Companies that have switched to both lean accounting and manufacturing have experienced significant benefits, such as:

• Shortened delivery times from three weeks to four days.
• Improved quality.
• Reduction in inventory storage from six months to less than two months.
• Increased employee productivity to $2,750 from $1,560.

Despite the benefits, not many businesses have made the switch to the new method. However, Socconini believed lean accounting will be popular in the next five to 10 years.

By switching to lean accounting, you are able to accommodate the changes in the supply chain. The efficiency and speed of the new manufacturing process will need to be accounted for in the financial records, as traditional cash and accrual accounting may not be as accurate throughout all parts of the workflow.