Original post shared by Partner, Tom Matthews:
My short answer is nothing! The two reasons you don’t get much from your financial statements is 1) they were designed by someone that does not know your business (your CPA/bookkeeper) and it was designed for someone that does not really know your business (IRS, Banker, vendor). You’re spending all this money and it really does you, the owner of your business, no good.
So what is the answer?
There is a reasonably new discipline in my world called “Lean Accounting.” Here is what Wikipedia says: It seeks to move from traditional accounting methods to a system that measures and motivates excellent business practices in the lean enterprise.
This whole concept started in manufacturing as a way to present the cost accounting reports to management in a way that they can be understood. Organizations that adopt lean techniques are very motivated to eliminate waste, free up capacity and improve profitability. I’ll bet you’ve never had anyone saying this is the purpose of reviewing an income statement or balance sheet for your company.
Here are the goals of this new reporting system:
- lean-focused performance measurements
- simple summary direct costing of the value streams
- decision-making and reporting using a box score
- financial reports that are timely and presented in “plain language” that everyone can understand
- radical simplification and elimination of transactional control systems by eliminating the need for them
- driving lean changes from a deep understanding of the value created for the customers
- eliminating traditional budgeting through monthly sales, operations, and financial planning processes (SOFP)
- value-based pricing
- correct understanding of the financial impact of lean change
There is no exact point in time where Lean Accounting began but conventional wisdom says it was Bill Smith, an Engineer at Motorola in the 1980s. It started as this methodology:
- Define the problem as perceived by the customer
- Measure the performance of the process
- Analyze data to determine root causes of problems
- Improve the process
- Control the improvements
As you can see, there is some pretty high-brow stuff in all these definitions. The point is you need to be able to manage your business. In order to do that, you need tools to help you measure, understand, analyze and act. The concepts in lean accounting will do that for you. And it does not matter if you are a billion dollar a year manufacturing company or a $600,000/year service business.
If you really want to get good at this, the gold standard book is called “Lean Accounting Best Practices for Sustainable Integration,” edited by Joe Stenzel.