(Register for the “Financial and Accounting Best Practices using ERP Software Webinar” in cooperation with Ordre des CPA du Québec – in French.)
You’ve probably already heard of the Lean Manufacturing approach developed by Toyota in the 20th century: an approach revolutionary in its opposition to almost all the tenets of mass production. If its benefits are obvious on the production floor, but how does it rate from the point of view of finances and controls?
Cash flow, the crux of the matter
One of the first responsibilities of a controller is to always keep an eye on the cash flow of the company. The Lean method insists on the importance of reducing inventory levels and on an acceleration of the production cycle, which can free up a surprising amount of cash.
Reducing inventory to a strict minimum
Reducing inventory levels leaves capital where it is most useful: in the bank! Rather than letting capital sleep on the shelves in the form of inventory, this money can then be used to finance expansion or optimization projects, or even to get through a difficult period.
The Lean approach tries to identify — and eventually eliminate —activities and delays that don’t add value for the customer in the production cycle. This generally reduces production time considerably. If production accelerates, it means there’s less time between expenses spent on raw materials or labour, and the moment when the client gets invoiced and thus, the moment you get paid. This releases even more liquidity that is “sleeping” in the Work in Progress inventory.
Paradigm shift: what is control?
The concept of control can often seem to conflict with the objectives of the Lean method. To optimize the flow of materials and accelerate procedures, whether they are administrative or production-related, traditional methods of control will tend to be eliminated.
Getting the approval for a purchase order greater than X amount of dollars, recalculating the commission amounts paid to sales reps, double-checking the accuracy of an order that is ready to be shipped to a client: these are examples of what the Lean method calls waste.
One of the main precepts of the Lean method is to incorporate “quality” within the process so as to eliminate quality controls, which represent waste. By using properly configured workflows, an ERP system can reconcile this concept with the internal needs for control in a business.
A Lean Accounting Department
When discussing the Lean method, we immediately think of the manufacturing world. But this method applies just as well to the service sector and even to internal administrative business processes. Eliminate loss, reduce cycle time — these are objectives that accounting and financial departments should try to achieve.
If you’re interested in this subject and want to learn more, we’ll be giving a more in-depth webinar on September 14. You’ll have the opportunity to see how the Lean method can help you accomplish more with the same resources, and how an ERP system can help you in achieving this goal.