Strategic Role Of Non Financial

Indicators & Lean Accounting

Prepared and Presented by Tunisha
 Introduction
We all know that studying a company’s financial statements is the best
indicator of the financial health of a company. Analysts and investors also
consider other financial measures, such as ratio analysis, to understand the
financial position. However, over the last few years, experts and analysts are
using non-financial performance measures as well to understand and reveal
the things that financial measures don’t tell.
In the simplest form, the non-financial performance measures give you the
information on a company’s performance in non-monetary or non-money
terms.
Usually, these measures help to understand the quality of the product or
service that a company offers. For instance, an airline uses several non-
monetary measures to gauze its performance, such as customer complaints,
instances of lost baggage, on-time performance and more.
What are Non Financial Indicators?
Non-financial indicators are performance measures that
cannot be expressed in monetary units. Though one
can’t express non financial measures in money terms,
these measures can be qualitative and quantitative.
Common financial metrics include earnings, profit
margin and return on assets. Measures such as customer
satisfaction, brand development, category ownership
and employee motivation fall into the non-financial
metrics.
There are a number of meaningful non-financial
metrics.  However the following four have a significant
impact on the performance of almost all the
organizations :

Company reputation
Customer influence and value
Competitiveness  
Innovation
 Examples
The following are some of the common non-financial performance
measures. Companies primarily use these measures to evaluate the
performance in relation to the customers, internal processes, and
Learning & Growth.
To measure the performance in relation to the Customers, a company can
use Conversion Rate, Retention Rate, Customer Satisfaction, Customer
Complaints, wait time for the customer and Brand Recognition.
For measuring the performance in relation to the Internal Processes, a
company can use Instances of Customer Support, Product Defect
Percentage, Order accuracy, On-Time Delivery, and Production efficiency.
To measure the performance in relation to Learning & Growth, a
company can use Average Time to Hire, Salary Competitiveness Ratio
(SCR), Employee Productivity Rate, and Internal Promotion Rate.
 Strategic role of non financial indicators
These measures support the financial measures or KPI (key
performance indicators). Most financial measures are lagging
indicators, which means they reflect what has already happened. For
example, revenue that a company earns from selling the product last
year. Thus, management uses non-financial measures to get an idea
of future financial performance.
Management also needs non-financial measures because it is easy to
link them to the company’s strategy. Companies don’t have their
vision or mission statement in money terms. For example, if the
mission of a company is to be the number one service provider, then
its revenue won’t help to track the progress towards the mission. In
such a case, customer satisfaction scores will prove to be a good
measure.
Third, many believe that “intangible assets” such as
customer loyalty and patents play a bigger role in the
success of a company than the tangible assets. It often gets
difficult to quantify the intangible assets in monetary terms.
Thus, a company can use non-financial measures to get
quantitative and qualitative data on intangible assets.

Financial indicators do not give the full picture. For instance,

they don’t tell why the sales are dropping, or why the cash
flow is reducing. To get answers to such questions,
management turns to non-financial measures.
Benefits of Non Financial Indicators
TRACK STRENGTHS AND WEAKNESSES
If a company performs better in solving customer’s concerns, but
customers had to wait for a long time for this, then non-financial
measures, such as a simple feedback form would catch this. Thus,
these measures help to reveal the core competencies and also the
areas that need improvement.

REVEAL BUSINESS PERFORMANCE

The financial performance of business automatically reflects in the
bottom line. Any under or over performance can be easily tracked
to the source using non-financial measures. For example, an
increase in the HR budget could reflect a high turnover rate.
FEEDBACK TO EMPLOYEES
Non-financial measures help to support the company’s strategies. As a result,
the departments and employees know what efforts they need to make to
meet the objectives. Also, non-financial measures help employees understand
how small things make a big difference, such as their daily attendance helps to
boost productivity. We can say that non-financial performance measures help
to establish a connection between the strategies and daily tasks.

ASSESS IMPACT OF EXTERNAL FACTORS

There are several types of external risks that a business faces. Such risks are
not in a company’s control, such as recession, the act of God, war and more.
These risks impact the revenue and expenses of a company. In such situations,
looking only at the financial indicators could provide an inaccurate picture of a
company. Thus, using non-financial measures gives a more holistic view. For
instance, if you are getting good scores in customer service and customer
satisfaction during such times, it would mean that the companies would get
on track soon after the macro factors get favorable.
Definition
According to James P. Womack and Daniel T. Jones,
“Lean accounting is doing more with less by employing
lean thinking. It involves never ending efforts to eliminate
or reduce waste in design, manufacturing, distribution
and customer service processes. It has been rigorously
applied to the accounting, control, measurement, and
management of business.”
 What is Lean Accounting?
Lean accounting, in the simplified form, is a systematic
approach to eliminate waste through continuous
improvement.
 Waste can come in three main forms:

1. Mura (waste due to variation)

2. Muri (waste due to overburdening people, equipment or system)
3. Muda (transportation, waiting, overproduction, over-processing,
inventory, defect, and disengagement of people)

In above three, generally Muda can be classified into two types i.e.
Type-1 muda and Type-2 muda.
Type-1 muda includes non value added work but necessary for the
system to function. This can be reduced but not eliminated.
Type-2 muda includes non value added and unnecessary work of
system. Lean accounting first removes Type-2 muda and then works
against Type-1 muda.
Importance of Lean Accounting
It provides timely information that can be understood
and used by everyone and the information that
everybody can understand, leads to better results and
decisions.
Better decisions lead to better pricing, production,
design, low inventories, short lead-times, better
customer services, and high productivity.
Lean accounting correctly shows the potential financial
benefits of lean improvements and concentrates on the
tactics required to realize the benefits.
It eliminates wasteful transactions from the system so that
simple and much less work is left for the accountants,
operational people, engineers, managers, supervisors, and
people supporting the customers. It helps in adding value to the
system.
It focuses the business around the value created for the customer
by linking performance measurements to the drivers of value
creation and driving changes to maximize this value.
It replaces traditional measurements with few and focused lean
performance measurements that motivate lean behavior at all
levels of the organization and create continuous lean
improvements.
Principles of Lean Accounting
1. DEFINE VALUE: The value should be defined in terms of a specific
product, with specific capabilities, offered at a specific price and time
from the perspective of the end customer.

2. IDENTIFY VALUE STREAMS: This principle denotes to identify the entire

value stream for each service, product or product family and
elimination of waste. The value stream is the sequence of processes
through which a product is transformed from raw material to final
product that is delivered to the customer. Identifying the value stream
almost always exposes enormous amounts of waste in the form of
unnecessary steps, backtracking, and scrap, as the throughput travels
from department to department and from company to company. Lean
accounting focuses on the total cost of the flow through the value
stream without any waste and endows with excellent cost control.
3. FLOW AND PULL: The production process is designed to maximize the
flow of the product through value stream. It means working on each
design, order, and product continuously from beginning to end so that
there is no waiting, downtime, or waste, within or between the steps.
As flow is introduced let the customer pull i.e., to provide what the
customer wants only when the customer wants it.

4. EMPOWERMENT OF PEOPLE: Lean accounting supports empowerment

of people. The system of measurement and control provides each
employee with the information and authority to take necessary action
at the time when it is required.

5. PURSUE PERFECTION: A lean thinking enterprise sets its sights on

perfection. The idea of total quality management is to systematically
and continuously remove the root causes of poor quality – with the
ultimate goal of achieving zero defects.
PRINCIPLES PRACTICES TOOLS OF LEAN
ACCOUNTING
Lean & Simple Business Continuously eliminate Value Stream mapping
Accounting waste from the Kaizen
transactions processes, PDCA
reports and other
accounting methods
Accounting processes that Customer & supplier value Target costing
support lean and cost management
transformation
Clear & Timely Financial reporting “Plain English” financial
communication of statements
information
Planning from a lean Invest in people Performance
perspective measurement tracking
continuous improvement,
employee training, Profit
sharing
Strengthen Internal Inventory valuation Simple methods to value
accounting control inventory without the
requirement for perpetual
inventory records
Tools of Lean Accounting
VALUE STREAM MAPPING
Value-stream mapping, also known as "material- and
information-flow mapping", is a lean-management method for
analyzing the current state and designing a future state for the
series of events that take a product or service from the beginning
of the specific process until it reaches the customer.

KAIZEN
It is a technique of lean management which shows continuous
improvement. It seeks to achieve small but continuous changes in
processes with the intention of improved quality and competence
in a systematic manner. It is an ongoing effort to improve
products, services or processes where employees work together
proactively to achieve regular, incremental improvements in the
manufacturing process.
TARGET COSTING
It is a system under which company has planned its product
cost and profit in advance that it wants to achieve for a new
product. It is a market driven cost which is computed before
a product is produced through market research and
competitor analysis.
Target costs are calculated by using a formula i.e.
Market price – Required profit margin = Target cost.

PLAN-DO-CHECK-ACT (PDCA)
It is a four step technique which assesses current situation
and plans for future. It checks the action taken over using
measures. It identifies root cause and generates solutions.
Then it examines the effectiveness of solutions and develops
new standard of work to sustain improvements.
PLAIN ENGLISH FINANCIAL STATEMENTS
Financial statements in lean accounting prepared in
simple and plain English format which is easily
understandable. In other words, a major change in the
lean conversion is to move away from a standard-cost
based profit and loss statement to one that is prepared
using “Plain English”. The Profit and Loss with variances
that don’t explain what has happened with the business
but, instead, lean accounting offers financial reports that
allow the readers of the financial statements to make
meaningful conclusions and decisions about the state of
the business.
 The 5-s system
5S is a system to reduce waste and optimize productivity
through maintaining an orderly workplace. Implementation of
this method "cleans up" and organizes the workplace basically
in its existing configuration.
5S is Sort, Set In, Shine, Standardize, and Sustain. It is a tool to
eliminate waste from a poorly organized work area. According
to it, firstly sort the area. It means to eliminate that which is
not needed. Secondly, organize the remaining items or set
them in order. Make the work area shine i.e. clean and inspect
work area everyday then write standards for above. Finally,
keep it sustained and regularly apply the standards.
Transaction Elimination Matrix
Transaction Elimination Matrix shows an action plan for
elimination of transactions. It is just a simple table
which enables the lean accounting team as to how the
changes are made and how to eliminate transactions at
each stage. Once a company undergoes with the lean
accounting methods, there are lots of wasteful
transactions that must be gradually eliminated by the
transaction elimination matrix which ensure that the
lean accounting changes are made prudently.
 OTHER TOOLS
GEMBA
Gemba (the real place) is a philosophy that reminds the top level
management to get out of the offices and spend their time on the
plant floor- the place where real action occurs. It promotes a deep
and thorough understanding of real world manufacturing issues by
first hand observation and by talking with plant floor employees.

BOTTLENECK ANALYSIS
It identifies which part of the manufacturing process limits the
overall throughput and improves the performance of the part of
the process. It improves throughput time by strengthening the
weakest link in the manufacturing process.
Companies that use lean accounting
TOYOTA
The automobile giant was perhaps the first major company to adopt this lean
ideology in their manufacturing processes, initially calling the method the Toyota
Production System. Not only have they eliminated waste but they have also
mastered the techniques required to minimize faulty products that do not meet
customer needs. Toyota works with two primary processes that allow these goals to
be reached. The first is a process called Jidoka, which translates roughly to
“mechanization with the help of humans.” This means that although some aspects of
the job are automated, humans are continually checking the quality of the product.
There are also programs built into the system that allows the machines to shut
themselves down if someone spots a problem. The second part is known as the Just
In Time or JIT model. This ensures that the next step of a process is only started once
the previous phase is completed. This way, if there is a flaw in the assembly line, no
extra and unnecessary work will be completed. This lean manufacturing technique
has paved the way for dozens of other companies to follow in their footsteps.
 Intel
Known for their computer processors, Intel adopted the lean
manufacturing techniques to provide a higher quality product
to an industry that demands zero bugs. This ideology has
helped reduce the time to bring a microchip to the factory
from more than three months in the past to less than ten days.
With items so precise and technical, Intel quickly realized that
producing a higher quantity of lower quality was not the way
to improve profits and increase customer satisfaction. Instead,
by implementing quality control factors and waste reduction
techniques, both parties benefit. This is even more so true in
the tech industry where products are changing and being
upgraded so frequently.
 Nike
The famous shoe and clothing giant has also adopted lean
manufacturing techniques. Much like other businesses,
Nike saw less waste and higher customer value, but also
some unforeseen benefits. Lean manufacturing was shown
to reduce poor labor practices in their overseas
manufacturing plant by up to fifteen percent. This was
mainly due to lean manufacturing valuing the worker more
than previous labor practices. It gave more significant
value to an employee and in turn higher value to the
company as a whole.