LEAN ACCOUNTING

1. LEAN ACCOUNTING CAPT Larry R. White, CMA, CFM, CPA, CGFM Commanding Officer, USCG Finance Center

2. What is Lean Accounting? • Lean Techniques should be applied to accounting processes. • Managing & measuring operations by financial accounting measures often produces bad decisions. • Tradition accounting measures can impede implementation of lean in operations. • Value Stream Focus

3. Outline • Lean in financial transaction processing. • Understanding the Financial Accounting/Reporting Perspective • If they won’t understand you, maybe I can help you understand them…..

4. Lean Six Sigma atUSCG Finance Center Customers: USCG, TSA, DNDO, DHS Purchase Card Transactions: 2,000,000 Payments/$5B Financial Reports: 600/month Staffing: 360 GS, 22 Military, 170 contractors. Second largest data center in CG.

5. Impact to Date • Backlogs/Work in Process – 1 day or less • 1 year ago 20 days or more • Managing to daily inflow, not prompt pay deadline • Redeploy 20 FTE, about 20 more likely • Overtime 75% of prior year • Most recently 20% of prior period

6. Eliminate Waste Continuous Improvement Respect for People Get Control of the Work (1 day WIP) Improvement is everyone’s job, all the time Know what the customer values from your process better than they do – and delight them! Lean Concepts FinCen Concepts

7. Implementing Lean • Management Socialization • Workforce Socialization • Implementation: • Training • Projects • Management Structure & Mechanisms • Priorities

8. Typical Weekly Lean Activities • Daily Operations Meetings: • Backlog, Error Rates • Team Process Improvement Meetings – Tues & Thurs • Project Generation • Weekly Status Meeting & Project Follow-up • LSS Program Meeting w/Blackbelts

9. Real Benefits • View Operations as a Production Process • Accounting mindset to production mindset • Focus on the process, not the person • Performance Targets (Quality & Efficiency) • Improvement - Willingness to accept change • Customer focus • Respect for People • Your work is important and management is interested. • It’s not all about the IT system.

10. The Accounting Perspective

11. Business Environment/CapitalMarkets Regulators Auditors Analysts Investors Etc. External Financial Reporting Value Creating Operations Decision Support, Planning, & Control Suppliers Customers Competitors

12. Balance in the Accounting Profession Management Accounting: Decision Support, Planning, & Control over Value Creating Operations Financial Reporting & Oversight Preparing and Auditing GAAP Financial Statements

13. GAAP Financial Reporting • Objective: • Information to present & potential Investors & Creditors in making resource allocation decisions • Assess amounts, timing, & uncertainty of future cash flows • Not designed to show value of an entity • Measured on Accrual Accounting basis • GAAP is an economic model–inherently abstract • Assess Stewardship Responsibility of Mgt • Protect entity’s economic resources • Comply w/law, regulation, contractual provisions

14. Characteristics of GAAP FR • Relevance (to Investors & Creditors) • Predictive & Confirmatory Value, Timeliness • Faithful Representation (of real world economic phenomena) • Verifiable (general consensus, not complete agreement, on representation & measurement method) • Neutral • Complete • Comparability (includes consistency) • Understandability (to those with reasonable knowledge of FR & with reasonably diligent study) • Constraints: Materiality, Benefits & Costs (to investors & creditors)

15. Internal Control/SOX • Internal Controls over Financial Reporting • Process Maps • Evidence Generated • Controls Tested • Internal Controls over Compliance w/Law & Regulation • Intern Controls over Operations • Opportunity!!!!!

16. Cost Management is a key contributor to achieving strategic objectives. Need for “actionable” cost information a top priority Despite importance, cost information is often impaired Implementing new cost mgt tools & systems islow to medium priority Traditional mgt accounting tools remain in wide use. Decision makers require clear, quantified value proposition for new tools. IMA Cost Management Survey

17. Activity Based Methods Target Costing Capacity Mgt Asset Mgt Process Mgt Extended Enterprise Lean Enterprise Theory of Constraints Process Based Financial Reporting Non-financial Performance Measurement Strategy Planning & Execution Customer Lifetime Value Enterprise Risk Mgt Resource Consumption Accounting Strategic Tools for Management Accounting

18. Accounting Problems with Lean & Operational Improvements • Change creates complexity • Accounting uses lots of estimates and changing them is a big deal • People believe information fm the accountants, even when its silly & old • Depreciation and which machine makes a cheaper product • Most decision making is “on the margin”, not full cost. (within the production value stream) • Understanding the nature of cost is critical. • Costs become more fixed & less decision relevant • Fixed costs/investment creates leverage capability • Relevance or attributable (to an operational decision) • Operational measures, not Financial, are the leading indicators of success.

19. What is Lean Accounting? • What I do at the Finance Center? • Removing Financial Accounting/Reporting fictions from operational decision making? • Focusing on financial information relevant to the production value stream. • What problems does accounting and financial control create for you?