Why LEAN Really Matters

No, this is not a blog post about losing weight or getting leaner, rather it is about LEAN Accounting. My colleagues over at the LEAN Accounting Blog recently published a great article on Why LEAN Really Matters. Many people do not understand LEAN Accounting and I believe if they did, they would be more profitable.

The purpose of LEAN Accounting is to support LEAN practices as a business strategy. It seeks to move from traditional accounting methods to a system that measures and motivates excellent business practices in the LEAN environment. LEAN is a process that considers the expenditure of resources for any goal other than the creation of value for the end customer to be wasteful, and thus a target for elimination. Working from the perspective of the customer who consumes a product or service, "value" is defined as any action or process that a customer would be willing to pay for.
 
Recently, the LEAN Accountants sat down with business executives to discuss LEAN and its benefits. We discussed how LEAN is for more than just manufacturing and how its concepts can be implemented in other non-manufacturing industries, such as construction or service organizations. Through the discussion, we talked about the key concepts of LEAN (the Eight Deadly Wastes) and the tools available to eliminate these wastes, such as Value Stream Mapping, 5S, Standardized Work, Total Productive Maintenance, Cellular Manufacturing, and Set-up Reduction, just to name a few.
 
During the discussion, we kept thinking about the value of LEAN and how a simple change in efficiency can reap huge long-term profitability benefits. A simple change in a production line or a process flow in a back office could increase output without increasing operational costs which is pure bottom line profit.
 
As we thought deeper into these profitability gains through increased efficiency from LEAN, we started to think more about the real long-term benefits of LEAN. For the business owner, what benefits does LEAN provide long-term?
 
McKonly &  Asbury, LLP works with a number of family owned businesses. Most of these businesses have a few shareholders and most of them are primarily S-corporations. At the end of the day, these owners have invested their lives into their business and for most of them, their business is the single biggest asset in their personal investment portfolio. These owners are always looking for ways to maximize the value of their business and increase their cash flow after taxes.
 
For these business owners, the greatest benefit of LEAN is not going to be the short-term cash flow improvements through efficiencies gained. No, in fact, we would argue that the greatest benefit to the business owner through the implementation of LEAN will be the long-term increase in business value that the owner will recognize.
 
As LEAN operations are implemented, more likely than not, the business owner will see an increase in overall business value. Even if top line revenues would remain flat, if profit margins are improving then bottom line profit and cash flow income will certainty follow. What this means for the business owner is improved cash flow short-term but an increase in long-term business value.
 
Most business valuations of ongoing businesses will look at two main factors to determine value: Income Stream and Marketability. The income stream is usually based upon free cash flow of the business. The traditional methodology is looking at the businesses EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). With a few adjustments for working capital and capital additions, most value is based upon this cash flow analysis. Improving efficiencies in operations will drive improvements in free cash flow even if top line sales are flat or even slightly down. Free cash flow is about what cash is free and available to the business owner once all expenses of the operation are paid. Having increasing revenues but no available free cash at the end does not increase the value of a business, contrary to popular belief.
 
From a marketability perspective, acquirers will look at a business’ cash flow stream and pay a market multiple for that cash flow stream based upon similar or recent transactions. Most acquirers of businesses want to know what the true available free cash flow from a business is. When acquirers review the books and records of a company, they will want to see the historical results of the business as well as what the future projections of the business are. A business investment in LEAN that increases business value through additional available cash flow can drive benefits to the acquirer that they will certainly pay for through the purchase price of the business.
 
Showing improvement in margins due to LEAN implementations will drive future cash flow improvements. These future cash flow improvements will be part of any acquirer’s analysis of future projected cash flows. Strong margins and strong cash flow will certainty make a company more attractive with a higher purchase value. This along with unique LEAN operation methods will also provide a differentiating factor that will possibly command a higher purchase value or multiple of earnings.
 
There are many justifications for why LEAN is important. Outside of those traditional justifications of internal process improvements and customer satisfaction, it is clear that LEAN will provide long-term benefits typically not discussed in most circles of the LEAN world. When thinking about implementing a LEAN project, remember to include in your analysis: 1)Potential increase in long-term business value; 2) Increased marketability of the business due to LEAN operations; and 3) Attractiveness to a potential acquirer due to improved margins and cash flow.
 
For further information on this article or about LEAN, please contact me.

This blog

by Scott Heintzelman - Scott is a CPA, CMA and CFE living in Pennsylvania. Scott is a partner serving on the executive team at McKonly & Asbury LLP, a regional accounting firm with multiple offices in the Mid-Atlantic. The firm has been an IPA ALL-STAR as well as winning Best Places to Work in Pennsylvania for numerous years.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.

42402

Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.

74592

Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.

47375

Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

86988
Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.
19904

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".

54488

William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.

79130

Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.

24513

Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

62881

Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

33891
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
100854
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.
25157

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

51337
Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
26978
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.
31290

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.

98211

The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.

32477

FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.

109097

Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.

59571

Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

38529
Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.
65454

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.

91272

AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.

52353