Month End Close

1. Month End Close Lean Reporting and Control

2. Month end close • Traditional financial reports created from standard cost accounting often cannot be understood by management & operations without explanation from finance. • Value stream financial reports are designed to provide the basis for taking action.

3. Plain English financial statements • Communicate financial results from operations in a way that is easily understood by non-financial people • Link financial performance to operating performance • Provide a basis for taking action

4. Traditional standard cost based income statement

5. … a problem Traditional Standard Cost Based Income Statement does not tell you: • Profitability by value stream • Actual costs in cost of good sold • Operating performance for the period

6. Plain English financial statement

7. Plain English financial statements • Value stream profitability is clear & under control of the value stream manager • Actual, direct costs without allocations • Costs categories related to resources • Costs not assigned to the value stream are shown where the costs are incurred. • The amount of cash spent during the period is clear.

8. Example of “Plain English” P&L

9. Real example of a “plain English” P&L format.

10. Example: Italian Manufacturer - All Value Streams

11. Cash-based financial reporting • The reduced time that products spend in the value stream and the stability of lean processes make cash-based financial reporting possible. • The preparation of financial statements is simplified because the financial effects of inventory is reduced. • Cash basis value stream profit must be adjusted for changes in inventory balances to arrive at GAAP profit.

12. Lean Accounting and GAAP

13. The Purpose of Lean Accounting Statements is Different from GAAP Lean Accounting statements are tailored to managing a lean value stream—for internal purposes GAAP statements are tailored for presentation of financial statements for shareholders and lenders to the company—for external purposes

14. Lean Accounting Statements Depict Internally Generated Working Capital and/or Cash Flow from Value Stream Operations Revenues are recorded when an item is shipped Expenses are shown when the commitment to spend is incurred as when--- materials are received from a supplier Labor is incurred Depreciation is accrued Other expenses are incurred

15. GAPP Statements Depict the Profit of the Company for the Period Revenues are recorded generally when an item is shipped Expenses are recorded to match the timing of the revenue recognition for items shipped Costs of the items shipped—labor materials and other costs included in “overhead” Costs of items produced but not shipped remain in inventory Costs are matched against revenue generally on the basis of a convention such as First in First Out

16. Lean Accounting Statements Must be Adjusted to Conform to GAAP The difference between Lean Accounting and GAAP statements lies in the change in inventory balances/items during the period Increases in inventory will require an adjustment to decrease Value Stream Cost of Sales Decreases in inventory will require an adjustment to increase Value Stream Cost of Sales

17. Month-end inventory reconciliation Value stream costs are cash disbursements for the period Balance sheet change in inventory What should Cost of Good Sold equal for financial reporting purposes?

18. Month-End Inventory Reconciliation • The difference between value stream cost of goods sold ($1,726,076) and GAAP cost of goods sold (1,948,963) is $222,887, the reduction in inventory • This is because the value stream P&L recognizes expenses in the period the cash was spent • This proves the reconciliation meets the matching principle

19. Month-End Close The Value Stream Income Statement : • Fully complies with GAAP and accrual-based external reporting, • Provides clear, timely, actionable information for managers to manage operations and make business decisions.