The third aim of Lean Accounting is to support relevant and timely decision making. And it's time to introduce some Lean Accounting tools. There are two principal management accounting tools that Lean Accounting uses for reporting and decision making. They are the value stream profit and loss account and the box school both tools were introduced by Brian maskull and Bruce beggarly in their 2003 book practical Lean Accounting. Let us first look at the value stream Profit and Loss accounts. And you can see on the screen here I have given an example a fictitious example of the value stream profit and loss account for the for revenue generating revenue streams of timber pond entertainment limited and one new market development value stream.

Now, the format and the presentation of the value stream profit and loss account is very similar to a standard profit loss account as you can See the differences that the value stream profit and loss account only shows directly attributable costs of each value stream with other overheads, corporate costs and so on being reported separately in a head office or corporate costs, column or report. That's here, for example, we see that live events generated directly 11.55 million pounds of revenue in the period covered by the value stream profit loss account, and the direct expenses and attributable costs amounted to 8 million pounds, giving a value stream contribution for the period of 3.5 million pounds 30.6%. If we look at another value stream, we see that touring shows generated 11.28 million pounds during the period, and their attributable costs amounted to 8.35 million pounds. A value stream contribution of 2.9 million pounds for the period and that is a 26% contribution on revenue.

The museums and displays value stream gave 35.9% contribution compared to revenue and the TV film and media value stream gave 34.4% contribution compared to revenue. The new market development value stream is not a revenue generating value stream so it doesn't have any income. It does obviously have expenses 2.9 million pounds for the period covered by this value stream profit loss account. And clearly there's no value stream contribution because it's only expenditure taken all together then the total contribution from the full value streams that generate revenue and the new market development value stream come to 9.2 million pounds, corporate overheads that's overheads and costs which are not attributable to any value stream. Come to two point five, 6 million pounds, leaving Earnings Before Interest tax and amortization at 6.2956 million pounds, which is 17.8% kind of net profit percentage if you want to see it like that.

So the structure of this value stream profit loss account will be very familiar to you. It's the same broad idea of income less expenditure, except that it's divided into value streams. And the income and expenditure that's shown is that which is attributable and directly relate to each value stream. So we're not showing allocations or apportionments of head office costs or other overheads, which are not directly derived from the value stream. Let's move on then to discuss the rules for creating the value stream profit and loss account. And this is part one of two.

And we've sort of discussed those already briefly, but essentially, the key rule is that only the directly attributable costs of the values are reported against that value stream. So corporate overheads and not a portion to value streams, but they're kept separate as corporate costs. And the general rule is that if the manager of the process can control the costs of revenues, I can vary them change suppliers and so on, then those costs of revenues should be included in the value stream profit and loss account. However, there are a couple of possible exceptions to this rule of only recording directly attributable costs or revenues. And there are as follows. Firstly, the depreciation of assets in the value stream is shown in the value stream profit and loss account as a process manager has responsibility for their assets and for their maintenance and therefore should have responsibility for the depreciation cost.

Secondly, in most cases of Lean Accounting, the Process Manager is charged a rental fee for the space that the value stream occupies within your organization. This is particularly true of Product producing manufacturing value streams. And the purpose of this charge is to encourage the value stream team to streamline their process and therefore reduce their footprint, which would free up space that could be used for new products and services. So it's a kind of incentive to use less space, and therefore makes space available for new product development, new customer development, which can bring in more revenue. And the calculation of the cost of space should be as simple one, perhaps the direct costs of running the premises without any allocation of corporate overheads divided by the total floor area of the premises, that would give a cost per square meter. And each value stream is charged according to the space occupied as I said, so the number of square meters that each value stream takes up times the cost per square meter.

But as they free up space, their charge is reduced. We don't recalculate the cost per square meter based on who's in the space but the charges were juiced and the cost of the surplus space is shown in the corporate level of the value stream profit loss account as an opportunity cost of unoccupied space. And that should incentivize finding new activities for that space. And if a new value stream then opens up to use that space, it of course will be charged for the space that it occupies, and the process will continue. And part two of our rules for the value stream profit and loss account. Thirdly, we have the wages and salaries of the people working in the value stream are of course directly attributable to it.

And they are included in full in the value stream profit and loss account, including pension costs and other benefits. Fourthly, it's often the case that there are people who work part time in different value streams. So a value stream may not require a full time maintenance team or a full time HR person or a full time finance person. Such skills would normally be shared with to several value streams, and the cost of those individuals would be split on an agreed basis, perhaps a percentage into each value stream 5050 if the person's split between two value streams 3333 33 if between, you know three value streams. And lastly, the value stream profit loss account often requires that the structure of an organization's accounts will need to be reconfigured to reflect the value streams. Each value stream would normally be a profit center with subordinate cost centers that reflect the direct costs and revenues of that value stream.

Such flexibility encoding and reporting is easily achieved in modern accounting systems. So how is the value stream profit loss account used? Well, it's used for monthly performance review at senior management level reviewed against strategic goals. So every value stream has a manager of industry manager, Process Manager and that person has full responsibility and accountability for the costs and revenues within their value stream. And of course, it's entirely normal for different value streams to make different levels of return. because there'll be serving different markets, different types of customer may be delivering different types of products and services.

So there shouldn't be one target value or one set value for value stream contribution, it will vary with the different markets that they serve, and the different products or services that they produce. We can see in the example on the screen that there's a consumer products value stream with a value stream contribution of 14.4%. As a business to business products only stream with a value stream contribution of 10.8%. There's a servicing and repair value stream whose value stream contribution is 39.7%. And then a spare parts value stream with a contribution of 5%. Now you would normally expect servicing and repair value streams, spare parts etc.

Trying to make a higher margin than the original sale. That's, you know, one of the ways that businesses are structured. And this particular example, I would be asking questions if I was part of the management team for this organization as to why the spare parts value stream is making only 5% value stream contribution, whereas the servicing and repair value stream is making 39.7%. And we can see there that material costs in the spare parts value stream are particularly high, I guess we're just turning around spare parts in that value stream, perhaps selling them on rather than manufacturing them as original products. And just to add a note, of course, the value stream profit and loss account gives us the financial performance of the different value streams. We should also be looking at the strategically measures.

We mentioned those earlier in the previous section. The senior management team should also be reviewing the performance of the operational measures as well to identify areas for improvement ideas. For strategic development and so on. The second tool of Lean Accounting, and particularly important for decision making and performance improvement is called the box score. And the box score is a term that was coined by Brian maskull and his book practical Lean Accounting. The box score is a weekly dashboard report that's prepared for each value stream in the organization.

And the box score comprises three elements. There's the operational performance measures the process output measures, as we saw earlier, there's process capacity, and there is summary financial performance. Because it's prepared weekly, it allows issues to be identified properly and action to be taken as necessary. But also because it's prepared weekly, we shouldn't expect the data to be fully auditable data. It's not necessarily completely correct, showing the direction of travel so that action can be taken rather than given an ironclad position. And here on the screen, we Have the box score for timber pond entertainment limited for their touring shows value stream, and it shows six weeks of performance there.

So under performance measures, we have the measures that they have chosen as suitable for their value stream. And they include the show setup time, number of equipment failures, energy usage, customer complaints number of an the customer satisfaction score. We also show the current capacity, which is a maximum of two shows per day, the number of shows that they have presented during the week. And that gives a productive capacity percentage is the number of shows shown against their full capacity, and therefore available capacity. And then we have summary financial data for the week, including revenue Commission's wages and salaries, materials, costumes, and so on. And you might like to pause the video for a few seconds just to consider the performance of this value stream over the time period.

For example, we see a spike in show setup time in a week, sort of 24 to 26. And this might reflect the number of equipment failures and those weeks, for example, and also the number of complaints, I should say. And we see that less shows took place in the week 25, there's more available capacity, perhaps they were canceled because of these equipment failures. And that is reflected in the reduced revenue for that week, leading to a reduced margin for that week. And with a longer period of performance data, we could perhaps start to see some other issues that we would want to look at as the management team of this touring shows value stream. Let's discuss the elements of the box score then Firstly, we have the operational performance measures.

As I said, these are the process output measures that are chosen by the value stream team. And we also may include some in process measures as well. The process capacity section needs some explaining It reflects the throughput of the value stream. and productive capacity is the percentage of total capacity, which is used for revenue generating activities, ie producing products or services. Non productive capacity is that percentage of the total, which is lost due to waste, for example breakdowns rework, and other lost time incidents. And of course, the aim of lean and Lean Accounting is to reduce non productive capacity.

So, it becomes available for other work available capacity being the amount of time that is available for other opportunities to generate revenue to generate profit. And the third element in the box score is financial performance. And this is of course, the key cost and revenue elements from the value stream profit and loss account as the report is weekly. Some of these figures may be estimates or kind of averages. How is the box score used? The box score is used to drive employees provement is a tool of improvement.

It's not a tool of judging performance, or of judging individuals. The box score is the core tool of weekly performance management in Lean Accounting, and the focus is on improvement. So it's used by the value stream manager and his or her team to identify problem areas to institute focused improvement activity and to make operational decisions as required. Team work together to resolve problems to generate ideas for improvement, and to work to improve the performance of the value stream. And as we know, if we improve the flow of work through the process, we reduce its cost and we increase its capacity to do more profitable work. And that is the focus of the information provided in the box school to help us to improve the flow of work, improve quality, and therefore create opportunities for better future profitability.

So we've seen that the box school before provides an easy to understand dashboard that can examine the impact of decisions and performance, looks at capacity and contribution and helps us drive the improvement of the value stream. There's a couple of notes here that I want to make in terms of lean decision making. Firstly, we might reject a decision which generates a positive contribution if it damages the operational performance of the value stream. The aim of lean is to improve the rate of flow through the value stream, as I've said on many occasions, so if a decision or an opportunity potentially damages that flow of work, then we may reject that opportunity. Secondly, we might accept a decision which is contribution neutral, if it does provide benefits of operational performance. For example, if it improves the flow through the value stream, the quality of the product or service improves customer value and customer service or for other benefits which provide a foundation for future growth.

Thirdly, we might accept a decision, which in the short term generates a negative contribution if it improves operational performance, and therefore helps create available capacity for future profitable opportunities. Lean decision making is not necessarily about always providing positive contribution. It's also about improving the operational performance of the value stream. In fact, the operational performance comes ahead of the contribution, we want to be continuously improving the flow, the quality, we want to be creating available capacity, so that we can take advantage of future profitable opportunities, which will increase the profitability of the value stream as a whole. So we come to the end of the section on Lean Accounting and lean decision making, with some questions for process improvement to help you consider improvements that might be possible for any value streams that you're working on. So the first question is, what is the purpose of the process?

And what outcomes do we need? The customer defines the purpose of a process. And it's the outputs the outcomes that they require, which should be the focus of our process improvement and our value stream. How does the process currently work? Where did the delays the errors and the risk points occur? This is where customer value is degraded, and we should work to improve those points.

And thirdly, how can we improve the process, reducing the risk reducing errors and reducing the delays. That is what our improvement activity is for