And the fourth aim of Lean Accounting is to eliminate unnecessary accounting transactions. Let's look at that. Now. Reducing accounting transactions seems to be one of the areas that accountants have most difficulty with in Lean Accounting, for some reason that there's kind of a mental block over reducing accounting transactions. accountants feel that it's digging into their core duty of financial property, financial control, and are often reluctant to try and even start reducing the number of accounting transactions. So let's have a look at what we can do in Lean Accounting.

And to start we're going to revisit the definition of lean that taiichi Ohno gave us in the book the Toyota Production System. And I know we've been through this a couple of times already, but we need to keep anchoring back in the core definition of lean because Lean Accounting is here to support the lean philosophy. So the Definition of lean is, all we're doing is looking at the timeline. From the moment the customer gives us an order to the point when we collect the cash, and we are reducing the timeline by reducing the non value adding wastes. Now reading that, we can see that the sad news for us accountants is that all transactions in the accounting system are waste by this definition, they're adding no value for either customers, or to be frank the business. So the question then becomes, how do we reduce the number of accounting transactions whilst maintaining financial control?

And as an example, let's look at accounts receivable and accounts payable. And let's ask the question, why do we use transactions for accounts receivable and accounts payable? And let's also ask the question, What does Lean Accounting suggest instead? So for example, traditionally, we use a purchase order to authorize delivery, and Lean Accounting we can use automatic electronic requests or just in time methods to authorize delivery. Traditionally, purchase orders and invoices form part of the legal contract. Lean Accounting says The truth is that we only need one single legal agreement between the parties.

Individual contracts are only necessary for single high value purchases. Traditionally, we use accounting transactions and accounts receivable and accounts payable to record and track material costs. However, in a well run lean system, recording is only needed on receipt and a few key points in the process. The price and the quality are specified in the contract. So we only need to track usage through the key points and if we're reducing the flow, that means that usage is much quicker and we don't need to track it quite so much through the process. Traditionally, also, we use transactions and accounts receivable and accounts payable to authorize payment, then accounting says we should pay according to the contract.

Once receipt is recorded. Traditionally, we use transactions to provide information on delivery terms on delivery requirements and so on. Well, those terms can be specified in the single contract with a supplier, along with any specific delivery requirements. Traditionally, we use transactions to show the exact product specification of the items delivered instantly and accounting suggests that we should be requesting data sheets for each product. And that a barcode on the product for example, could link to specification information, transactions and accounts receivable and accounts payable, and sure separation of duties. And that is clearly important to ensure this, but there are other ways of ensuring separation of duties.

And Lean Accounting suggests we should look into a different way of ensuring that And finally, traditionally, the three way Match provides us with financial control that allows us to check the price, the quantity and the quality. Lean Accounting says that the three way match is not necessary. The price is set by the contract, and the quantity and quality can be inspected when the receipt is recorded. Again, we don't need to have transactions to follow things right through the process. I'm not saying we can switch off accounting transactions next Tuesday. Clearly there is a spectrum of implementing different controls.

As we progress with our sophistication in terms of lean and Lean Accounting. All I am saying is that the traditional reasons for needing accounting transactions don't necessarily apply in the modern system, and particularly when we're moving towards lean and that's process times are reducing and therefore the amount of time that we need to track transactions is reducing. Another reason that Lean Accounting doesn't like accounting transactions. Because the accounting transactions do not really offer control, it's a bit of a fiction. The main problem with the type of control that accounting transactions is supposed to offer is that the information is available too late, is no good thinking that purchase orders and delivery notes provide control. If they aren't processed for a week or more after delivery, any problems of quality and quantity need to be dealt with immediately, as soon as they arise by the team handling the materials and responsible for the process, or the team that's dealing with the supplier or purchaser.

So the teams working with the goods or services need to have their own control processes. It can't be removed at arm's length to the finance team who will only get around to dealing with it days, weeks, or perhaps even months after the problem has arisen. In fact, accounting transactions are only really useful for reports period ends Whether they can show the cost of losses or of returns, or of wastage, and this means that we only need the minimum of transactions to allow costs and revenue to be recorded. But if we're going to undertake starting to reduce our accounting transactions, then we need a structure, a structure for transaction elimination. and reducing accounting transactions is an iterative process. As I suggested earlier, it's not about getting rid of all of them on day one, we can begin to look at the process, remove some put in place alternative controls, and then work through over and over again, to get better at removing accounting transactions.

More transactions can be eliminated as a process team get better understanding and controlling the financial processes and the work processes through other means. And I'm suggesting here that there's a three stage iterative process for transaction elimination. Firstly, we should map the process and identify where the transactions occur, then we should use problem solving tools to identify alternative ways of achieving control that also reduce the number of accounting transactions. And then third, we should test the revised controls and implement those that work. And we should review the process again in a few months and work through it again and see what next stage of transactions we can reduce. As I've mentioned, transaction reduction transaction elimination is an iterative process.

And that means we have a maturity path, the transaction elimination maturity path. And we can see on the slide here that I've done sort of three levels from making a start to making progress and getting there to highly competent and I don't want to read all of this out you can pause the video and read it for yourself. But for example, in making a start We might start with a preferred supplier selection process with single cron contracts and quality specifications. Once we get that up and running, we might start to consider operational processes directly managed by the process teams, where they have direct ordering from preferred suppliers with auto pay on so quality and quantity have been checked. And then when you get highly competent with lean and with your transactions, we might have electronic tracking of goods and materials using barcodes or similar methods NFC etc.

When making a start, we might have electronic ordering for regular purchases electronic payment, and that might move on towards a portal and online processes to give a wider range of goods and services. And then that might highly competent become a portal stroke online system that covers most suppliers and customers with our first steps in transaction elimination, we might start to reduce the levels of authorization. And then we might start to move to just in time and preferred supplier status, with rigorous checks on receipt, which reduces the need for authorizations, further down the line, and so on, you can see that it's an iterative process, we established one level of control, we get better at that, we look at ways that reducing and removing those controls by moving to a higher level. I don't think transaction elimination is easy. In fact, it's probably the hardest aspect of Lean Accounting.

And as I mentioned, it's perhaps the most difficult to for accountants to start to get to grips with to want to tackle because we accountants do like our transactions, and starting to think that they're actually waste and not adding value, you know, stressful for us. But actually we can put in place other controls in the process, more modern controls that will help us move these burdens some transactions All right, let's move on then to the next theme of Lean Accounting.