© BMA Inc All rights reserved. Month End Close Lean Reporting and Control

© BMA Inc All rights reserved. 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.

© BMA Inc All rights reserved. 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

© BMA Inc All rights reserved. Traditional standard cost based income statement

© BMA Inc All rights reserved. … 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

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Plain English financial statement

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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.

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Example of “Plain English” P&L

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Real example of a “plain English” P&L format. Gross Sales £32,332,000 Less Adjustments(£162,000) Net Sales£32,170,000 External Sales Force (7.5% of ns)£2,428,0007.5% Material Purchases£7,853,00024% Margin After Comm & Matrls£21,889,00068% Wages-Mfg£5,778,000 Fringes-Mfg (41.4% of wages)£2,393,000 Supplies & Tooling£991,000 Depreciation-Mfg£380,000 Utilities-Mfg£247,000 Outside Services£1,072,000 Scrap & Warranty£468,000 Other Coversion Costs£426,000 Total Mfg Conversion Costs£11,755,00037% Total Matrls & Conversion Costs£19,608,00061% Margin Before Support Costs£10,134,00032% Wages£2,142,000 Fringes (28.9% of wages)£618,000 Supplies£131,000 Travel & Entertainment£158,000 Professional Services£69,000 Outside Services£82,000 Depreciation£85,000 Rentals£118,000 Advertising & Exhibits£27,000 Employee Recruiting£28,000 Other Support Costs£402,000 Total Support Costs£3,860,00012% £6,274,00020% SUPPORT COSTS OPERATING PROFITS REVENUES VARIABLE COSTS MANUFACTURING CONVERSION COSTS

© BMA Inc All rights reserved. Example: Italian Manufacturer - All Value Streams

© BMA Inc All rights reserved. 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.

© BMA Inc All rights reserved. Lean Accounting and GAAP

© BMA Inc All rights reserved. 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

© BMA Inc All rights reserved. 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

© BMA Inc All rights reserved. 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

© BMA Inc All rights reserved. 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

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

© BMA Inc All rights reserved. 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 Beginning Inventory £ 1,186,035 + Value Stream Costs 1,726,076 Subtotal 2,912,111 Less: Ending Inventory ( 963,148) GAAP Cost of Goods Sold £ 1,948,963

© BMA Inc All rights reserved. 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.