Accounting has become the center of attention in this economic downturn. Small business owners are watching the bottom line as diligently as a guard watches over prisoners, taking stock of every motion in profit and loss, revenue and expenses, assets and costs. Yet, if an employer is pressed to explain to his management staff what the true relationship is between profit and loss as it relates to operations, and whether an investment in tools that allows that transparency is worth it, he or she may be at a loss for words.
 
This was the case recently at a family-owned company that specializes in computer-controlled machining and manufacturing. In 2006, the company switched from a standard job costing accounting system to lean accounting, using ShopWerks, an accounting software system that had been developed in-house by the company's president and IT manager.

The old system, in place for 24 years, was based on a process of having employees manually record each job start, set-up, run time and job end at the completion of each shift. The company accountant would manually figure the time spent on each recorded step or operation, and then enter the data from the time card into the computer. The computer then calculated the cost of each operation. Management used these final figures to determine whether a job had been profitable. Or not.
 
The president knew that this was an inadequate system, because the profit or loss data arrived after a job was complete. He questioned whether there wasn't a better way to manage or improve profit and prevent loss during the operations, when you could actually have an impact on the outcome. He spent $600,000 and two years developing a lean accounting system that would give him that real-time control. Was it worth the investment, especially given these current difficult economic times, when every penny spent is being closely watched and guarded? This is the very question he was asked at a recent management meeting.

The president decided the only way to convince the management team that lean accounting was worth the investment was with a show of numbers. Although he knew that lean accounting had saved costs and increased profits across a wide array of operations, he focused on one simple aspect: the job recording process.
 
Using the average number of employees the company had during those 24 years of job costing, which was 30, he determined that the amount of time spent each day recording time against a job was 15 hours (30 employees, 30 minutes each day, total of 900 minutes, or an average of 15 hours per day).
 
Take that 15 hours per day and multiply it first by 5 days a week (75 hours) and then by 52 weeks. The total? A whopping 3,900 hours per year spent recording job information.
 
At an average hourly rate of $65.00, the cost to the company just for the simple task of recording job time was $253,500 PER YEAR.
 
The president hesitated before estimating what it cost his company to record job time during the 24 years before implementing lean accounting, but he finally did the math: $6,072,000. That's more than $6 million spent – some may say wasted - on that one simple procedure, a task that did not provide the results needed to manage true profit and loss.

He had his proof in response to management: for an initial investment of $600,000, lean accounting brought the company a 10-fold return on the money in the years ahead. Since implementation in 2006, where value stream costing recording is done automatically, the company has saved an estimated $760,500, an amount that has a significant impact on any small business bottom line.

Fortunately for manufacturing companies interested in adopting lean accounting, there's no need to develop in-house software or make an investment of $600,000 like this president did. In fact, he has developed an entire lean accounting system that can be purchased for only $14,995, giving you a quicker return on investment. For more information, email info@shopwerkssoftware.com