How Lean Processes Can Benefit Firm Cash Flow

Picture a traditional manufacturing process. What do you see? Work started well before it's needed? Items being produced in large batches? A bunch of work in process (WIP) sitting around waiting to be finished?

While those are all common scenes in manufacturing facilities, I don't see inventory or WIP. What I see is a bunch of cash sitting around on shelves. And this cash is sitting around in CPA firms, too.

Learning from Manufacturers

Manufacturers looking to implement Lean processes have to first consider WIP and its impact on cash flow. The scene on the shop floor is more chaotic than it needs to be. Usually, it's because the manufacturer doesn't know any other way - it's the way things have always been done. Enter Lean processes. Manufactures now focus on reducing batch sizes and WIP, creating a more synchronous flow of product and information through the system and reducing the chaos.

A manufacturer that implements Lean should be able to reduce its WIP inventory by 50 percent or more and reduce raw material and finished goods inventory. What does this mean for cash flow? There is a significant improvement, even in the first few months.

And don't think for a minute that this leads to a decline in customer service. In fact, lean manufacturers that focus on producing smaller batch sizes more frequently (few vs. many) increase their flexibility and responsiveness to customers. It's a bit counterintuitive, but a business truth none the less. The more inventory a company has, the less likely it is they will have what they need.

Translating to Public Accounting Firms

Public accounting firms have WIP to deal with as well. Think of all of that work sitting in your automated workflow solution waiting for the next step to be taken. Most firms don't look to control WIP. Eventually it begins to get out of control and creates chaos - especially at bottleneck steps in your operations.

Do your employees focus on completing WIP quickly? You can answer this question by looking at how you reward them. Are they encouraged to complete projects or gain charge hours? Most traditional firms encourage and reward those employees who hit charge hour goals. Typically, these firms are great at starting new work but terrible at getting the work completed and out the door. When faced with a tough problem, it's easier to put what you're working on off to the side and pick something else up. This creates more WIP and further delays your cash inflow.

Putting Lipstick on a Pig

CPA firms have devised a nice strategy to somewhat mitigate the negative consequences of having excessive WIP - projects in process - by implementing "progress billing." While this helps, it is really masking a bigger problem. Why don't you just get the work done and bill the full amount so you can collect the entire payment sooner? Firms that are implementing lean processes in their tax return and audit processes are getting more done earlier in the year, therefore billing and collecting fees sooner.

Changing Your Firm's Mindset

Focus on getting your employees to see your WIP as cash - because that is what it is. To become even more successful, you need to convert WIP to cash sooner. Unfortunately, this mindset isn't prevalent in the industry, so you will see many accountants that are great starting a project, like a tax return or audit, but terrible at finishing it.

Firms that have implemented Lean have the upper hand when competing against those firms that leave inventory sitting around. Lean firms will provide better client service in terms of turnaround time and accuracy while having more time to provide value-added services. Most importantly, Lean firms will be in a stronger financial/cash position. And what impact could that have on your firm?

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