Flow Accounting

Acknowledgements to Kate Mackle

John Darlington (University of Buckingham & Value Flow Consulting)

Introductions

The Objective of this short Module

To expose you to some of the reservations about current cost
accounting practices applied in an improvement context
To introduce you to Flow Accounting as a means of providing a
common framework to represent your enterprise as a system in
order to:
Understand the current state as described by performance
and money
To provide you with an example of how to develop a Big
Picture Financial Map
To open up the discussion about the role of accounting
information in an improvement process

How effectively is the system performing?

Demand on
Suppliers or
Partners

Is the natural
budgetary
boundary wall
an impediment
to patient care?

Demand from
customers

The information that converts

demand into instructions to
deliver the product or service

CAPACITY
The physical flow that delivers
the product or service

Money to
Suppliers or
Partners

Defining the
System in
terms of
Boundary Walls
& Structure is
an important
first step

Money from
delivering the
services

How much value do we generate for the money consumed by the system?
How long does it take for the system to respond to the demands placed upon it?

There is a problem with conventional accounting systems

Actively work against flow

1. Encourages Unit cost thinking, a tired

manufacturing concept to dominate decision
making
2. Treat bottlenecks and non bottlenecks the
same

Lead us to the wrong decisions

1. Focus on costs instead of value

2. Drive to reduce length of stay and risk
premature discharge re-admission and excess
costs

Are confusing and complex to people

1. Give credit for activity over purpose:

tests/treatments not required
2. Encourage cost reductions which often prove
to be mirages

Cost Accounting .Rest In Peace

The Cost Concept - Quality

DO

MAY
DO

DO NOT
DO

35
30
25
000s

20

The cost concept

blocks us from
achieving
competitive edge
through six
sigma

15
10

Annual savings

Investment needed
5% to 2%

2% to 1%

1% to 0.5%

% Scrap Reduction

The Cost Concept - Inventory Turns

DO

MAY
DO

DO NOT
DO

The cost concept

blocks us from
achieving the
competitive edge
through high
inventory turns.

2.5

s M 2.0
1.5
1.0

Annual savings

0.5

Investment needed
10 to 20
5 to 10
Inventory Turns

20 to 40

*Assuming starting inventory of 16m and 25% carrying cost

Examples of the problems with

the unit cost mechanics

Unit Costing Mechanics

If we half the
process time do
we half the cost?!

Raw
material

Slitting
17 seconds

37 hour week

Costs
38,000

Cutting

Pressing

18 seconds
23 seconds
Process Flow
Costs
Costs
45,000
32,000

These costs
includes allocation
of overhead so
there are NO
changes to real
costs if we do
process
improvements

Welding
20 seconds

Constraints govern
Throughput; time
saved on a
constraint is time
saved for the
overall system.

Costs
46,000

Cost per
Second
0.2853

Cost per
Second
0.3378

Cost per
Second
0.2402

Cost per
Second
0.3453

Cost per
process
4.850

Cost per
process
6.081

Cost per
process
5.526

Cost per
process
6.907

Cost per
Process
23.364

Disturbing trend.in Service

To follow manufacturing practices including unit cost thinking

To forget the purpose of the organisation and try to Control the cost
There is a difference between the bottom line impact and cost accounting
practice
Bigger batches use more precious cash!! Housing Maintenance
Allocation of peoples time to different jobs appears to alter the cost per
job but the salary is unmoved and it is the salary which hits the bottom line

Disturbing trend.in Service

To follow manufacturing practices including unit cost thinking

Justice System cost per caseyou are over-manned on section X by 6

heads
Highways agency cost per hole.. we would like help to calculate the cost
more accurately
Business School.. You will become profitable after the re-organisation
because we will slice the overhead differently

So can we devise a different way of looking at lean and the

accounting information to assist it?
In operations lets play down the various fancy tools with Japanese
names.
In accounting lets go back to basics (theres already plenty of good
practice around)
A combined common sense approach

Flow Accounting

Two Uses of Accounting data

Accounting data

Statutory

Regulatory
based

Management

Preference
based
Lead/Response
Time

Government
Reporting

Unit cost

Flow
Accounting
Current Accounting Systems

Time based
measures

What is Flow Accounting?

Flow accounting is a management accounting methodology.
The objectives of a flow accounting implementation are To show in monetary terms how the systems interacts with
the outside world
To make sure that sub systems understand how to contribute
positively to the overall goal of the organisation
To assist in working out the scope for improvement in money
To encourage the right lean behaviours.
It is based on common sense and developed out of practical
application.

Flow Accounting- The Principles

In the NHS is the final arbiter the patient?

The final arbiter of performance is the customer

Measurements should be easy to understand
They should be accessible and reflect responsibility
Where possible they should appeal visually
They should display trends and relationships
They should emphasise lead time to respond
Accounting should be capable of encouraging different agencies
to collaborate and deliver better overall care by crossing agency
boundaries

Terminology and Definitions

With any systematic approach there is usually some principles and terminology to
learn; a standard way of describing the different aspects of the system. Flow accounting
is no different.
It is useful to explain these now before we start handling the data and drawing
conclusions about what it is telling us about the financial consequences of our current
state or way of working

Financial Measures

NP
Net Profit

UP

ROI
Return on
Investment

UP

CF
Cash Flow

UP

Three Operational Measures

Profit Making Orgs

Throughput
The rate that money is
generated by the company
through sales
Inventory
The money which is
invested by the company
to purchase things which it
intends to sell
Operating Expense
The money the company
spends in order to turn
inventory into throughput

Non-Profit Making Orgs

Throughput
The rate at which the
purpose of the
organisation is fulfilled

Inventory
The response time of the
organisation to the
demands placed upon it

Operating Expense
The money the
organisation spends in
order to respond in an
acceptable time to
customers

Boundary measures

Understand control at the

Plant walls:Real cash flow
Real costs

O.E s

Throughput

Response Time

OE
Operating
Expense

DOWN

UP

DOWN

Delivering Improvements

Measures (Simultaneously)
Inventory and carrying charges. The traditional view

NP

ROI

UP

Net Profit

UP

Return on
Investment

CF

UP

Cash Flow

Throughput

UP

Response Time

OE

Operating
Expense

DOWN

DOWN

Response Time
Both Ford and Ohno followed four concepts

Improving flow (lead time) is a primary objective of operations.

This primary objective should be translated into a practical
mechanism that guides the operation when not to produce
(prevents overproduction). Ford used space; Ohno used
inventory.
Local efficiency measures must be abolished.
A focusing process to improve flow must be in place. Ford used
direct observation. Ohno used the gradual reduction of the
number of containers and then gradual reduction of parts per
container.

The Balanced Facility, Ward Dept., Etc.

Plan Each Resource to Have
ENOUGH
but NO MORE
Capacity to meet the Demand
Result, - an Efficient
Facility

Balanced v Unbalanced Capacity

Reducing the severity of the Statistical
Fluctuations and/or number of
Dependent Events flattens the curve
and moves the kick to the right.

LEAD
TIME
(WIP)

UTILISATION

80

85

100

When combined with Dependent Events, Statistical Fluctuations

accumulate they do not average out

Structure of the Flow Accounting Process

Big Picture Financial
Map - a diagnosis of
the Current State

Policy Analysis

Demand Analysis

Capacity Analysis

Response Analysis

Clarification of the financial consequences of the current state

Tackle the
whole in one

Break down into

chunks

Quantitative financial assessment of the initial future state

Value Flow Accounting

& Decision Making

Data Acquisition
Structure & Modelling

Value Flow
Performance Measures

Financially quantified current state

Financial consequences of the future state agreed

A Flow Accounting Case Study

Childrens Social Services
Marie Jones
Operations Manager Business & Performance
Children & Families Services
Conwy County Borough Council

Terminology:
Throughput ?
The rate the
organisational goal is
achieved.......
to safe guard and
protect the welfare of
vulnerable children
and their families
through reducing
vulnerability,
increasing resilience
and managing risk.

Terminology
Inventory?
All the money tied up in the
things it intends to sell.

Operating Expense ?
All the money converting
Inventory into Throughput

..all the children & families

waiting for something.

..the service expenditure

Constructing the Big Picture Financial Map

Close
Shared Process
Contact/Referral

Children with
Disability

Assess and
Plan

Shared Process
Review

Retain Short
Term

Shared
Process
Initial
Assessment

Transfer to
Adult services

Child in
Need

Plan

Shared Process
Review

Closure

Transfer to Long
Term Team

Core
Assessment

Shared Process
Review

Transition to
Adult services
Child
Protection

Retain Short
Term

Shared Process
Conference

S47

Plan

Shared Process
Review

Concern
Decrease Child in
Need

Children with
Disability

Transfer to Long
Term Team

Core
Assessment

Shared Process
Review

Concern Increase
Looked after
Child
Looked After
Child

Plan

Court Work

Retain Short
Term

Shared Process
Review

Return home
Child in Need

Children with
Disability

Adoption
Transfer to
Long Term
Team

Core
Assessm
ent

Shared
Process
Review

Permanent Care
Transition to
Leaving Care

Independent
Living

Analysing Demand
Contact Demand = 6387, but this was 2836 children.

 Arrival pattern is random

Referrals (value work) accounts for only 11%
of all demand.
The prevalence of Contact amplifies demand
on the system.

Demand amplification arises from: Multiple referral in regard to the same incident.
Repeat referrals for the same client

Comparing demand over time was tricky

Operational definitions had changed so not
comparing like with like.
The Police 42% of demand
But of this only 7% entered the system.

Analysing Demand

All Demand
=7112
Contact =
6387

Close

Referral 725

Children with
Disability

Assess and
Plan

Shared Process
Review

Transfer to
Adult services

Shared Process
Contact/Referral
Retain Short
Term

725

Shared
Process Initial
Assessment

475

Child in
Need

Plan

Shared Process
Review

Closure

Transfer to Long
Term Team

Core
Assessment

Shared Process
Review

Transition to
Adult services
Child
Protection

Retain Short
Term

Shared Process
Conference

S47

Plan

Shared Process
Review

IA = 7
days

Concern
Decrease Child in
Need

Children with
Disability

Transfer to Long
Term Team

Core
Assessment

Shared Process
Review

Concern Increase
Looked after
Child

40.2%
(179/475
Avg 32
days

Decision in
1 working
day

Looked After
Child

Plan

Court Work

Retain Short
Term

Shared Process
Review

Return home
Child in Need

Children with
Disability

Adoption
Transfer to
Long Term
Team

Core
Assessm
ent

Shared
Process
Review

Permanent Care
Transition to
Leaving Care

59%
428/725

Independent
Living

Inventory Analysis
How to identify?
Follow the procedural workflow of CS
Work waiting at decision points or tasks would
become apparent.

Low levels of data being reported

No confidence in the reports
? Technical error or under-reporting

Inventory Analysis

All Demand
= 7112
Contact =
6387

CWD

Referral 725

Close

Children with
Disability

Assess and
Plan

Shared Process
Review

170

Shared Process
Contact/Referral

725

Shared
Process Initial
Assessment

475

Child in
Need

Shared Process
Review

Plan

Decision in
1 working
day

Closure

Core
Assessment

Transfer to Long
Term Team

Shared Process
Review

146

Short
Term

Child
Protection

Shared Process
Conference

85

Retain Short
Term

Shared Process
Review

Plan

73

169

Children with
Disability

Core
Assessment

Looked After
Child

Plan

Court Work

Retain Short
Term

Shared Process
Review

Concern Increase
Looked after
Child

Return home
Child in Need

Children with
Disability

Transfer to
Long Term
Team

Concern
Decrease Child in
Need
Shared Process
Review

43
7

Transition to
Adult services

Long
Term

Transfer to Long
Term Team

345

40.2%
(179/475
Avg 32
days

Retain Short
Term

184

S47

IA = 7
days

Transfer to
Adult services

Adoption

158
Core
Assessm
ent

Shared
Process
Review

Permanent Care
Transition to
Leaving Care

59%
428/725

Independent
Living

Operating Expense

All Demand
= 7112
Contact =
6387

Dedicated CWD 1,558,471

Referral 725

Children with
Disability

Close

Assess and
Plan

Shared Process
Review

170

Shared Process
Contact/Referral

Retain Short
Term

725

184
Shared
Process Initial
Assessment

475

Child in
Need

Shared Process
Review

Plan

Short term
449,397

Decision in
1 working
day

Core
Assessment

Transfer to Long
Term Team

Shared Process
Conference

85
345

Retain Short
Term

Shared Process
Review

Plan

73

169

Children with
Disability

Shared Process
Review

7
Looked After
Child

Plan

Court Work

Retain Short
Term

Shared Process
Review

Long Term
1,052,991

Transfer to Long
Term Team

Dedicated CP 80,470

40.2%
(179/475
Avg 32
days

Closure

146

Child
Protection

S47

IA = 7
days

Transfer to
Adult services

Core
Assessment

43

Concern Increase
Looked after
Child

Dedicated LAC 5,420,105

Concern
Decrease Child in
Need

Shared Process
Review

Return home
Child in Need

Children with
Disability

Transfer to
Long Term
Team

Transition to
Adult services

Adoption

158
Core
Assessm
ent

Shared
Process
Review

Permanent Care
Transition to
Leaving Care

59%
428/725

Independent
Living

All Demand
= 7112
Contact =
6387

Shared Service Resources 1,274,253

Dedicated CWD 1,558,471

Referral 725

Children with
Disability

Close

Assess and
Plan

Shared Process
Review

725

184
Shared
Process Initial
Assessment

475

Child in
Need

Plan

Decision in
1 working
day

428/725

Shared Process
Review

Short term
449,397
Shared Process
Conference

Closure

Core
Assessment

Transfer to Long
Term Team

85

Retain Short
Term

Shared Process
Review

Plan

73

169

Children with
Disability

Shared Process
Review

Plan

Court Work

Retain Short
Term

Shared Process
Review

Dedicated LAC
5,420,105

Long Term
1,052,991
Core
Assessment

Concern
Decrease Child in
Need

Concern Increase
Looked after
Child

Return home
Child in Need

Children with
Disability

Transfer to
Long Term
Team

Transition to
Adult services

Shared Process
Review

43

Dedicated CP 80,470
Looked After
Child

Transfer to Long
Term Team

345

40.2%
(179/475
Avg 32
days

Retain Short
Term

146

Child
Protection

S47

IA = 7
days

Transfer to
Adult services

170

Shared Process
Contact/Referral

59%

Overhead Costs 1,558,471

Adoption

158
Core
Assessm
ent

Shared
Process
Review

Permanent Care
Transition to
Leaving Care

Independent
Living

What did it tell us?

THROUGHPUT
All Demand

7112
C=6387
R= 725

Referral
Decisions
Initial
Assessment

428/725 (59%)
made in one
working day
179/475
(40.2%)
complete within
7 working days
32 days average

INVENTORY

OPERATING EXPENSE
TOTAL

10,853,648

TOTAL

717

CIN TOTAL

500

OVERHEAD

1,558,471

CWDS

170

1,274,253

ST

184

SHARED
RESOURCES

LT

146

CWDs

1,017,961

48

SHORTTERM

449,397

CWDS

CP

80,470

ST

LONG-TERM

1,052,991

LT

43

LAC

5,420,105

CP TOTAL

LAC TOTAL

169

CWDS

ST

LT

158

The Flow Cost (opening state)

Annual Throughput (Demand) 7112/12 = Monthly of 593
Inventory = 717 x 30 days = Average response time of 36.2
Demand =
593
Operating Expense Annual 10,853,648/12 = Monthly of 904,470

904,470
36.2 days

Flow Cost
Step 1 Adjust for the length of time in the System
= 904,470 x 36.2 days = 1,091 393
30 days
Step 2 Apply the Throughput
= 1,091,393 = 1840
593

Throughput
593

The Improvement
THROUGHPUT
All Demand

7773
C= 7084
R= 689

Referral
Decisions

662/689 (96%)
made in one
working day

Initial
Assessment

344/525
(65.5%)
complete within
7 working days
16 days average

OPERATING
EXPENSE

INVENTORY
TOTAL

638

CIN TOTAL

429

TOTAL

11,430,697

OVERHEAD

1,551,610
1,343,442

CWDS

156

ST

137

SHARED
RESOURCES

LT

136

CWDs

1,088,768

42

502,231

CP TOTAL
CWDS

SHORTTERM

ST

CP

93,094

LT

34

LONG-TERM

947,268

167

LAC

5,904,284

LAC TOTAL
CWDS

ST

LT

159

The Flow Cost (First future state)

Annual Throughput (Demand) 7773/12 = Monthly of 648
Inventory = 638 x 30 days = Average response time of 29.5
Demand =
648
Operating Expense Annual 11,430,697/12 = Monthly of 952,558

952,558
29.2 days

Flow Cost
Step 1 Adjust for the length of time in the System
= 952,558 x 29.5 days = 936,682
30 days
Step 2 Apply the Throughput
= 936,682 = 1445
648

Throughput
648

Was the system performing better?

Flow Cost Before = 1840
Flow Cost After = 1445
An improvement of 21%
How can you improve the flow cost?

By increasing Throughput
By reducing Response Time
By reducing Operating Expense

Was the system performing better?

Never forget systems Purpose
Any idiot can reduce expense and many are trying in the UK right now
Time will only laugh at cost savings if you forget purpose

to safe guard and protect the welfare of vulnerable children

and their families through reducing vulnerability, increasing
resilience and managing risk.

Next Steps now the system is more

stable?
THROUGHPUT
All Demand

7773
C= 7084
R= 689

Referral
Decisions

662/689 (96%)
made in one
working day

Initial
Assessment

344/525
(65.5%)
complete within
7 working days
16 days average

OPERATING
EXPENSE

INVENTORY
TOTAL

638

CIN TOTAL

429

TOTAL

11,430,697

OVERHEAD

1,551,610
1,343,442

CWDS

156

ST

137

SHARED
RESOURCES

LT

136

CWDs

1,088,768

42

502,231

CP TOTAL
CWDS

SHORTTERM

ST

CP

93,094

LT

34

LONG-TERM

947,268

167

LAC

5,904,284

LAC TOTAL
CWDS

ST

LT

159

The Big Picture Financial Map (BPFM) should tell us

The pareto of the most important aspects of the business
The overall capability of the system to fulfil the demand placed on it
in terms of money
A feel for the relative emphasis & importance; Throughput, Inventory,
lead time, throughput as a % operating expenses
A view as to where the more detailed mapping activity should focus
An assessment of the required level of improvement activity:
considering:
Customer demands
Competitive pressure
Group aspirations
The scope for improvement

When Policies can be quantified they

are called Key Performance
Indicators

Key Performance Indicators or How do you

know if you have had a good day?
NON-PROFIT MAKING

MANUFACTURING

On Time in Full

Promise Lead Time

Days Inventory

Raw Materials
Work in Progress
Bought-out
Finished Goods

Achievement of Purpose or
Target

Response Time for system

Broken down how?

Front Desk
Backroom expert/dept
??????

Quality

Quality

Productivity

Productivity

In both instances be on the look out for Flow

measures versus local optimisation

Cause and effect analysis

Medium to strong negative correlation of -0.64. Bonus Incentives (25%) to

make volume of parts over the right mix of parts could be a contributory factor
(If Null were true a correlation as great as this would occur by chance alone
with a probability of less than 2.5%)

Cause and effect analysis

Medium to strong negative correlation of -0.56. OEE does NOT tell you if you are
making the right parts at the right time and is only appropriate for individual
resources. The highest levels of customer service have been during the lowest
periods of OEE. Batch sizing is very closely related to OEE. (If Null were true a
correlation as great as this would occur by chance alone with a probability of
less than 4%)

Summary Flow Accounting

Current Cost Accounting
Actively works against flow
Lead us to the wrong decisions
Are confusing and complex to people
Flow Accounting
Analyses and Interprets accountancy data in an different way resulting in Flow:
Improved customer service
Reduced lead times
Focus on total cost
Clearer understanding of the operating expenses of current capacity
Improved results