While there has been very little discussion of it in the Australian accounting profession, I thought it was high time I discussed 'innovation accounting' as coined in Eric Ries' bestseller The Lean Startup.
In its simplest form, innovation accounting Ries describes as "An Accountability Framework That Works Across Industries."
The notion behind innovation accounting is that while traditional accounting, although an integral part of any business, does not adequately satisfy the unique timeliness and relevance needs of the modern startup. The fact is that traditional accounting principles are used measure established business ventures as well as startups as if they were playing on the same field. The fact is the modern startup is on a whole different wave length from established traditional business, and thus the need for a new take on accounting is required.
The whole notion of Lean Startup is about the startup cycle of Build - Measure - Learn cycle, within that cycle innovation accounting plays different roles. I have elaborated on these roles as I see them within each area of the cycle.
Build
-Set a business hypotheses: This is typically the entrepreneur's business idea, but established in a scientific manner to test against.
"There is a market for widgets."
-Establish a minimum viable product (MVP) to establish real data: An MVP is the quickest way to obtain market feedback and test the business hypotheses without waste.
An MVP for widgets may be a basic website with to collect preorders or potential customers to register interest to buy widgets that don't even exist yet.
-Identify quantifiable metrics to monitor progress: The entrepreneur must identify what metrics are of relevance to validate the business hypotheses.
The metric for validating demand for widgets may include things like traffic, conversion rates and other leading web metrics.
Measure
-Establish the baseline: Once the metrics have been identified, the entrepreneur must use the MVP to establish a starting point to measure progress.
In our widget example we would set the baseline around the real data obtained from our basic website around the metrics that we set earlier.
-Monitor progress: The entrepreneur must now monitor the performance of the MVP under the original hypothesis.
For our widget site we would sit patiently and watch the data tick over until we are satisfied we have sufficient data to make modifications.
-Tune the engine: From here the entrepreneur can make changes or split test to drive performance from the baseline to the ideal, all while still monitoring the progress of our key metrics.
On our widget website we can make any number of changes namely the sales copy and the site design.
Learn
-Pivot or persevere: Having made adjustments to move from the baseline to the ideal, the entrepreneur can either decide to either pivot (change ideas or direction) or persevere with the current business model.
In our widget example we will either pivot to test the market for doodads rather than widgets, or we can perserve and proceed with our widgets business.
You can see from this example we have gone through a whole business cycle before your tradition profit and loss accounting has even come into play (Hence my previous article: Why your profit and loss statements don't tell you a thing). Even after a business is established, it should still never stop using innovation accounting to run the business.