How Innovation Accounting Can Work for Small Businesses

Posted on 17th July 2016 in Advisory

Written by Amy Harris

Whether you want to create a new bookkeeping app or to improve your website, innovation accounting is a way to define, measure and communicate progress

When Hannah and I launched our first business together (this is round two), we both read the New York Times bestseller, The Lean Start-up, by entrepreneur Eric Ries. Some books you read, use and forgot but not this one.

In The Lean Start Up, Eric Ries outlined a range of business strategies that have revolutionised the way that entrepreneurs launch, test and measure new products and services. Ries identified five Lean Start-up principles to help entrepreneurs improve their chances of success. One of those principles is called innovation accounting. We talk a lot about accounting on FUTRLI but this time it isn’t in relation to finances…

According to Ries, by implementing the three basic steps to innovation accounting, entrepreneurs can prove objectively that their business is growing and that it’s sustainable. These three steps are:

1. Minimal viable product (MVP)

In a traditional product cycle, entrepreneurs would work on a product until they deemed it perfect. Only then would they launch it. Using the Lean Start-up methodology, you launch the product as soon as you possibly can. This is the minimal viable product. It means you’re constantly getting feedback that you can use to improve the product. It also means you can test your fundamental hypotheses about the product, your audience and the market almost from the start.

2. Iterative progress

Once you’ve launched your MVP and started collecting feedback, the next step is to make further iterative launches, improving the product every time based on the information you’re gathering. Through this process, the product or service moves from the baseline to the ideal, at which point you’ve reached step three.

3. Decision point

At this stage, you’re either making good enough progress that it makes sense to continue or you need to think again. If it’s the latter, you may need to execute what Ries calls a “pivot”, which involves reassessing your fundamental hypotheses and starting the process over again. Steve Blank, another Lean Start-up guru, defines a pivot as “changing (or even firing) the plan instead of the executive”.

According to Ries, innovation accounting not only improves an entrepreneur’s chances of success, it also makes entrepreneurs accountable in a way they never have been before. And this can only be good for entrepreneurs, investors and customers alike.

How you can use innovation accounting to help your business

Lean start-up principles like innovation accounting were initially designed for fast-growing tech start-ups. But the concepts can be applied to almost any small business.

Whether you want to create a new bookkeeping app or just want to improve your website, innovation accounting is a way to define, measure and communicate progress for any project you’re working on.

So, say you want to create an online payment process for customers on your website. Traditionally, your IT supplier would build it, test it on a private server and then launch. Only then would your customers use it. If there are any problems at this point they’re usually difficult and expensive to fix.

Using innovation accounting you define the MVP with your IT supplier and launch as soon as possible. Before the launch of each version you set targets for what you want the payment process to achieve (eg increase revenue by x%). You then check your results, see what you can learn from them and start again. In Lean Start-up methodology, this is known as the Build-Measure-Learn feedback loop. It’s a way for businesses to be really rigorous about measuring their activity and growth as well as creating a better experience for their customers.

If you’d like to find out more about innovation accounting and the Lean Start-up methodology, you’ll find loads of resources at the Lean Start-up website. And if you try it out, be sure to let us know how you get on.