Making More Than I Spend…Business is Strong Right?

Making More Than I Spend…Business is Strong Right?
Monday, July 16th, 2012 Scott Bossart

                As a whole, there is some level of truth to a philosophy or perspective of as long as an organization has income higher than expenses, the organization is strong and successful.  Many smaller businesses rely on the monthly meeting with the accountant to determine the state of the business.  From a fiscal perspective, this is valid, a great fiscal review process, and will certainly tell you once the business is starting to falter.  Fiscal solvency is important and having a formal review with a financial accounting expert is good for the business and business owners.  This can also give some indication of where profit margins exist, but typically only at a relatively macro level.  By macro I refer to final products or services, purchases, etc.  From a fiscal perspective, the net effect is typically the one everyone looks at.  There exists a greater issue with only looking at the net effect.  Once the net declines, it typically means money was lost attributed to a specific area or segment of the business that more than likely could have been prevented had it been a focal point in a defined work flow.  By the time the month end visit with the accountant occurs, the loss is past and could potentially be growing, or has grown, worse.  The resulting affect could be several months of correction before profit returns, which then creates more time to catch up.

                If you don’t have your business broken down into individual components, and have the ability to monitor each within the final product or service, you could be missing huge opportunities, or worse, not seeing the level of risk that could cause losses.  This is where work flows come in.  Consider all the steps required to complete a service or finish a product and write them down in order on a piece of paper.  This is it, your work flow, albeit fairly crude.  This allows you to dig into each step you noted from two very important perspectives…Cost/Profit centers and risk.  This will also provide the ability to determine what steps generate the most profit vs. what generates low profit.  Let’s take a product for the first example:  It requires several raw materials introduced in the work flow at different intervals.  It also requires some activity, intervention, or sub-steps either by machine, people, or both (process flow).  At the end of the day all of these steps, raw materials, and activities have a cost and are added up to obtain a final cost to produce.  This is not the final product costs as there are other financial administrative functions that need to be included.  In this cost to produce, you should have the ability to monitor, track, and measure it against all of the other steps for the final product.  This same logic can also be applied to service oriented examples.  In doing so, it will provide information regarding the percent of total cost allocations of the final costs to produce as well as the balance between the work required for one step vs. another.  It is not a fair assumption to say if one step requires more work than another, it will also cost more.

                It is important to determine the restrictions for each component within your work flow.  Restrictions are those things that can impose limitations towards completing the individual step in the work flow and ultimately impact the final product or service.  Determine the bottlenecks in the process, meaning those things that naturally limit the product or service from a consistent fluid motion to be completed.  If you consider the components or steps required for a product or service to be completed, and then factor the time element into the picture, what particular component will take more time than another?  Where does work seem to get held up on its way to being completed?  In simple terms, this is your bottleneck.  Then you have those items that are somewhat out of your control.  These are things that require an external resource to be applied in order for you to complete your product or service.  Where is the risk?  Ask the question if the bottleneck restricts further or the external resource cannot deliver, what happens to the time…the costs…the schedule…and ultimately the customer?  There has to be a contingency plan for these things.  They are potentially the high risk items that can drive costs up.  These costs can escalate, in some cases, exponentially to the point of loss or even catastrophic fiscal failure.  This is why you break down your product or service and monitor, track, and measure on a routine consistent and frequent basis.  The knowledge of what the costs impact are before the product or service reaches the completion stage, can more quickly set into motion corrective action and limit the financial impact to the organization.

                Work flow is important when gaining a full understanding of what is happening within the organization.  It needs to be defined in great detail.  Each step required for the product or service to be completed needs to be considered, identified, and documented.  This also acts as the training ground for new staff and even revisions or growth to the organization.  Once the work flow is determined, proofed, and approved, then you can begin to progress through the cost impact of each component considering the labor, raw materials, operating supplies etc. This is the start of monitoring, tracking and measuring.  Once these are established, the next consideration is the “What-if” situations.  If something goes wrong, what happens both from a product flow perspective, but more importantly, from a cost perspective?  Consider for a moment, if you’re in a service business such as home remodeling and the project timeline is established.  During installation of cabinets you determine that the cabinets are not the correct size for one reason or another.  You should already know the true cost impact to the project.  You should be able to determine from past historical and factual data (not simply what you remember to be true the last time), the escalation of all related costs.  Now consider if you were running reports over the last 6 months to even a year and see the this occurrence happens more often that you realized.  What is the overall impact?  Could this one thing be the break point between making money and losing money?

                Let’s take that same scenario regarding a manufactured product earlier.   Let’s suppose the production machine breaks down for an hour.  There is a cost impact to both the upstream flow and the downstream flow from this event.  It has an impact to the final cost to produce and if not fully understood, monitored and tracked, this could have a huge impact to the bottom line.  Good manufacturing practices know this impact when it happens or shortly after and does not require month end accounting to determine the full impact.  I cannot stress enough the importance of documenting the work flow through the organization.  It should be for everything from production to service oriented.  Without it, all cost determinations, monitoring, measurements, and frequency become only a mere guess.  I hear it often how smart the business owner is and how they know all of this from shear experience and skill.  But when they step into this level of breakdown for the organization, the factual data suggest otherwise from what they thought to be true.  Spend the time to develop the work flow and understand how to accurately monitor, track, and measure the organization.  You will be surprised to where your profit margins actually are or even where you can squeeze more profit out of an area that is marginal to even failing on the costs side.  Don’t be afraid to ask for help.  The cost of assistance will pay for itself very quickly while the increased revenue will continue and grow as you apply the same logic to other components.

Stay Well.

Scott B.


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