Last annotated on November 21, 2014
1. The Operating Cycle DefinedThe Operating Cycle, also known as the Cash to Cash Cycle, is a measure of how long it takes to convert raw materials received into cash from a customer. Regularly measuring and analyzing your operating cycle is very important in managing cash flow.
2. Cost of Goods Sold explainedCOGM basically tells you how much it cost you to manufacture all of the parts made during a given period. Here is the COGS formula. from a cost perspective, you only release cost into the P&L when you sell that product. If you didn't sell it, the cost remains trapped in inventory, where it will be released in the next period, or in whatever period you actually sell that part. This is the phenomenon known as inventorying costs! In this case inventorying is being used as a verb, the act of trapping cost in inventory, not the actual cost of carrying inventory. What happens if inventory had grown at the end of your fiscal year? Very simply, since you didn't realize the costs on your P&L, you get to pay taxes to the government on the amount of cost trapped in your inventory because it reduced your Cost of Goods Sold! That's right, for every dollar of excess inventory you produced and stocked you get the privilege of paying the fed about thirty-five cents. For every dollar of excess inventory, which cost you cold hard cash to buy and produce, you waste an additional 35% of that amount in excess taxes that you wouldn't have had to pay! Inventory is the little death that creeps. Keep that firmly in mind. If you're not going to sell it tomorrow, don't make it today. Period. Mathematically and unequivocally inventory is evil and costs you money in so many ways.
3. What Lean isn't, what it is, and how to use itLean is not a methodology. Lean is not a process or a procedure. Lean is also not a set of guidelines. Lean is a philosophy. It's extremely important that these points are understood. In order to “implement” Lean you will first need to embrace its philosophy, and then gather the tools to implement an efficient and effective shop floor. Overproduction is simply making more than you need at a given time. Conveyance is the unnecessary transport of materials from one location to another. Inventory consists of three components: raw materials, work in process (WIP), and finished goods. Motion encompasses any aspect of employee movement. Over-processing is probably the most difficult of all the wastes to eliminate. Waiting is exactly that. This is very much related to overproduction. The number one reason that Lean implementations fail is that most fail to embrace the philosophy. Most believe that it's solely about reducing inventory, and they try to impose “just in time” (JIT) procedures too early on in the adoption. What happens then is a nightmare. For a little while all seems fine. Excess inventory is being sold off and WIP is being turned into finished goods, which is being sold off, and everything seems just fine. Then the first Profit and Loss (P&L) statement comes out. Senior management gathers around and everyone says, “What? I thought we were doing so well! Why did profit do down?!” Yes, the first few months will show reduced profits due to the Accounting phenomenon know as “inventorying costs”. They gamely push on. A little later the back-orders start to creep up. This is because inventory was sold off without having a proper scheduling method in place. No one thought to implement a new scheduling system to account for the tighter time frames of a JIT system. The double whammy of reduced profits and new back-orders will cause even the hardiest of managers to abandon a new project. So now, several months and probably several or even many thousands of dollars later, all the work is being abandoned and the old ways return to consume cash and resources like never before.
4. The 3 statements you're concerned with, and why you're probably looking at the wrong one!There are only three statements that a manufacturing company is really worried about, and you're probably looking at the wrong one! The three statements are Cash Flow, Balance Sheet, and Profit and Loss (P&L). For those of you that look at the P&L as a measure of corporate health, you're way off the mark. In Accounting there are many different ways to cost a product. There's the Contribution method, Absorption method, Activity Based Costing, and more. In addition there are three different ways to calculate raw material costs for use in manufacturing: Standard, Average, and Last. There's only one way to calculate cash flow. Money comes in and money goes out, and at the end of the period you either have more cash in the bank or less. accounting tricks can be used to change the P&L, but there's no way to change cash flow! It is entirely possible to be wildly profitable and have no cash to pay your bills. This situation is further exacerbated because tax liability is tied exclusively to profit, so for every dollar you show as profit you owe the government a big chunk of that dollar at the end of your fiscal year. On the flip side, it's entirely possible to break even, show a respectable profit or even a loss at the end of the period, and have boat loads more cash than at the start of the period. The key is to optimize your operations for cash flow. The Cash Flow statement will tell you if you're healthy, and the Balance Sheet will tell you where the pain is. The P&L will basically tell you how much you have to pay in taxes.To optimize for cash flow you have to reduce unnecessary cash expenses. This is directly tied to eliminating the seven wastes identified by Toyota and creating an efficient operation.
5. Business Process Management on the Plant Floor6. Theory of Constraints
In TOC you have to actually sell it for it count towards throughput! This is actually the true definition of throughput. Inventory is the grand total of all your raw materials, WIP, and finished goods. Operational expenses are just that, the expenses incurred for manufacturing product. The goal in any company is to make money. To maximize cash flow and profit, you have to maximize throughput while minimizing expenses and inventory. In any operation there is always at least one constraint active at a time, usually more than one. Exploiting the constraint means never letting it run out of work. Subordinating all other resources to the constraint means that you limit cycle time of the preceding step to the constraint's cycle time. Elevating the constraint can be the most difficult, but is not always immediately necessary. It could mean the purchase of another expensive machine, the addition of a second or even third shift, or additional labor at the constraint. An internal constraint is when the market demands more product than the system can produce, and means that the constraint needs to be elevated. Takt Time comes from the German word taktzeit, loosely translated meaning Cycle Time. Cycle time is a measure of how long it takes to produce your part. Takt time is something different. Takt time takes your demand and divides this by the available working time to give you a time required to make your part. Don't pile up WIP in front of machines or work centers!
7. Line Balancing
Line balancing takes place in a line that contains manual operations. It is very simply the act of evening work flow so that as one piece is completed by a worker, the next one is being set down in his station for that worker to start on. A truly balanced line is a marvel of “one piece batch” flow! One concept I've become comfortable with is the “floater”. This is one or more people that have been cross-trained in the majority of steps or all of the steps, and can move into a different role as necessary within the same shift. This gives flexibility to a line and allows for when people are tired or not feeling well. Remember, there will be variation in the cycle times for manual steps because people scratch their eyes and go to the bathroom. The pile is psychologically pressuring, as are the glances from the coworkers down the line! This will also serve to reduce the supervisory burden, as a truly balanced line is almost self regulating. Create a line, or cell, and balance that line! This will increase visibility and simplify measurement, reduce total process time (which shortens the Operating Cycle!), and create instant visible accountability on that line.
The only source of variation is not the worker or fatigue. Machines may break down, quality issues may arise, absenteesim may ocur,... Balanced line is a fragile line !!
8. Capacity and Constraints
Whenever a constraint is identified it will become necessary to determine whether to subordinate resources or elevate the constraint. If it comes back that demand can be satisfied by subordinating resources, you're in luck and don't have to determine whether to buy a machine or add a shift!
9. Manufacturing for the Sweet Spot!
The sweet spot is very simply the fastest a machine can run a part without introducing variability, and subsequently quality defects, into the manufacturing process An actual cost is money that's paid out: you cut a check for rent, you cut checks for payroll, you cut a check for materials purchased, etc. These are Actual Costs! A Virtual Cost is any cost carried in the system that does not represent money going out the door. Your burden rate is an excellent example of a Virtual Cost. The burden rate is made up of actual costs, but when applied to a job in the system the burden rate becomes a Virtual Cost. When evaluating the potential savings of a production rate increase, don't use Virtual Costs in your analysis. If you're not reducing any Actual Costs, you're not saving any money. You're probably going to end up losing money. Find the sweet spot. Stick to the sweet spot.
10. Open Computing Model
The Open Computing Model is a term I coined to represent utilization of Open Source, and mostly free, software in the enterprise. Most companies, even large ones, do not run the latest versions of software. Take a look at the minimum system requirements for the last three releases of Windows operating systems. hardware requirements continue to increase. What benefits do you get from the upgraded hardware? In short, minimal hardware upgrades are necessary with most flavors of Linux so the life of your hardware can be extended. Additionally, none of the core software will break when you upgrade to the next version! Using Open Source alternatives isn't always roses. Here are a few areas where it (in my humble opinion) falls down just a bit. ERP's are typically written for a Microsoft environment and finding a good ERP for Linux can be challenging. The next time a salesman comes in and tries to sell you the latest, greatest ERP ask yourself honestly how many of your users are really going to learn how to use all of those modules that will save you millions of dollars. In my opinion if you're going to spend big money on IT/MIS and purchase a fancy ERP, get Dynamics. After working with all of the above ERP's, and many more, I feel that Dynamics is the best. There are many more options for reducing IT costs. Google Apps for business will let you host your email in the cloud and even has collaboration built in for Google Docs now. Another alternative for office suites is OpenOffice.org. Look at your options, and don't feel like you have to spend big money on proprietary solutions. This is another area where a little research can save big money.
11. Costing – Absorption, Contribution, and Activity Based Costing
if you're standard cost is wrong then you're P&L is wrong. Standard Cost is where you apply a standard cost to materials. What this means is that every time you buy materials, issue them to a job, or receive them from manufacturing each material has its own unique cost which does not change, even if the price paid for the materials changes or a labor rate changes. When the price paid for raw materials changes from this standard it throws a Purchase Price Variance. This variance is posted out at the end of a period to either place more cost into inventory, or remove cost from inventory. Likewise if a labor rate changes this will produce a Manufacturing Variance, and subsequently an Applied Labor Variance. Average Cost is when the average of all prior costs from that period are applied to the job/materials. This reduces the application of variances, but does not eliminate them. Last Cost is whatever the last cost paid was, be it the very last charge for materials or the newest labor rate, that last cost is applied to each job as cost. Management by Exception is the practice of creating a baseline, and focusing your efforts on results that fall outside of that baseline to a standard deviation. You then effect change to bring those results back within the measurement tolerance. First up is a relative newcomer called Activity Based Costing, or ABC. ABC involves a two stage allocation process. In the first stage overhead costs are assigned to cost pools, and in the second stage costs are assigned to a job based on a cost driver. The next method is the Contribution method. This method uses an entirely different income statement. The statement separates costs into fixed and variable costs, and then subtracts the variable expenses from sales to obtain the contribution margin. This amount contributes towards covering the fixed expenses for the period, and if there's still any left over that's the gross profit. The final method I'll be talking about is the Absorption method. This is my preference for a very simple reason; for external reporting such as to a bank or the IRS, the Absorption method is required. Why not use the same data the rest of the world uses to measure the health of your organization? Also, under the Absorption method, sometimes known as the “full costing method”, you will see in glaring lights the impacts of bad inventory decisions. The Absorption method assigns all manufacturing expenses, variable or fixed, as product costs. is tallied and divided by the expected level of activity to produce a burden rate. This burden rate is then applied to jobs based on the applicable cost driver. The most widely used cost driver today is the machine hour. As big a fan as I am of TOC, I would still recommend sticking to the Standard Costing under the Absorption method. each of these methods will yield a different gross profit number. Yes, that's right. Each method will yield a different gross profit number even with the exact same inputs. The Contribution method will yield a lower gross profit than Absorption because it reduces the effect of inventoried costs on the income statement. When the period costs are released into the P&L rather than absorbed as a product cost, it decreases the amount of cost carried in inventory. With regards to Direct Labor, if your operation is heavily machine oriented with few manual steps consider absorbing Direct Labor into you burden rate.
12. Running the Numbers – Important Financial Ratios
Here's my acid test; not only should your Quick Ratio be at least 1 to 1, but it should be no less than half of your Current Ratio! Even that's being a little generous, because if your Current Ratio is 2 to 1 (generally considered healthy) and your Quick Ratio is 1 to 1 (also generally considered healthy) that means that inventories make up a full 50% of your Current Assets! Not good. Your Accounts Receivable, if your customers are on net 30 terms, represents a full month's worth of future cash receipts. Your inventories, when properly managed, should realistically never exceed your Accounts Receivable. Average inventory is the total dollar amount of inventories (raw materials, WIP, and finished goods) added up and divided by the number of periods. Realistically, you should shoot for 18 turns at a minimum. The real value of this ratio is in the comparison from period to period. If you notice your turns starting to drop you need to work on inventory reduction because you're starting to build inventory. As we've already seen this has a negative impact on cash flow and needs to be addressed. If you see your turns starting to drop, you'll also notice a corresponding increase in the operating cycle. This tells you that you're money is working for someone else, and not for you. The other tremendous value in figuring your turns comes into play when your net sales figure changes. If net sales increases there might be a corresponding increase in inventory values. Your inventory turns will tell you if the increase is excessive or not. As well, if net sales drops then you should see a corresponding decrease in inventories. If your turns decrease even though your inventory value has also dropped this will tell you right away that you haven't managed your inventory properly during the sales decline. Net Sales is the total sales for the period in question, with allowances for returns and damaged goods, etc. Working Capital is Current Assets minus Current Liabilities. Both of these figures were used in the calculation of the Current Ratio, so they should be readily available. An exceptionally large number of turns could mean a lack of working capital, and that's a bad situation. An exceptionally small number could mean that you have a lot of capital tied up somewhere. Most commonly this would be a very high Accounts Payable which offsets a high Inventory number. The best use of this number is in conjunction with the other ratios. If you have a very high Current Ratio then your turns will be fewer as the denominator climbs. Also, high Working Capital turns with a low number of Inventory Turns could spell disaster as this would point to a Working Capital deficiency. Due to the potential for subjectivity and possible misinterpretation I would suggest not using this as a measure until you've begun to turn your operations around. Once you've optimized for cash flow and your Inventory Turns is in double digits (at least) then start to measure Working Capital turns. This will provide a counterbalance to other measures, and provide an additional piece of information for use in diagnosing problems on the Balance Sheet.
An equally important use of this ratio would be in determining the feasibility of a capital expenditure. If Inventory Turns is climbing with the Current and Quick Ratios you're reducing inventories and building cash while maintaining a good balance of Accounts Receivable to Accounts Payable. If your Working Capital Turns is also decreasing steadily this is a time to put that capital to work for you. Instead of taking out a loan for a new machine to increase capacity or capabilities, consider using cash and eliminating the cost of capital.
13. Goals Vs. Desires – Proper Goal Setting
A proper goal has the following characteristics. It is achievable. It has a measurable aspect to it. It has a time frame. Achievement of the goal advances the organization. There are action items associated with the goal. It addresses a problem statement. Being achievable means that there is a probability of success associated with the goal. The measurable component is firm and tangible. Whatever the time frame it has to be there. The goal absolutely has to advance the organization. Attaching action items to your goal is the final component. The final item isn't necessarily part of the goal statement, but is no less important than the other aspects. Whatever goals you set have to address a problem statement.
14. Your First Steps
The first thing you need to do is figure out where you're at. This involves running the ratios and getting a clear picture of where the pain is. Gather your Income Statement, Balance Sheet, and Cash Flow Statements for the most recent fiscal end, and the two years prior. Now compare your Net Sales, Inventories, and Cash balances. Make a note of which direction they're traveling, and if they're traveling together or not. Now run the ratios, for all three years. You're looking for the Current Ratio, Quick Ratio, and Inventory Turnover ratios. Is your Current Ratio 2 to 1 or better? If it's not, you know right away that you're either over leveraged or you have an issue with capital management. Quick Ratio. Again, another measurement of how able you are to meet your short term obligations. Is this number at least 1 to 1? It definitely should be! Also, is it better than half of your Current Ratio? If your Quick Ratio is not at least half of your Current Ratio or better than inventory is making up too large a portion of your Current Assets and this points to capital management issues again. Next, did Net Sales go up or down, and did inventory move with it or against it? If sales increased and inventory increased as well this is not particularly troublesome. However, if sales decreased and inventory increased then you definitely have an inventory management issue. You also have to measure the increase in inventory versus the increase in sales. This is where inventory turns come into play. Now look at Net Sales and Inventory Turns. If sales increased and inventory increased with it, how did this affect your turns? Realistically speaking your Inventory Turns should not have been affected by any increase in inventory. It's natural for inventory to climb with sales, but it should do so proportionately. If inventory climbed with sales proportionately this will be reflected in the number of inventory turns remaining relatively static. If inventory turns dropped then you have an inventory management issue. Look at all the numbers and paint yourself a realistic picture of your current position. Gather the numbers for the past few periods for comparison. Determine your most intense pains. Make a note of the pain on the same sheet you noted the ending balances for the three years you're looking at. Write it in as clear a problem statement as you can. This problem statement will be used to formulate your corporate goals for the coming year. Now, you have a proper corporate goal with action items attached to it. Guess what? The action items from the above goal become the basis of departmental goals. Now you have a vision. Even if it's as simple as reducing inventories and improving cash flow. The actions of every manager and supervisor have to be aligned with the corporate goals. By using the trickle-down effect of this goal setting method they will be.
15. Now Walk Your Floor
What you're looking for here is great big piles of work-in-process material. These piles will tell you where you're falling down in production. More specifically, they will tell you where you're falling down in production scheduling. Yes, your delivery issues are directly related to the big piles. What's going on here is that your scheduling is not being handled properly. Instead of working on today what you need to sell for tomorrow, you're creating big piles that are expedited from. This is called the staircase. The staircase starts at the top with raw materials and works its way down to the bottom towards finished goods. This is the staircase effect, and comes from bad scheduling habits. It stems from expediting from piles of WIP rather than scheduling processes. What you need to do now is resolve to restrict the flow of materials to the areas of build-up. Begin scheduling around the constraints first. Only send the parts there that are absolutely necessary to be processed to make an order. Next, while you're out on the plant floor, put a dot on a part. Now look at every place where that part stops and waits. Long waiting periods before processing is a symptom of the “batch and queue” mentality. What you need to do is check your booked orders, and then compare that list to various stages of WIP. When the piles start to disappear then you can work on revamping your scheduling methods. As Even though you'll be freeing up capacity in the form of relieving unnecessary production from the queue you still need to be aware of whether or not you need to elevate your constraint(s). It's as simple as gathering your shipping data for all parts produced on a machine, or in a work center, and based on the shipping data figuring out whether or not you have the processing time available for all of those parts. The next thing to be careful of is not starving the area of work. Even though there may be a lot of material there, make sure it's the right material! The next step to reducing wait times is reduce the size of your containers. Moving the parts to the next stage and beginning work on them right away is a key concept. Moving the parts around at the next stage will be quicker and easier, because of the smaller containers, so staging time will be reduced as well.
16. The Myth of Economy of Scale
The single greatest barrier to making that a reality is the myth of “economy of scale”. There is a large number of people that believe once a set-up is completed on a machine that a large number of parts need to be run to justify the cost of that set-up. Unless it reduces the actual amount of money leaving your bank account, you are not saving money. What economy of scale does do is provide a salesman with the option of reducing the price of a part, falsely. What economy of scale does is give the production department the excuse it needs to produce excessively large batches of every part; which builds inventory, increases tax liability, increases cost of quality, removes valuable machine capacity, reduces your manufacturing flexibility, etc. If you want to reduce your burden rate, cut expenses.
17. Purchasing Habits
High inventories are a primary abuse of cash flow. The purchaser's job is to have enough material on hand to complete the current jobs; no more and no less. Change your buying habits as soon as you can to reduce your raw material inventory.
Metrics are the numerical values that a department's or manager's performance is based on. A Production Manager has to take responsibility for back-orders. If for any reason the proper amount of parts can't be shipped it falls to the Production Manager to fix the issue. However, that doesn't give him license to inflate inventory and add labor to the point of bankrupting the company. Sacrificing quality is never an option. The backorder issue is pretty cut and dried. If you're suffering from back-orders now, then determine an appropriate level of reduction to hold them accountable for. It may be a 50% reduction, it may be a 33% reduction, but quantify it and give it a time frame. The ultimate goal is zero, and after several rounds of reductions this will eventually be the proper measure. set WIP and Finished Goods at a percentage of COGS and make the Production Manager responsible for maintaining these numbers below that.
The metric would be holding labor at or below the current percentage of sales. This takes into account increasing and decreasing sales. Quality is also a hard and fast number. Internal defects have to quantified as a separate metric.
Earlier I said that giving someone a labor metric to be held to, you also have to give them power to hire and fire. Every department should have a list of metrics that they're held to. These metrics should be obtainable and hard numbers. Each department should also have opposing metrics to make sure that each department is properly optimized.
local view again and creating disharmony
19. Tracking Your Progress
Time to complete a job is a key measurement a baseline should be established. Take your current average and continue to measure it against future averages of the time to complete a job, and make sure it continues to go in the right direction. Measuring your internal defect rate is extremely important as a focusing step. Concentrate on the highest quantity first, and continue to eliminate slices of the pie. Continue to monitor your progress. At the very start, wait three months before holding a progress meeting. If the results aren't noticeable in the first month it would be pretty demoralizing, and you don't want to lose anyone's commitment. After three months, hold a management meeting and discuss the results of your efforts. Point out areas where more effort is needed, and devote resources to those areas. Track your key measurements. Hold meetings to discuss progress, and hold people accountable to their metrics, and you'll see progress.
20. Business Process Management
Managing your processes is as simple as creating a flowchart representation of “what is”, then tweaking that to a flowchart representation of “what we'd like it to be”. Start with current state, and then determine what future state would improve the function of that process.
21. Quality Management
Cost of quality is an important metric that's often measured improperly. Cost of quality is a pair of numbers, one a dollar amount and the other a percentage (cost of quality in dollars divided by net sales) that represents how much bad parts cost you each period. First, internal fallout, or defect, rate is more important than the PPM for customer defects. The way to reduce internal defect rates is to focus your efforts. Go to the source of the problem. No quality issue was ever solved from the conference room. Getting everyone focused on a single issue is important so you can make optimal use of resources. The next most important issue is making sure every piece of scrap is recorded and every defect is recorded. For the sake of your inventory and good purchasing habits, as well as your reputation with your customers, record every piece of scrap. Reduce your internal fallout rate to improve your net, and this will reduce your external defect rate.
22. Cash Management
As a quick benchmark you can measure cash as a percentage of your net sales. Shoot for a minimum of 10% of your net sales as a cash balance. The lower your net sales, the higher a percentage you're looking for. If your operation is optimized for cash flow your cash balance will continue to grow. Use a 25% upper limit for your cash balance. When looking at the upper limit and determining a use for excess cash, think “depreciable expense”. A capital expenditure will increase your depreciation and further improve cash flow while reducing your taxable liability. Cash is an asset, profit is a taxable liability! Think in terms of actual improvements, not virtual or false improvements. Actual improvements reduce expenses, virtual improvements make no impact on cash flow and could end up costing you more money if they have any impact at all. avoid the practice known as “stretching your vendors”. Billing your sales promptly, making sure that your on top of your Accounts Receivable and aggressively going after overdue invoices. Managing your inventory and optimizing labor resources. Getting the basics right forms the foundation of any cash management strategy. Then you need to forecast your cash requirements. Every month, after you close the period, insert the actuals next to your projections. Firstly, it will give you a margin of error to work with. Secondly, it will give you an idea of where you'll run into trouble. Finally, when you start to build a cash balance, knowing what to do with excess capital is just as important as knowing how to build capital. Finally, always talk to your bank. Develop a relationship with your banker and keep them informed of what's going on.
23. Your Health at a Glance, Running the Numbers
Run the numbers every quarter and dissect them. Your Accounting Department should do a full analysis every quarter on these key measurements. Identify every entry that makes up both numerator and denominator for the ratio and determine what numbers changed, and how, on the Balance Sheet. Then, determine the relevance of the change to your Operational Initiatives. In particular look at your Liquidity Ratios, Activity Ratios, and Operating Cycle for the most accurate picture of your health. These numbers, coupled with a Cash Flow statement and the P&L statement should tell you exactly where you're at, and how you've gotten there. The number one cash management principle to live by is this.
24. If You Can't Measure It...
find out what it is exactly that needs improving. Determine how you'll measure it and get a baseline. However you decide to measure it get a picture of what it looks like today and what it's looked like the past three years. Whatever system of measurement you put in place will yield the same results with the same inputs every single time. The measurement itself can't have any inefficiencies, which is why it's best to keep it simple. When creating a measurement think “Number and Percentage”. Remember to create opposing metrics for each measurement. Measure both the number of occurrences and it's percentage of opportunity. Place opposing metrics on any departmental or managerial expectation to maintain operational integrity.
Firstly, forget about “marking up” a piece price! Take a part that was determined to have a standard cost of $1.00. If you mark that cost up by 20% you get a sell price of $1.20. That leaves a gross profit of 20¢. 20¢ divided by $1.20 yields a gross profit percentage of 16.6%! Instead, determine the gross profit percentage that you need. Subtract that percentage from 100 and divide your cost by that number. Secondly, separate the quote work-up from your salesmen. you will want to have your Engineering Department prepare the quote because this will ensure that you take on more profitable jobs. If the gross profit is reduced by the salesman this will be known up front and you can have Engineering and Production look into process standardization or even automation in the very beginning stages of the project. This keeps the flow of information accurate from one department to the next as well.
26. Accounts Payable Vs. Accounts Receivable
First of all, if you expect to have positive cash flow then your payables can never exceed your receivables. Regularly take an Aged Receivables statement and an Aged Payables statement from accounting. The first thing you should look at is their totals.
27. Good Debt Vs Bad Debt
Any time you find yourself in need of a Working Capital loan, you know that you've mismanaged your cash. Purchasing increases should be as a result of an increase in production, not in sales. It does no good to book sales you won't produce, and likewise no good to bring materials in that won't be used in production. This is where departments must communicate, and the accurate flow of information on a timely basis becomes extremely important. The purpose behind the loan is what separates the good from the bad. Always make sure that taking a loan is the last resort. Understand the difference between good debt and bad debt to help ensure that none of your debt goes bad. pay yourself bonuses based on positive cash flow instead of profits.
28. Managing Employees
This is not about Human Resources and discipline, this is about how to get the most out of your people. Ambiguity is probably the single biggest threat to employee productivity. In the workplace everybody should know what's expected of them. They should understand their functions, what constitutes a good job and what constitutes a bad job. These expectations are primarily set through opposing metrics. Business Process Management is an excellent tool for removing ambiguity.
29. In Summary
Remember that cash is king. The real bottom line is a positive cash flow. Optimize processes and procedures for cash flow, and profits will come. Concern yourself more with profits and your cash flow will suffer. Recognize the difference between cash flow and profit. Actively manage your constraints. Identify, elevate or subordinate, then re-identify continuously! If you don't manage your constraints, they'll manage you. Continually strive to reduce your Operating Cycle and increase Inventory Turns. In this way you make the best use of your cash and minimize the possibility of crippling debt service. Create opposing metrics for your organization to strive towards. This is how you maintain a balanced and healthy optimization of procedures. Keep firmly in mind the difference between virtual costs and actual costs. Changing the way a cost is applied or increasing the run rate does not save money. Reducing actual expenses saves money. If you haven't increased throughput (the amount made and sold to customer) you haven't made a real improvement. Don't make it today if you're not going to sell it tomorrow. Keep your inventories to a bare minimum. Always make changes with an eye for improvement in quality and a reduction of variation in the process. Always walk out on the floor. Regularly check processes for accuracy and efficiency. Document your processes to remove ambiguity from the workplace. Continue to monitor your progress through the use of your ratios and other measurables. Meet regularly. Clearly write problem statements for each pain your organization is experiencing. Rank them in order of magnitude – crippling pain at the top on down to minor aches at the bottom – and create corporate goals to address your major problem statements. Manage your processes to assist with the management of your workforce. Remove ambiguity from the workplace. Recognize the difference between good debt and bad debt, and eliminate bad debt from your organization. Start over again. Yes, after you start building up a cash balance and you've become debt free, after inventories are at rock bottom levels and your operation appears to be as efficient as it ever will be, start again from the beginning. This new operation is the benchmark from which your future state will be judged against. Remember that continuous improvement means just that. It never stops.