Accounting for Leaders

Basic Business Cents

Useful Accounting

May 20, 2009

As an engineer, I found accounting dull and boring. As a business owner I find it interesting and very useful, in fact a tool that I enjoy.

Software is available to do all the reports for you, but I believe like most things, it is best to do them by hand until you understand what is going on. Just like you don’t want to automate a bad process in manufacturing, you don’t want to automate a bad process in accounting. It is deadly for the leader to not understand the finances of the organization.

Accounting is defined as “The art of recording, classifying, and summarizing in terms of transactions and events of a financial character and interpreting the results thereof.” There are Generally Accepted Accounting Principles (GAAP), which cover the Income Statement (Profit and Loss Statement), Balance Sheet, and Cash Flow Statement.

The Income Statement is a tabulation of the revenue received over a period of time, the expenses over the same time, and the difference between them, which defines the profit or loss over that time frame. It includes noncash items such as accounts receivable, accounts payable, and depreciation. The expenses are listed by major category so as to provide more information as to where the money is going.

The Balance Sheet has three parts: assets, liabilities, and ownership equity. Where the Income Statement is over a period of time, the Balance Sheet is at one point in time. By definition, the net worth must equal assets minus liabilities.

The Cash Flow Statement is a listing of when revenue is actually coming in and when expenses are actually being paid. It tells you where your money is coming from-operations, financing, or investmests, and where it is going-operations, financing, or investments. It is an analytical tool that is useful in determining the ability of the organization to meet its obligations. Always a necessary aid for management, its importance is great in this economic climate.

As useful as these three tools are, they are a reflection of what has happened in the past. Management must predict the future. The Pro Forma Financial Projection shows potential of expected income, costs, assets, or liabilities in relation to some planned or expected act or situation. By taking the information on the Income Statement and then predicting results for the next year by month and the following two years by quarter, I have a tool that is extremely useful in making management decisions. It is a prediction that is fine-tuned each month as it is updated. Like any theory that is supported or disproved with data, it improves with use.

Myron Tribus once said, “Making management decisions by looking at the financial numbers alone is like driving a car by looking in the rear-view mirror.” The Pro Forma Financial Projection allows us to look forward and see the impact of our decisions.

Problem Solving System, Part II

Basic Business Cents

Fix the Problem, Not the Blame

Part 2

April 22, 2009

In the last column, we discussed the first three steps of a systematic problem-solving approach called the QC Story. Today’s column will finish the description of this useful tool.

4. Take action that will eliminate the main causes. Once the cause has been identified and proven, this step is relatively easy. Use data to evaluate several possible solutions to the problem. Take care to remove causes and not just symptoms of the problem. Care should also be taken so that the solution does not have detrimental side effects on this process or any other parts of the organization.

5. Study the results. Data should be collected to check the effectiveness of the action taken. Compare the situations before and after. If the results of the action are not what was desired, first determine if the action was implemented as planned. If the solution was implemented as planned, but the results are undesirable, it is necessary to test a different solution.

6. Standardize on the new method. After the desired results are achieved, develop a new standard and communicate it to everyone involved in the process. Provide training and devise a check system to observe compliance with the new standards.

7. Document the conclusion. Review the problem-solving procedure and identify what was learned. Note what worked well in the improvement process and what did not so others can learn for the future.

The final action is to redraw the flow chart of the process reflecting the changes and comparing the flow chart to the version done before the problem-solving action. Hopefully it is simpler as well as more effective.

This may sound complex at first but after you have gone through it a few times, it is fairly simple and valuable. A dramatic example of application of this process was revealed to me on a trip to Japan twenty years ago.

The world headquarters of Canon, Inc., a large manufacturer of cameras, copiers, and printers, is a beautiful building with a large and impressive lobby. But, I felt the display of data in chart forms in various places about the lobby were distracting. I studied them and found they were QC Stories about problems they were experiencing and progress they were making in solving those problems. When my host met me, I asked him why they were airing their dirty linen in front of the public like that and he said, “Oh, we get many good ideas from our visitors.” Thinking about it, most of their visitors are probably customers or suppliers who have a vested interest and knowledge to contribute to solve those problems. They knew all organizations have problems and there is no stigma with that as long as progress is made to solve the problems. They were not embarrassed to get help from wherever they might obtain it.

So we have problems, it is important we make progress in solving them. A systematic approach like this seven step process is indeed helpful.

Fix the Problem, Not the Blame

Basic Business Cents

Fix the Problem, Not the Blame

April 21, 2009

Attack the problem, not the people! People generally do the best job they can within the process with which they were trained. It is up to management to improve the process, but they do not always know how to start. A systematic approach to problem solving is useful.

The Japanese developed such a problem-solving process, which they called The Quality Control Story or QC Story. It has been adapted in this country, sometimes under the name of The Quality Journal or The Seven-Step Process. Details of this process can be found in Chapter 10 of the book, Statistical Methods for Quality Improvement by Hiroshi Kume. This discipline brings consistency to problem solving in every department of the organization and displays progress so that anyone can look at it and offer additional suggestions for improvement.

The Quality Journal adds a before and after simple flow chart of the steps in the process relevant to the problem to show improvement (and hopefully simplification) or not. When I asked a Japanese friend why they did not do this, he responded, “We assume you know what is going on in the process before you attempt to make any changes to it.” I don’t think we can always make that assumption in this country.

The seven steps are described as:

1. Clearly define the problem. In 1.a, actually state the problem and how it impacts the total system. I recommend using a pencil for this because often when data is collected, the problem is different from what was thought starting the problem-solving effort. It is not unusual to have to rewrite the problem statement more than once. In step 1.b, data is collected and displayed in chart form to prove that this is indeed a problem.

2. Observe the problem. Examine the problem from several points of view; typically, different times, different places, different types, and different symptoms. Involve the people actually doing the work in collecting the data and displaying it in chart forms. This step is particularly useful in learning about the problem.

3. Determine the main causes of the problem. This step is divided into two parts; first brainstorm all the possible causes of the problem and theorize which are the main causes. We have now set our hypothesis on the main cause to correct, but wait, there is a step 3.b. That is to collect data to prove our hypothesis; that we have correctly identified the main cause of our problem. If not, then we go back to our brainstorming chart, usually a cause and effect chart to develop a new theory of the main cause of the problem.

4. Take action that will eliminate the main causes. Once the cause has been identified and proven, this step is relatively easy. Use data to evaluate several possible solutions to the problem. Take care to remove causes and not just symptoms of the problem. Care should also be taken so that the solution does not have detrimental side effects on this process or any other parts of the organization.

5. Study the results. Data should be collected to check the effectiveness of the action taken. Compare the situations before and after. If the results of the action are not what was desired, first determine if the action was implemented a planned. If the solution was implemented as planned, but the results are undesirable, it is necessary to test a different solution.

6. Standardize on the new method. After the desired results are achieved, develop a new standard and communicate it to everyone involved in the process. Provide training and devise a check system to observe compliance with the new standards.

7. Document the conclusion. Review the problem-solving procedure and identify what was learned. Note what worked well in the improvement process and what did not so others can learn for the future.

This may sound complex at first but after you have gone through it a few times, it is fairly simple and valuable. A dramatic example of application of this process was revealed to me on a trip to Japan twenty years ago.

The world headquarters of Canon, Inc., a large manufacturer of cameras, copiers, and printers, is a beautiful building and grounds with a large and impressive lobby. But, I felt the display of data in chart forms in various places about the lobby were distracting. I studied them and found they were QC Stories about problems they were experiencing and progress they were making in solving those problems. When my host met me, I asked him why they were airing their dirty linen in front of the public like that and he said, “Oh, we get many good ideas from our visitors.” Thinking about it, most of their visitors are probably customers or suppliers who have a vested interest and knowledge to contribute to solve those problems. They knew all organizations have problems and there is no stigma with that as long as progress is made to solve the problems. They were not embarrassed to get help from wherever they might obtain it.

So we have problems, it is important we make progress in solving them. A systematic approach like this seven step process is indeed helpful.

Understand Your Key Processes

Basic Business Cents

Process Flow Charting

April 20, 2009

Would you like to take cost out of your operation while improving the quality of your product or service? Try flow-charting your work processes to remove waste and rework.

In a previous article, we stated all work, whether it is in manufacturing, service, non-profit, or at home is made up of a series of processes that we follow, with each process containing a series of repetitive steps. We tend to follow this routine blindly because it is what we were told or we are comfortable with. If we simply list on a piece of paper each step of a process that we wish to improve and then make a critical examination of each of these steps, we will almost always find a way to improve the process. Why is this important? Experience has taught us that 35-60% of our work goes into producing waste, rework, or redundancy. Think of the time that would free up, think of the savings that would go directly to the bottom line, think of the satisfaction of finding better ways to do our work!

Of course, there are more sophisticated ways of charting work processes than simply listing the items on-by-one, but we can discuss those later.

The credit for process flow-charting is given to Allan Mogensen. He was always the fancier of gadgets and technology. He flew his own airplane and during a business trip to Minneapolis, his wife said she was scared to death to fly with him but was more afraid to let him fly alone. He was well into his 80s at the time.

In the early days of the motion picture camera, Mogensen moonlighted from his teaching job at the University of Rochester to take movies of weddings and funerals. He later used this camera to help Eastman Kodak plan layout of equipment, machines and working spaces. He was also tasked to simplify the manufacturing process wherever he could. Thus began his lifelong quest for “work simplification.”

Later, Mogensen began to realize the importance of work simplification in the white-collar world. He firmly believed, “We are saving pennies on the plant floor while frittering away big bucks in the office.” He felt one of his most rewarding experiences in business was seeing the advances achieved in “paperwork simplification.”

Key to Mogensen’s work was to get the person doing the work to analyze the process because they know what is really going on. It may be something quite different from what management thinks.

Dr. Williams Deming had a chain reaction theory which is relevant to Mogensen’s work: “Improve (process) qualityÞCosts decrease because of less rework, fewer mistakes, fewer delays; better use of machines, time, and materialsÞProductivity improvesÞCapture the market with better quality and lower priceÞStay in businessÞProvide jobs and more jobs.”

Simple, so simple.

Leadership

Basic Business Cents

Leaders Lead!

March 19, 2009

The sketch below depicts three types of leaders. With which one do you most associate your own behavior?

Most people realize that today you cannot behave like the dictator sitting in the driver’s seat cracking the whip over the team. Unfortunately, many managers do not know how to manage when they can no longer manage by edicts and threats and so they move to the back of the wagon. They sit there in a fetal position, hoping the team is going in the right direction. That is also not an effective way to lead the team to the desired goal. Today’s leader is in front of the team, feet on the ground, providing direction.

Everyone is having fun today dissecting the auto industry to understand where they went wrong. One reason is the unfortunate pattern of alternating “car men” and “financial men” into the CEO position. Donald Peterson of Ford (Taurus), Bill Hoglund of General Motors (Saturn), and Lee Iococco of Chrysler (K Car and also the Mustang while he was at Ford) were “car men” and had great success. “Financial men” who followed tended to focus on short-term financial results and the fall into mediocrity followed. Myron Tribus of MIT once said, “Managing your company on financial figures alone is like trying to drive your car by looking in the rear-view mirror. The numbers reflect what has already happened and cannot be used to predict the future. Management is prediction. That requires feet on the ground, leading your team in the desired direction.

What is that direction? It is the role of the leader to provide the aim of the organization. Every organization must have a vision, and by extension a vision statement shared with all employees. A strong and clearly worded vision statement allows employees to make decisions consistent with the organization’s overall goals and objectives. Without this clear direction, the employees will do their best but they may not be pulling in the same direction.

A good vision statement must meet three criteria.

· It must be memorable. If the employees cannot recall it immediately, it probably is not of much use to guide their behavior.

· It must be inspirational. It should excite the employees to want to enlist in the crusade to achieve it.

· It must be compelling. It should move employees to action. Understanding the vision and being excited about it means nothing if action does not take place to get the desired results.

In order for the employees to buy-in to the vision, it must be communicated to them in a way to achieve true understanding. Japanese friends say that it takes more than one of the senses to communicate. Merely sending it out in printed format, putting up posters, or pontificating about it will not achieve the desired buy-in and commitment. The leader must publish it in written form and also explain it to all employees about it in a true dialog format.

Success in today’s challenging business world is increasingly based on the extent of the leadership, personal involvement, and visibility in developing, deploying, and maintaining an evironment for excellence. Leaders lead the way.