12 Most Common Mistakes of Small Business

(I originally posted this on August 8, 2011 in the 12most.com blog)

Many of us face challenging economic times with uncertain tax and new mandates that causes business planning challenges. It’s been my experience that success in small business has as much to do with avoiding operational mistakes as it does with doing the overall economic environment. With many small businesses not making it during the past several years, I want to highlight 12 common mistakes made by business owners so that you can avoid them.

1. Focus

A common mistake is lack of focus. Small businesses often do not have the resources to go after multiple markets simultaneously, and if they try, their marketing message is sure to be muddled. Specialization simplifies your life and maximizes your profits. Focus helps you define your customer and minimize competition.

2. No Tracking

Many small businesses do not routinely monitor key business indicators and process measures. This reduces the ability to more timely respond to business issues or to identify problems in the making. Track your lead generation activities as well as your production or service processes.

3. Selling

Another mistake is not spending enough time selling. This is particularly a problem for sole practitioners without a dedicated sales person. If you are a one-person shop, spend at least 25 percent of your time selling. Your business cannot grow without new customers. It’s tough, but you must make the effort to contact new prospects each week. You need to keep the future funnel filled while working on your existing projects.

4. Planning

Without a plan you can’t know where you are going. You normally wouldn’t take a vacation without a plan, so why would try to run something as important or complex as a business without a plan? The plan should be where you document the reasons for your major decisions. You then need to monitor the plan to understand deviations. There is a reason no bank will loan money to persons without a business plan. People who plan are generally more successful.

5. Pricing

Pricing is a key. I see too much discounting. Why sell at a price lower than you have to? Charge for your product or service based upon value to the customer rather than what you think they are willing to pay. Target the customers who can pay for your value. Understand your competition’s pricing put don’t get into a pricing war. A key is to deliver a quality product and service at a reasonable price.

6. Customer

The next mistake is not clearly defining your customer. Without a clear definition of your customer, you cannot be focused, and with a clear definition of your customer, you are much more likely to be focused. Describe your ideal customer profile in specific words.

7. Poor Budgeting

Many small businesses do not create a budget to set goals or plan key expenses. The key is to plan for profit and make sure your revenues and expenses are aligned to support that goal. Too many times, I see profit as a “leftover” versus a specific goal.

8. Repeat Business

Another mistake is not going after repeat business. The best customer is the repeat customer, and many studies show the repeat customer is the most profitable customer. Attracting new customers is expensive and can be time consuming, so avoid this mistake. Maintain a database of your customer’s likes and dislikes and figure out how to sell more products and services to them. Also thank them and follow up in a non-sales mode. Your social media network would be one great tool for this follow up and to stay top on mind.

9. Employees

The first employee mistake is not hiring employees to free you up to do what you do best. Your greatest constraint is time, and the best way to leverage your time is to hire employees and delegate work that can be performed by others. Some of these tasks could be virtual assistant part time positions which is a growing field. Take time to hire the right employee. Mistakes here will cost you dearly, both emotionally and financially. And once you hire someone, clearly define job responsibilities. Write job descriptions beginning with the first employee you hire. You do not want finger pointing or misaligned priorities.

10. Bookkeeping

Financial records provide you with the information you need to manage your business. Data, in particular financial data, should drive your decision making. Operating a business without financial records is like driving a car without a dashboard. Don’t do it. There are a variety of low cost options out there to help you.

11. Technology

Next to employees, your best productivity boost will come from maximizing technology. If you are weak in the areas of word processing, spreadsheets, bookkeeping, and utilizing Social Media tools, take classes. You can outsource these tasks, but computer skills are becoming basic requirements for today’s successful business owners. If you run a retail operation, a point-of-sale system is essential, and a computerized customer database is key for maximizing repeat business and identifying your ideal customer. More importantly, a business without a web presence is potentially losing a lot of leads.

12. Capitalization

Not having enough capital – cash in the bank to support yourself and to get the business off the ground. Your car and mortgage/rental payments still have to be paid. Once operational, sufficient working capital is needed when customers are slow to pay or when you have the dry spells. Working capital becomes even more important to support growth. You don’t want to outgrow your working capital capacity.

What other common issues have you seen

Featured image courtesy of  licensed via creative commons.

The Social Roadmap: Social Media Marketing: The Business Playmaker

It seems that Return on Investment is the hot topic in my Social Media discussions.  There are a variety of view points out there.  Several center on why is there such a big attempt to measure ROI in Social media, while business cards and brochures are not held to the same standard.  My financial analysis background has trained me to look for the return for any kind of investment being money or time.  This blog by Sam Fiorella describes this very well.  The Social Roadmap: Social Media Marketing: The Business Playmaker: "This is the latest post in a series that explores the various social media ROI arguments and philosophies I’ve engaged in with fellow intera..."  The nice thing about Social Media is that there are a lot of tools out there to track.  However, you need to establish goals upfront and set up linkages across your systems to track from activity to final conversion.

And by the way, there is a return on business cards,  How many do you hand out at networking events?  Do they result in leads directly or indirectly, and can you convert those to your opportunities.

Related articles

• Social Media ROI Presentation from SMASH at USC (tonyadam.com)
• Nonprofits, Social Media, and ROI (philanthropy411.wordpress.com)
• How Dell finds ROI from social media (holykaw.alltop.com)
• Social Media Influences Website Traffic Indirectly (informationweek.com)

Business Pricing Strategies

One of the toughest decisions for a small business or start up is pricing their product or service. When we launched Sprint PCS, we had 21 major pricing elements to evaluate for our initial launch pricing positioning. We had to determine what was bundled, what was free, and what was individually priced.  We also had to make sure that the overall yield was consistent with the business plan that supported billions of dollars of investment.  Today for start ups, the choices range from giving it away for free, to pricing based on costs, to charging what the market will bear. The implications of the decision you make are huge, defining your image, your funding requirements, and your long-term business viability.  Your revenue model is the key to your business strategy.  Doing it right the first time is important since making mid course changes can be disruptive to your business.

 Here is a summary of common revenue models used by businesses today, with some of the pros and cons or special considerations for each:

1. Product or service is free, revenue from ads and critical mass. This is a common model used by Internet start ups today, the so-called Facebook model, where the service is free, and the revenue comes from click-through advertising. It’s great for customers, but not for start ups, unless you have deep pockets and can convince investors of future revenue generation capabilities. If you have real guts, try the Twitter model of no revenue, counting on the critical mass value from millions of customers to generate revenues down the road.  Ning, a social network platform tried this with a and had to transition to a "freemium model" to a tiered paid model.
2. Product is free, but you pay for services. In this model, the product is given away for free and the customers are charged for installation, customization, training or other recurring services. This is a good model for getting your foot in the door, but this is basically a services business with the product as a marketing cost.
   
3. “Freemium” model. In this variation on the free model, used by LinkedIn and many other Internet offerings, the basic services are free, but premium services are available for an additional fee. LinkedIn's advantage is that they have been able to attract a segment willing to pay these fees. This also requires a huge investment to get to critical mass, and real work to differentiate and sell premium services to users locked-in as free.
   
4. Cost-based model. In this more traditional product pricing model, the price is set at a multiple of the product cost. If your product is a commodity, the margin may be thin. Use it when your new technology gives you a tremendous cost improvement. Skip it where there are many competitors.  A lot of contractors use this approach.  A key here is to monitor the appropriate multiple as cost structures do change over time.
   
5. Value model. If you can quantify a large value or cost savings to the customer, charge a price commensurate with the value delivered. This doesn’t work well with “nice to have” offerings, like social networks, but does work for products that uniquely solve critical needs.
6. Portfolio pricing. This model is relevant only if you have multiple products and services, each with a different cost and utility. Here your objective is to make money with the portfolio, some with high markups and some with low, depending on competition, lock-in, value delivered, and loyal customers. This one takes expert management and ongoing analysis to work.
   
7. Tiered or volume pricing. In certain product environments, where a given enterprise product may have one user or hundreds of thousands, a common approach is to price by user group ranges, or volume usage ranges. Keep the number of tiers small for manageability and make sure you have a good sense of your products economics with various volumes.
8. Competitive positioning. In heavily competitive environments, the price has to be competitive, no matter what the cost or volume. This model is often a euphemism for pricing low in certain areas to drive competitors out, and high where competition is low. Competing on price alone is a good way to kill your start up. It is important to have strong elements such as service and quality.
   
9. Feature pricing. This approach works if your product can be sold “bare-bones” for a low price, and price increments added for additional desirable features. It can be a very competitive approach, but the product must be designed and built to provide good utility at many levels. This is a very costly development, testing, documentation, and support challenge. At Sprint PCS, we did the first inbound minute free at launch to make customers comfortable in receiving calls and giving out there PCS phone number to generate traffic and awareness since the existing analog cellular service was mostly outbound calling.
10. Razor blade model. In this model, like cheap printers with expensive ink cartridges, the base unit is often sold below cost or with minimal margins, with the anticipation of recurring revenue from expensive supplies. This model that requires deep cash pockets to start, so is normally not an option for start ups.

Your business model interacts closely with your marketing model.  Marketing is required to get visibility and access to the opportunity, but pricing defines how you will actually make money over the long term and drives your cash flow. Your challenge is to set the right price to match value perceived by the customer, with a proper return for you.

I received the inspiration for this post from Martin Zwillings Startup Professionals Musings blog.

Related articles

• Giving Something Away: How Tech Startups Land Their First Customers (dailyfinance.com)
• 6 characteristics of successful Freemiums (techvibes.com)
• The new business model is subscriptions (leadsexplorer.com)
• How to Get More Customers by Adding Value (nichetitans.com)
• Freemium Summit Recap (startupcfo.ca)

Financial Traffic Accident Waiting to Happen

I am designing a Customer Lifetime Value Financial model for client.  We were digging into his website traffic data and found a disparity in some of the traffic data provided through various sources which would drive one to quite different conclusions.  This was frustrating!

I did a little research and found the following data in the November 29, 2010 issue of Brandweek.  The article listed Nielsen, comScore, Compete, and Quantcast numbers with the firms' internal data. With different filters and methodologies being used to determine what is a unique visit, I wasn't surprised about some variance.  However, there are big differences.  Even Nielsen has reported that there data has under counted visits.  Here is some data for some popular sites which highlights some of the challenges.  There are many stories about websites contesting their

                                            Unique Audience Numbers in Millions*

Site                  Hulu     Daily Beast    Huffington Post     Twitter   BreakMedia   ESPN

Internal Data     30.0          4.8                    44.2                190.0        34.2          NA

Quantcast         25.0          3.9                    24.7                  59.1        22.7         20.6

comScore        21.7           2.9                   23.1                  25.1         34.3         42.7

Compete          13.6           1.9                   12.3                  25.8          NA           0.136

Nielsen             12.3           NA                   13.0                  20.1          NA         21.1

* Other than Nielsen, data is for October 2010.  ESPN does not disclose traffic.

For the purchasers of this data, there is a lot of confusion as to who to believe and how do you deal with the data disparity.  Unique visits is one of the measures used to monitor the effectiveness of your social media strategy.  Have you seen this disparity with your sites?  I have with my alumni association web site.

Related articles

• Nielsen, about Those Web Traffic Data (arnoldit.com)
• Nielsen says its Web traffic data is flawed (seattletimes.nwsource.com)
• Cultivating Your Customers (customerthink.com)

10 Tips to Create a Budget For Your Small Business

The key for small business success is cash flow which needs planned and managed. A budget is a useful tool. It is a written financial plan that helps you set goals and measure progress. A properly structured budget model will also let you do what if scenario analysis to see the impact on your cash flow and help to secure financing.


Here are 10 Tips for creating your budget:

1) What do you expect to sell? Start by coming up with a sales revenue target. This is driven by multiplying your units and price for your key products and services. This will allow you to test the impact of rate and volume variances. Your first year needs to be monthly so that you can check monthly cash flow needs. You also need to consider how your prices compare to the market to understand any pricing pressures you need to evaluate.
2) What's it costing you to produce the goods/services you sell? If you're buying finished items for resale, this is relatively easy. It's trickier when your produce items since you have to calculate all the factors, such as labor and material, which go into manufacturing a product. This needs accuracy for your model to work properly. The cost per unit needs to match the units you are using to drive sales.
The difference between your Revenues and Cost of Goods is Gross Profit. Dividing the Gross Profit by Revenues gives you a Gross Profit Margin percent. If your Gross Profit Margin percent is staying flat or trending upward, you're probably on track in terms of adjusting your prices to show changes in what you pay for what you sell or produce. Seeding a declining margin over time gives you a heads-up that you must adjust your prices or check your cost structure.
3) What's it costing you to sell what you sell and operate? Advertising, marketing, labor commission, storage and general and administrative overhead. Some of these costs will be variable with sales and some will be fixed within a sales volume range.
4) What are the financing costs? You need to include interest expense on all forms of debt including any credit card or accounts receivable financing. This expense will normally be a function of the amount being financed.
5) How much Inventory do you Need? Inventory levels are very important to manage. It should be a reason of your forecast sales. Too much inventory and you are using up cash unnecessarily and too little, you may have lost sales. Managing your supply chain is critical to having proper and timely inventory levels. Retail businesses will have finished goods as their major inventory while manufacturing and construction businesses will have to factor in raw materials and unfinished inventory.
6) What are your Accounts Receivable? Managing Accounts Receivable is critical to the cash flow lifeblood of a small business. You need to understand how long it is taking for your customers to pay and develop ways to improve it if it is hurting your business. There is where having a real credit and collections policy is important and you need to track delinquent accounts. For big-ticket items that have a long lead time, you may need to consider an upfront deposit
7) What are your other assets? In addition to accounts receivable and inventory, you have cash balances and property, plant, and equipment to forecast. You also need to reduce the balance for accumulated depreciation and depreciation expense. Don't forget to consider the age of your equipment if you need to replace it during the forecast period. If your capital spending is a function of growth you need to have it as a function of your sales growth and don't forget about the lead time to get it installed.
8) What are your liabilities? This represents who you owe including payroll taxes and current debt payments. This would also include credit cards. Accounts payable is important to manage. Pay too quickly and you are using up cash and pay too slow it could hurt your businesses credit rating. This should be a factor of your monthly expense forecast and capital spending. When you make debt payments you want to be sure to separate the interest as an expense and the principal portion as a reduction in the balance.
9) What is your debt to asset ratio?  This measures debt as a percent of total assets.  If this ratio keeps increasing, your business becomes more riskier.  You need to include debt repayments on existing debt as well as new debt.
10) What is your cash Flow? This is the bottom line of what you need to see. The following is the formula for cash flow:
Net Income
+ Depreciation
- Change in Current Assets
+ Change in Current Liabilities
-Capital Spending
+ Change in Debt
= Cash Flow

Conclusion
Although tracking the big 10 budget tips and knowing what's up with your cash flow is essential to knowing and running your business, don't be afraid to turn to professionals for help. It needs to be done right.

Great Reasons to outsource Payroll

I have come across several small businesses with payroll and IRS issues when they attempted payroll on their own.  Even a small business with few employees should consider outsourcing of payroll.  While peace of mind may be reason alone for outsourcing payroll, below are additional reasons why outsourcing payroll services may be a great solution for your small business:

1. Save time by letting outsourced payroll specialists do the work.
2. Generate money by focusing your time on building your business.
3. Avoid penalties where errors in federal, state and local taxes and filing requirements may be avoided.
4. Reduce costs by comparing in-house processing wages to outsourced processing fees.
5. Avoid the hassle of needing to stay on top of payroll rules and regulations.
6. Economically Add employee benefits such as direct deposit and 401(k) plan options.
7. Avoid payroll processing headaches having to upgrade in-house software.
8. Leverage outside expertise on regulations, withholding rates and government forms.
9. Eliminate payroll disruption if your payroll person leaves.
10. Security, most payroll services firms have technologies that can spot and alert clients to various types of payroll fraud.
11. Have all reports and forms filed timely.
12. Ability to leverage multiple payment options.
13. Small Business Accounting Systems such as Quickbooks have interfaces to major payroll vendors in addition to their own outsourced payroll service.  For those utilizing many of Quickbooks features, Intuit's payroll services should be considered.

Traditional Business Plan - Why it is Not Appropriate For Entrepreneurs

Image by Alex Osterwalder via Flickr

In my Financial Planning and Analysis work, I had the opportunity to review and develop many business plans for both large corporations and for entrepreneurs.  A conclusion I have reached is the traditional business plan is not appropriate for entrepreneurs.

When I review my small business consulting work, I have helped entrepreneurs develop four types of business plans depending on where they are in their business life cycle:

• The "Idea" Business Plan: It is a summary where you describe your venture in broad strokes and what will be required to make it happen. The objective is to answer the question to you concerning the feasibility of the idea.  And, yes at times I have seen the original genesis on  napkins (They were big ones).

•   The "Equity Financing" Business Plan: This highly polished 20-35 page document is used to persuade equity partners to invest now. The objective is to sell a potential investor on the value of a ‘show & tell’ meeting with you.

• The "Operating" Business Plan: This plan evolving over time contains the details  documenting how to operate your business from launch date to maturity.  This Business Model can be used to highlight key processes for improvement.

• The "Bank/Debt Loan" Business Plan: This conservative version of the business plan is used to apply for a loan and focuses on persuading the banker that you can satisfy their lending criteria.  Be careful since this plan can be the source of financial covenants you must meet in the loan document.

I did some research given my corporate background since none of these were the traditional corporate business plan that I had developed and taught how to do over the past twenty years.  I found from my experiences and research the entrepreneur needed  a more flexible planning approach for the following reasons:

1)  Mindset:    As I observed, entrepreneurs and larger corporations think differently and have different goal structures.   Research conducted in 1997 by Saras D. Sarasvathy, Phd of the University of Virginia concluded that entrepreneurs used an Effectual rather than a Causal reasoning when transforming their ideas into a full fledged business. Causal reasoning is the underlying philosophy of the traditional business plan structure:

• Take a predetermined goal and given a set of means,
• Develop any new means needed to achieve that goal,
• Identify the best cheapest, fastest, most efficient way to achieve that given goal.

Effectual reasoning is opposite of casual reasoning in that it begins with a set of means and allows the goals to emerge over time.  It is more of a stepping stone or option approach.  A good analogy can be derived from my restaurant consulting experiences.  Casual reasoning would be when a client provides the catering chef with a menu and the chef then determines the most effective way to prepare the menu.  Casual reasoning would be when a client asks the chef to prepare a menu at the last minute with what he currently has on hand.  The chef then looks at all the potential outcomes to make a decision.  The latter better reflects the mindset of the entrepreneur while the former reflects the business manager or strategist's in existing enterprises.” 

2)  How do you research new?  Traditional business planning focuses on getting the market research right before you do anything else. How to you research new?  Entrepreneurs gain their best market research from actually launching in an Alpha mode and then adapting to the market as it responds to their new venture's offer.

3)  Its all going to change!  Entrepreneurial research shows successful outcomes have high deviation from their original concepts.  The traditional business plan asks us to sit down and plan out the next 3-5 years and describe in detail the sequence of events. Experienced entrepreneurs know that there are just too many variables in resources, market acceptances, timing, product development and the entrepreneur themselves to predict meaningfully in detail the traditional 3-5 year business plan forecast. The entrepreneur will rely on their ability to adapt to the changing environment as it evolves around them.

RSA Animate - Drive: The surprising truth about what motivates us

This is a very thought provoking video on what motivates us. It makes we want to revisit company reward and compensation systems. The other aspect of this presentation is how it is presented.  I found the style very effective and it kept my attention.

The Real Margin: Economic Value Added (EVA)

I had a "Blast from the Past" question in LinkedIn's Financial Modeling and Analyst Group asking about Economic Value Added or EVA  and Weighted Average Cost of Capital or WACC.  It triggered memories of many late night brain storm sessions with my Sprint Long Distance Division Operations Analysis manager team of Ben Buttolph, Brad Zerbe, Clark Ward and our Financial Management Develop Program rotation participant Mike Ayres.  We actually called our concept Threshold Margins in our Economic Realities Project which became EVA the following year when Sprint Corporate rolled out Stern Stewart's Economic Value Added incentive plan across all Sprint Divisions.  The EVA/Threshold Margin concept is key to a Value Based Management approach that we were promoting in our Economic Realities Project.  I must admit Stern Stewart did have a better name for the concept!  I wish I had read The Quest For Value* before we did the project versus after making our final presentations.

 


EVA is an estimate of economic profit, which can be determined by making adjustments to GAAP accounting, including subtracting the opportunity cost of  capital. EVA is a way to determine the value created, above the required return, for the company shareholders.  EVA is Net Operating Profit After Taxes ( NOPAT) less the money cost of capital. The cost of capital refers to the amount of money rather than the % cost of capital. The amortization of goodwill or capitalization of brand advertising and other adjustments turn Economic Profit into EVA.



Mike Ayres had the task of proving that EVA and Net Present Value arithmetically tie under a variety of scenarios, so management could be assured that increasing EVA creates shareholder value. 

What he proved was that the Net Present Value of a Business Case was the same as the Market Value Added or NPV of the EVA of the business case.

I rolled out a simpler version of this concept to several small businesses and it highlighted that some of the higher operating margin segments did not provide the highest returns to the business due to their fixed and working capital intensity.

Let me know if I can help you understand your relative economic returns of your business segments.



*G. Bennett Stewart III (1991). The Quest for Value. HarperCollins.

Economic Realities

Economic Realities is a concept I have worked with several small businesses and at Sprint dealing with relative product economics and how to optimize an entities performance.  The key is to understand the capital and resources driven by product/market mix.  My first development and use of this concept was at Sprint.  My  Long Distance Division Operations Analysis Team had recently completed several major initiatives:

• Activity Based Management prototypes for several shared services organizations
• Developed a Private Line pricing model
• Reviewed additional investments for several products
• Statistical study on the relationship of advertising spending to traffic growth for key industry players
• And, analyzed several large corporate contracts

Bill Gunter, SVP LDD Finance and I were waiting to meet with Art Krause, Sprint CFO to review a couple of these projects.  Prior to our meeting starting, Art mentioned he just reviewed a major network growth investment business case and saw the growth driving the network elements needing to be purchased but at the Long Distance Division level, he wasn’t seeing that kind of growth.  He asked me to take a look at it.

The initial answer was quickly derived.  While the national accounts traffic was growing, the consumer business traffic mix was declining as AT&T and Sprit were seeing consumer market share shift to MCI as a result of their Friends and Family launch.  Therefore, Sprint was seeing growth in traffic driving peak capacity needs; off peak capacity usage such as residential was decreasing as a percent of business.  Thus, capital spending was disproportionate to overall growth due to peak/off peak capacity needs.

While the answer was easy, I started thinking about the strategic consequences of this shift and our Marketing Business Unit Growth Profitability since the Long Distance Division MBU’s had differing levels of profitability.  I gathered my team and we discussed the issues and roughly tested several hypothesis.  While we weren’t charted to do this project and still had a heavy workload, the team ended up working evenings and weekends to contribute to this project since we saw the potential of the project to be very strategic.

While the Sprint LDD MBU’s had Market Margins which reflected their access, marketing, and directly controllable costs, a lot of network and shared services costs were not factored in.  Leveraging some of our studies and getting some help from other groups, we were able to develop contribution margins which reflected such costs as billing and network.  We also overlaid Working Capital implications given different billing policies for different customer segments and different payable differences driven by switched and special access billing practices by the Local Exchange Carriers.

In effect, we ended up with mini balance sheets for the MBU’s so that we can drive a cost of capital charge.  The MBU’s that drove the capital should cover the economic cost of capital.  An interesting conclusion was that MBU’s with the highest contribution margins did not necessarily have the highest economic margin when the economic cost of capital was factored in.  This work also enabled the Long Distance Division to quickly roll out Economic Value Added when that approach became a corporate initiative.

We then modeled the impact of value creation with a capital spending constraint in the five year forecast.  This study showed large differences in shareholder value creation depending on what products grew with that fixed capital constraint. This caused significant focus on our product mix in the upcoming Strategic Planning and Budgeting process.  It was rewarding to walk into conference rooms and see our concepts on white boards and how various Marketing and Network teams were going to work within that framework.

We ended up presenting this study to Sprint’s Executive Leadership Team and eventually to all of Sprint’s Divisions.  This Economic Realities Study became a recurring study to kick start the Long Distance Divisions planning process.  It is with pride that several of the analysts who worked on this project are eventually became Managers, Directors, and even Vice Presidents within Sprint.

In my consulting work, I was able to replicate this concept to small and medium sized businesses.  Do you know the Economic Realities of your business?

Measurements

I have been engaged to help improve bottom line results and cash flow for small and medium sized businesses.  In many situations I had the opportunity to deploy Lean Six Sigma techniques.  In some cases, minimal measurements existed. While following the DMAIC steps, it was interesting to see process performance improvements just by establishing and gathering the measurements.

DMAIC 

Define: Set the context and objectives for your improvement project.
Measure: Determine the baseline performance and capability of the process you’re improving.
Analyze: Use data and tools to understand the cause-and-effect relationships in your process.
Improve: Develop the modifications that lead to a validated improvement in your process.
Control: Establish plans and procedures to ensure your improvements are sustained.

After defining the objectives for the improvement projects, my team started to gather measurements. In my engagements with a cabinet making company and with an Amish furniture making company, the clients began to see improvements when process completion measurements we were tracking were posted. In both cases, we just posted a simple graph that was updated at the end of each shift by the shift foreman. Shifts began competing against each other and a shifts did not want to show slippage in performance and began wanting to achieve previous highs. We saw 10% to 20% improvements from our baseline before deploying any process changes, other than measuring the process output. It was interesting to observe human behavior just by the act of measuring.  

We also needed to make sure we had the right measurements that drive true profitability and cash flow.  In a lot of cases, I have come across clients using disfunctional measurements that had unintended negative cash flow consequences.  I have come a cross a lot of inventory and manufacturing cost accounting measurements driving poor decision making.


The important learning was to have the proper measurements and communicate those measurements to process performers.