We are always looking for ways to further improve business processes. We want to improve quality and flow and eliminate waste all while increasing profitability and decreasing costs. To reach these goals many businesses, especially manufacturers are turning to lean processes.
But what exactly is lean manufacturing? Lean manufacturing is a process that focuses on eliminating waste by only producing what is needed to meet customer demands. Benefits of the lean process include lower costs, higher quality, and shorter lead time.
The Lean Enterprise institute cites five principles of the lean process
- Indentify. Identify value of the product from the customer’s standpoint
- Map. Map all of the steps in the value stream for each product. Look for steps that don’t create value and eliminate them.
- Create flow. Make sure the remaining steps follow a tight sequence so the product will seamlessly flow to the customer
- Establish pull. As flow is introduced, let customers pull value from the next upstream.
- Seek Perfection. Keep repeating the first four processes to identify waste and values and to put those values to good use. A perfect process is one where maximum value is created with no waste.
The lean process was originally created for manufacturing but can be applied to any business setting. In fact, lean accounting is becoming a popular method among accountants. The lean philosophy applies all industries because it goes further than mass productions and meeting quota, it's a customer and employee driven process.
Many people use the accounting software in QuickBooks and forget the rest. For the most part, clients know how to use accounts receivable and accounts payable. What is often forgotten or misused in QuickBooks? That would be estimates, sales orders, sales reports and items (products and services you sell).
People misunderstand the importance of using estimates (bids, grants, proposals or quotes) for follow up and profit margin tracking. Sales people or customer service could be entering those estimates directly into QuickBooks. Worried about your employees messing up your software? Security controls can be established so that they can't go anywhere else in the software. Do you know what your profit margin is per job or are you simply making journal entries and "approximating" the profit margins? What was the estimated versus actual revenue and costs? Can you set up your company's selling workflow in the software? You should be able to.
Whether you sell products or services it is vital to set up items in QuickBooks. Why? The more detail you use for item lists the better your reports. Questions can be answered like ... Which item is my best source of income? Which items are my best sellers? Product costs and labor costs should all be set up and tracked in QuickBooks. Pricing? Set up your price levels and use those to your advantage to help control sales profit margins.
The Sales Order tool is excellent for managing partial shipments and sales order fulfillment for inventoried products and their interface to purchase orders, pick lists, and packing slips in QuickBooks.
A full or mini ERP implementation should take full advantage of the financial and business software your company purchased.
For the above metioned QuickBooks functions, it makes a difference which QuickBooks package you have ...
Is QuickBooks right for your company? Compare it to other leading software systems: Download the Software Selection Guide
Fish can only be out of water for a few minutes before they stopping flopping around and start to dehydrate. The same holds true for a business without cash. Much like fish need water; your business needs a sea of cash to survive.
Businesses require a steady stream of cash moving in and out of the business in order to function from day to day (ie Cash flow).
Cashflow is used to measure your business' financial performance and is crucial in order to be solvent. Cash doesn't include your inventory, accounts receivable, or property. Even though all three of these can turn into cash, you more than likely can't trade excess inventory or the spare cubicle for goods or services.
Be careful not to confuse cash with profit. Why? Because profit is the money a business makes after accounting for all the expenses (In other words, it's what's left over after you have used the cash to pay the bills) Even if a business can forecast a profitable year, if there's no cash in the short term, the business is in trouble.
It's important that your business doesn't drowned in all the cash that's in the bank. Companies who pay attention to their cash flow statements know that if they have abundant cash on hand they are able to invest the cash back into the business in order to produce more profit.
There's something about profitability and margins that accountants just love. What is it exactly? Well, a margin calculation can tell you a great deal of information about the financial stability of your business.
Case in point; profit margins.
Profit margins are the easiest way to calculate your business profitablity by measuring the percentage of each sales dollar that results in net income.
Let's say your company sells coffee cups for $10 each and they cost $6 to make. Your company also has to pay $2 in tax, leaving $2 for the net income of each cup.
That means that your company is making $0.20 for every $1 or 20% chart The profit margin indicates a company's ability to control costs and pricing. The higher your company's profit margin, the more profitable your business is and it gives you better control over the pricing of the product.
Financial website Motley Fool calls pricing a product to be profitable the "holy grail of sales and marketing groups" because pricing influences sales and creates profits that is essential to a company's success.
If your company's costs increase and your sales rate can't keep up, you're in danger of having your profit margin dip. A low profit margin translates into a lower margin of safety, meaning your company is more likely to decline in sales that can result in net loss.
Profit margins play a big factor in business competition. Competitive industries that are easier to get into have much lower profit margins than less competitive industries that typically have a strong brand.
Profit margins are easy to figure out and a quick way to check your company's profitability. No wonder accountants love them so much.
Bob Dylan was right, the times they are a-changin. With the economy in trouble, it may be tempting to take drastic measures to keep your business investment afloat but you might want to stop and think before making any big decisions...
stuffed.co.nz -- Glen Fergusson - Sales and Marketing manager for a brand new Californian Porsche dealer has lost his job and faces possible legal proceedings as the company strives to reclaim the costs of the 18 Porches given away free under Glen's Opening day "buy one get one free promotion" "I admit I didn't really do the numbers properly on this one" said Glen who told reporters that he had "seen the concept work really well for coffee stores" and in terms of numbers you could argue that Glen's campaign worked. As the new Porsche dealer sold 19 Porches [sic] in the first hour of the store opening" [Read the full article]
Ok, so Snopes.com declared the story false, it was written by New Zealand's humor site stuffed.co.nz , but either way it's entertaining and there is a lessoned to be learned:
Don't fall for the old "making it up on volume" scheme.
Slashing prices may seem like a good way to move your inventory out the door, but before you get the "Super Sale" signs out take a step back.
Reducing your prices means reducing your gross profit margin. Even though products might be flying off the shelves without much effort in the short-term; it might actually take your company longer to make up what was lost in the markdowns, making you work even harder to break even.
Paul Williams of Idea SandBox advises in his blog on MarketingProfs Daily Fix that marking down prices can make your customers think that your products aren't worth their original price, which means that unless your customers "just gotta have it," they'll more than likely wait until you slap a sale sticker on it before they buy.
Williams advises that instead of offering everything at a discounted price, try offering additional products or services to your customers, this makes them feel like they're getting one heck of a deal and are getting the most for their money. If your company does it right, you'll create a win-win situation; your customers are happy and you retain their business and make money.
Times they are a-changin', but there is one thing that remains the same in these tough economic times: higher quality deserves higher prices, and you deserve to charge what your product is worth. If your company is in the business of quality, then your customers will remember you even as your competitor is cutting prices.
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In the world of accounting, ratios give and invaluable amount of information about your company and it's fiscal well being. Accountants use financial ratio analysis on a regular basis. These analyses help to evaluate the financial performance by comparing financial ratios of a business over various periods of time to other businesses in the same industry.
In his book Financial Analysis Tools and Techniques , financial expert Erich A. Helfert defines ratios analysis as
"the use of a variety of ratios in analyzing the financial performance and condition of a business from various viewpoints such as managers, owners, and creditors.
Get out your financial calculator.
There are three different types of ratios:
Liquidity
Profitability
Solvency
Liquidity
Liquidity ratios measure your business short-term ability to pay bills as they are due and let you know if you have the cash to cover and unexpected expenses. Liquidity ratios compare your most liquid assets (assets that are easily turned into cash) with your short-term liabilities. In general, the greater the ratio of liquid assets to short-term liabilities, the better off your company is. These ratios let you know that your company can pay debts that are owed and still continue to operate normally.
Current Ratios
Acid Test Ratios
Current Cash Debt Coverage
Receivables Turnover
Inventory Turnover
Profitability
Profitability ratios measure the operating success of your company for a specific period of time. They give you a better understanding of how well your company made use of its resources to generate profit.
Profitability Ratios
Profit Margin
Cash Return on sales
Asset Turnover
Return on Assets
Return of Equity
Solvency
Solvency ratios measure how well your business can survive over a long period of time by measuring your income after taxes. Solvency ratios take a look at your past financial statement analysis and let you know if your company can continue to pay its debts now and in the future by looking at your income after taxes. A ratio that is higher that 20% means that your business is financially healthy. The lower your ratio, the greater chance your company will default on its debt obligations.
Solvency Ratios
Debt to Asset
Times Interest Earned
Cash Debt Coverage
All of these ratios, liquidity, profitability, and solvency alike can provide you with useful financial information about your company. If you can get so much information from just looking at one type of ratio, imagine the invaluable knowledge you can gain to keep everything on track and guide your company to success.
