If Your Improvement Projects Are “Saving Your Business Lots of Money,” Why Isn’t That Money On Your Bottom Line?
If you’ve ever wondered where all of that “savings” is, you’re not alone.
To justify their existence many business improvement projects, especially Six Sigma initiatives, develop what can be elaborate systems for tracking ‘soft savings’. These soft savings are purported financial benefits from their projects, often supported by accounting, but that they cannot account for. There is a very simple word to describe these systems and this concept – WASTE.
You need one metric to measure the financial impact of your business improvement initiatives and it is called ‘your bottom line’. Either you have the money in your bottom line that you expected, or you don’t. It really is that simple.
I mention the complicity of accounting in this problem because I have actually seen the exact opposite of this problem as well. The controller of one plant we were working in refused to believe the way we were calculating the impact of the improvement initiative we were supporting. His strict accounting methods dictated he project much smaller improvements in the annual budgeting process.
And so he did.
By mid year he was having to explain to an upset Board why his plant was running a 10+% positive variance in their production costs.
Think about this for a second: his costs, six months in, were 10% lower than projected, which was a HUGE saving–tens of millions of dollars–and the Board was upset.
Why? Because they had needlessly borrowed money to support other aspects of the business. Not a bad problem to have, but a problem nonetheless.
If you would like to learn more about how to correctly and accurately evaluate the impact of the business improvements efforts being performed in your business, contact us for a free consultation.
Subscribe to our blog and get an update whenever we post new content!