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Putting Your Accounting Knowledge Into Practice: An Engineering Perspective

What should a business owner do to make sure he has the best possible information at his fingertips? How do you start putting this accounting knowledge into practice?

We’ve already discussed how to identify the key transactions of the business. Also, how to record the information that’s important to your business and pull it into insightful reports. Now let’s look at how you put this all into action.

Making your finances work for you

With your understanding of the financial basics, how do you start putting this accounting knowledge into practice and making your finances work for you?

  • Firstly, you must have systems that are appropriate for the business. Decide who’ll be responsible for the recording of information. The methodology and the level of detail you get into will depend on the size of the business.
  • Secondly, you must list the types of reports you need. What types of information and analysis will help you prepare these reports easily. This involves adapting your accounting system to capture the information needed. Making sure it’s easy to pull the reports from the system, no matter how simple or complex.
  • Finally, you need to have a routine to help you check the information. You’ve no doubt heard the hackneyed phrase ‘garbage in, garbage out’ – it’s a truism that’s as applicable for accounts. When someone gives you financial information, you need to know how reliable this information is.

So how do we sanity check your reports? What should you be looking for when carrying out these reviews?

accounting-knowledge-practice

Using your reports in the right way

In my experience, when business owners get their financial reports, most of them jump straight to the profit and loss report. However, I’ve learned that it’s more important to start with the balance sheet.

I will ask you to remember the ‘Wile E Coyote and The Road Runner’ cartoon that was on television years ago…

The roadrunner was always speeding along a road, with milestones at the side. If he first passed the 5km mark and later passed the 15km mark, he knew (and we knew) that he’d traveled 10km in total. However, what if someone mistakenly put the 15km in the wrong place, say at 14km? The roadrunner would think he’d traveled 10km when he’d actually only traveled 9km!

By unquestioningly relying on the milestones, the roadrunner is misinformed and doesn’t correctly understand its performance.

Similarly, this applies to accountants. The balance sheets provide the milestones and the profit and loss is a measure of the progress or profitability. If you get the balance sheet wrong so will your profit and loss projection be inaccurate.

I recommend that businesses start by looking at the balance sheet. Then ask if the figures for the various assets and liabilities look reasonable and reliable.  If they’re reasonable then the profit and loss are also likely to be reliable.

Checking your balance sheet

So, how do we check the balance sheet?

One way is by comparing the sheet to the records that the bank has. This could be by reviewing your bank statements and being sure that you understand any emerging differences. The only difference we should have is timing differences ie. if we pay a cheque but it’s not yet processed at the bank. Accountants call this checking process ‘bank reconciliation’. Therefore, what you’re doing is simply proving your records are correct by comparing them to another source.

We should also look at customer balances. I find that most business owners are very much on top of who owes them money. If I give them a list of customer balances with something wrong then they’ll quickly tell me. So check your customer balances, look for anything inaccurate. If you find any, correct them immediately. Remember, if a customer balance is wrong then your sales figure could also be wrong.

Let’s move on to the supplier balances. Again, most business owners are aware of who they owe money to and thus will quickly spot any error. Again, if supplier balances are wrong, then your purchased costs could also be wrong.

Your inventory or stock number is a key figure in your accounts.  If your inventory is overstated, this has the effect of making it look as if you got stock for free. In consequence, your profit will be overstated.  If your inventory is understated, then it looks as if you lost stock somewhere so your profits will be understated.   It is very important to get your inventory or stock number right.

Finally, we can quickly look at the other assets and liabilities that might be on the balance sheet. Check if they look ok. For example, if there’s machinery or equipment listed in your assets, do the balances look ok? If there are tax liabilities, do those amounts seem right?

Once you are convinced that your balance sheet is reliable, then you can rely on the related profit and loss account.

Getting your head around shareholder funds

There’s one section of the balance sheet that sometimes confuses clients. This is the section called ‘shareholder funds’ or sometimes called ‘owners equity/capital’. In essence, this section represents the value of the business to the owner.

To understand shareholder funds, you need to ask the question, ‘If the business makes money, who does that money belong to?’ The answer is that it belongs to the owners.

So the difference between what the business has (the assets) and what it owes (the liabilities) represents the value of the business. We call it shareholder funds (or owners’ equity) for companies or owners’ capital for non-company businesses.

Shareholder funds are reduced by money taken out of the business such as dividends or drawings.  So the difference between any two balance sheets represents the profits made by the business in the period.

Check your reports regularly

Your reports are a real goldmine of information. So I recommend to my clients that they get into a routine of regularly – at least monthly – reviewing and checking their reports. By doing so, you learn as much as possible about the business and can quickly identify where action may need to be taken.

If you are familiar with the ‘Lean thinking’ approach to business, you may have heard about the three voices.

  1. The first voice is the voice of the customer, giving feedback on the quality of the service your business is supplying to them.
  2. The second voice is the voice of the people working in the business. They see up close what’s actually happening and are often an untapped source of information regarding how well the business is operating.
  3. The final voice is the voice of the process. We access the voice of the process by identifying the key measurements that let us know how the process is doing.

You should always look at your accounts as a voice of the process. A well designed and implemented account will provide extremely valuable information about the performance of the business. Therefore, rather than thinking of accounts as a compliance-type chore, think of it as a hidden hub with rich information. So try to find out how best you can access it.

Getting in control of your business performance

When you understand your accounting basics, the value of good reporting, and the insights provided by your business numbers, you’re in real control of your enterprise.

And when you add the benefit of working with an experienced, process-driven accountant, you’ll soon start to see the positive changes and improvements in your sales, cash flow, and the profitability of your business.

If you’d like to know more about working with AccountsPLUS, and applying our ‘engineer’s perspective’ to your accounts, please do get in contact. We’d love to help you get complete control over your finances and business performance.

Get in touch to arrange a meeting with the AccountsPLUS team 

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Making the best business decisions – how to evaluate your opportunities

One of the questions that I get asked most often by business owners is how to decide between one or more options – when faced with path A or B, how do you know which fork to choose and what the potential outcome may be?

These sorts of question arise for businesses of all sizes and they’re just as important for the small business owner as for the large business owner. In the past three months, I’ve helped a painter/decorator decide if he should change his van and I’ve helped a large food manufacturer decide whether to outsource production, or keep it in house. For both of them, their decision was important and could have an impact on their business.

The value of good advice

I wasn’t long qualified as an accountant when an old school friend, now a dentist, asked me if he should refurbish his dental surgery. He’d already asked his accountant, who replied “that’s up to you”. That answer wasn’t very helpful. We know it was up to him to decide but his accountant wasn’t providing him with any advice as to how to make that decision.

To put it bluntly, he wasn’t adding much additional value as an accountant.

But (thankfully) times have changed, and most good accountants now realise that a large part of their role it to help with this kind of decision making – whether it’s supplying the right numbers, forecasting the potential outcomes or looking at the strategic implications.

So how do I go about making financial decisions?

I focus on the cash flows in your business and compare the different cash flow relating to all the options.

The simplest way to explain my approach is to imagine that the business has a large barrel of cash and ask what will happen to the cash in each of the scenarios. What money will come in and what money will go out? Once I identify the cash flows, I enter them into a table with three columns.

  • The first column is for the cash flows in the current situation.
  • The third column is for the cash flows in the alternative situation.
  • The middle column is for the difference in cash flow between the two options (I’ll show you an example of a completed table shortly).

Before you do that, you need to decide what sort of a time period you’re going to consider.  Its common to look at a decision over the life of the relevant item – so if it’s a van and you plan on changing again in three years, then you might evaluate it over three years. If you’re looking at outsourcing production, you might just look first at one year and then consider whether you need to review a longer period.

So, let’s look at the van example.

How much will a new van cost?

Let’s say John is currently running an 8-year-old van. His garage has a good 3-year-old van for €12,000 and will give him €1,500 for the old one. John wants to know if he should change.

The first thing I will ask is what the current van is costing him. He tells me his current van works up the following costs:

  • €3,600 a year in diesel to fuel the van.
  • €300 a year to tax and €500 a year to insure it.
  • Repair costs as the van had been giving him trouble which needed repair
  • €100 per day to hire a replacement van while his own was off the road – he expects this to continue and suggests that I allow 5 days a year for being off the road with maintenance work.
  • 2 days a year in lost earnings while he is dealing with the van – where he normally earns €400 per day on average.
  • Overall the van is costing John about €2,000 a year in maintenance, €1,000 of which is normal wear and tear, the other €1,000 is due to breakdowns.

Next, let’s look at the costs of buying a new van:

  • The new van John has his eye on will cost €12,000
  • We can then subtract the €1,500 trade-in on the old van.
  • John reckons he’ll sell the van on in 3 years for €4,000.
  • He estimates that it will cost him about €3,100 a year in diesel.
  • It will cost him €250 a year to tax it but €600 a year to insure it.
  • He’s not expecting to have any breakdown days or van hire.

So, overall the new van should cost about €1,000 a year in maintenance, which is all for normal wear and tear.

Note – these are not real numbers. They’re my best guesses to develop a reasonable example for you.

I put my table together, taking three years into account.

Current VanDifferenceNew VanComment
Investment0-10,500-10,500As I’m only looking at what will happen from now, I don’t consider the cost of the current van.
Fuel-10,8001,500-9,300This is fuel cost over 3 years, based on the info supplied.
Maintenance-6,0003,000-3,000Maintenance cost over 3 years. based on the info supplied.
Van Hire-1,5001,50005 days pa for 3 years at 100 per day
Lost Earnings-2,4002,40002 days a year for 3 years at 400 per day
Tax-900150-750Info as supplied
Insurance-1,500-300-1,800Info as supplied
Resale Value04,0004,000Info as supplied
Net Cash In/(Out)-23,1001,850-21,350 

 

Positives in the cash flows are ‘cash in’ and negatives are ‘cash out’. In the difference column, positives show where the new option is better than the current option; i.e. cash in, or less cash out.

So, what the above table tells us is that a new van looks like it will save about €1,850 over the three years. We need to be careful and remember that we’re making assumptions, albeit reasonable ones, about the performance and reliability of the new van. We need to be confident that we are aware of, and considering all of, the costs.

We’re not taking into account intangible elements like the effect on his business profile of driving in a newer van. Also, we’re not taking into account the effect on customers of cancelling work because the van let him down. And we’re also not taking into account the effect of having a reliable van and less stress and worry on John himself. We can allow for those in our decision but it’s hard to quantify them and put them in the table.

The bottom line is that the new van looks like it will save him €1,850 over the three years but there are some intangibles that might also be worth a lot to John and only he can put a value on those. I think most of us would change the van based on the info above.

The time value of money

Another factor to take into account is what accountants call the ‘time value of money’.

If I ask you which would you prefer – €1,000 now or €1,000 in 1 year – you’ll all intuitively know that if I get €1,000 now I could invest it somewhere and maybe make another €10 to €30, say €20, in that year. That means that €1,000 now is really worth €1,020 in 1 year. This is what we call the time value of money.

For some decisions, it can be worth taking this time value of money into account.  If you have high interest rates and two options with very different cash flow patterns then it may be worth looking at. But for most day-to-day investments, it’s not worth the additional work – and in any event it will involve other assumptions.

A systematic approach to decision-making

So, that’s how I recommend that you approach decision-making – by systematically breaking down those cash flows and seeing which scenario works out best for your business.

  • Identify the options available to you.
  • Note down the cash flows for each option.
  • Put them into a table and see which one looks best.

Put a little bit of time into challenging your assumptions and into thinking through the options to make sure you have considered everything that is relevant. And armed with your outputs you can be confident you’re making the best decision for the future.

Next time we’ll look at some more practical examples of how this can be put into practise.

If you’d like any assistance with your business decision-making, please do get in touch to see how we can help

 

 

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Putting your accounting knowledge into practice: an engineering perspective

What should a business owner do to make sure he or she has the best possible information at his/her fingertips?

We’ve already discussed how to identify the key transactions of the business and also how to record the information that’s important to your business and pull it into insightful reports. Now let’s look at how you put this all into action.

Making your finances work for you

So, with your understanding of the financial basics, how do you start putting this knowledge into action and making your finances work for you?

  • Firstly, you must have systems that are appropriate for the business and decide who’ll be responsible for the recording of information. The methodology for this and the level of detail you get into will depend on the size of the business.
  • Secondly, you must list the types of reports you need and what types of information and analysis will help you prepare these reports easily. This involves adapting your accounting system to capture the information needed and making sure it’s easy to pull the reports from the system, no matter how simple or complex.
  • Finally, you need to have a routine to help you check the information. You’ve no doubt heard the hackneyed phrase ‘garbage in, garbage out’ – it’s a truism that’s as applicable for accounts as anything else. When someone gives you financial information, you need to know how reliable this information is.

So how do we sanity check your reports? And what should you be looking for when carrying out these reviews?

Using your reports in the right way

In my experience, when business owners get their financial reports, most of them jump straight to the profit and loss report. However, I’ve learned that it’s more important to start with the balance sheet.

To explain why, I will ask you to remember the ‘Wile E Coyote and The Road Runner’ cartoon that used to be on television many years ago…

The road runner was always speeding along a road, with milestones at the side. If he first passed the 5km mark and later passed the 15km mark, he knew (and we knew) that he’d travelled 10km in total. However, what if the 15km had been mistakenly put in the wrong place, say at 14km? The roadrunner would think he’d travelled 10km when he’d actually only travelled 9km!

By relying unquestioningly on the miletones, our road runner is misinformed and doesn’t understand his performance correctly.

Accounts are similar. The balance sheets provides the milestones and the profit and loss is a measure of the progress or profitability. If you get the balance sheet wrong then the profit and loss will also be wrong.

I recommend that businesses start by looking at the balance sheet and ask if the figures for the various assets and liabilities look reasonable and reliable.  If they’re reasonable then the profit and loss is also likely to be reliable.

Checking your balance sheet

So, how do we check the balance sheet?

We check the bank accounts by comparing them to the records that the bank has – the bank statements – and being sure that we understand any differences. The only difference we should have are timing differences; e.g. we pay a cheque but it’s not cleared at the bank yet. Accountants call this checking process ‘bank reconciliation’, but what you’re doing is simply proving your records are correct by comparing them to another source.

We should also look at customer balances. I find that most business owners are very much on top of who owes them money. If I give them a list of customer balances with something wrong then they’ll quickly tell me. So check your customer balances, look for anything that looks dubious and correct when you find something that needs correcting. Remember, if a customer balance is wrong then your sales figure could also be wrong.

Lets move on to the supplier balances. Again, most business owners are very aware of who they owe money to, so they will quickly spot anything that’s wrong and we can fix that. Again, if supplier balances are wrong, then your purchased costs could also be wrong.

Your inventory or stock number is a key figure in your accounts.  If your inventory is overstated, this has the effect of making it look as if you got stock for free so you profit will be overstated.  If your inventory is understated, then it looks as if you lost stock somewhere so your profits will be understated.   It is very important to get your inventory or stock number right.

Finally, we can quickly look at the other assets and liabilities that might be in the balance sheet and check if they look ok. For example, if there’s machinery or equipment listed in your assets, do the balances look ok? If there are tax liabilities, do those amounts seem right?

Once you are happy that your balance sheet is reliable, then you can rely on the related profit and loss account.

Getting your head around shareholder funds

There’s one section of the balance sheet that sometimes confuses clients. This is the section called ‘shareholder funds’ or sometimes called ‘owners equity/capital’. In essence, this section represents the value of the business to the owner.

To understand shareholders funds, you need to ask the question, ‘If the business makes money, who does that money belong to?’ The answer is that it belongs to the owners.

So the difference between what the business has (the assets) and what it owes (the liabilities) represents an amount owing to the owners. We think of it as a liability to the owners and we call it shareholder funds (or owners equity) for companies or owners capital for non-company businesses.

Shareholders funds are reduced by moneys taken out of the business as dividends or drawings.  So the difference between any two balance sheets represents the profits made by the business in the period, less any profits taken out in the same period – in other words, the profits kept by the business.

Check your reports regularly

Your reports are a real goldmine of information. So I recommend to my clients that they get into a routine of regularly – at least monthly – reviewing and checking their reports. By regularly looking at your reporting, you learn as much as possible about the business and can quickly identify where action may need to be taken.

If you are familiar with the ‘Lean thinking’ approach to business, you may have heard about the three voices in any business that give feedback, helping you to manage and improve.

  1. The first voice is the voice of the customer, giving feedback on the quality of the service your business is supplying to them.
  2. The second voice is the voice of the people working in the business. They see up close what’s actually happening and are often an untapped source of information regarding how well the business is operating.
  3. The final voice is the voice of the process. We access the voice of the process by identifying the key measurements that let us know how the process is doing.

Your accounts should be looked at as a voice of the process. When your accounts are designed and implemented well, they provide extremely valuable information about the performance of the business.

So, rather than thinking of accounts as a compliance-type chore, think instead of the rich information that’s hidden within your accounts – and consider how best to access this.

Getting in control of your business performance

When you understand your accounting basics, the value of good reporting and the insights provided by your business numbers, you’re in real control of your enterprise.

And when you add the benefit of working with an experienced, process-driven accountant, you’ll soon start to the postive changes and improvements in your sales, cash flow and the profitability of your business.

If you’d like to know more about working with AccountsPLUS, and applying our ‘engineer’s perspective’ to the machinery of your accounts, please do get in contact. We’d love to help you get complete control over your finances and business performance.

Get in touch to arrange a meeting with the AccountsPLUS team 

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Turning your financial transactions into insightful information: an engineering perspective

Understanding the nuts and bolts of your accounting really does give you an advantage as a business owner. As we outlined in our last blog post, breaking down your transactions into inputs and outputs (and thinking like a process-driven engineer) is the first step in getting in proper control of your accounts and finances.

The next step is to start thinking about the process that takes the inputs and outputs – the transactions – and organises them in a way that provides information and insights.

Getting genuine insights from your numbers

To get useful business information, we need to group the transactions in a way that makes sense. At its simplest, we can think of sales, expenses, assets and liabilities. However, accounting packages allow us to get even more, and better, analysis.

For example, we can analyse our sales in multiple ways:

  • We can group the sales by product type or by customer type or by customer region.
  • We can group it by salesperson or by selling unit.
  • We can group sales by best-selling product or poorest-performing product.

By thinking this through when we set up our accounts, we can design the system to provide invaluable information about how the business is performing – information that keeps you in control of the future financial path of your enterprise.

For example, one of my clients is a business consultant. When he first came to me, he just had one figure for sales, with no further analysis. As we were speaking, it became clear that he had three very specific, and different, types of sales:

  • One-off projects – where he helped implement improvements for clients.
  • Recurring income – where he was retained by clients on a part-time basis.
  • Training income – where he provided custom in-house training courses for clients.

However, it also became clear from our discussion that he was most focused on increasing the share of sales that was coming from the recurring income. He’d set a goal of increasing that recurring income to be 66% of his business, but at present he had no way of measuring that – and no way of telling if he was meeting that percentage target.

I recommended that he use an accounting package and group his sales into four categories: Projects, Recurring, Training and Other – a final category, to catch anything that was not in the first three.

As he raised his invoices, he could then select the relevant category for the type of sale.  After that, at any time, he can run a report which summarises the sales by category. And, by doing so, he can easily see if he’s on target or not.

By adding these specific categories into your ‘Chart of Accounts’ (the list of different codes in your accounting system), we make it incredibly easy to track and measure every element of your business and its finances.

Insights into your spending and expenses

We can apply exactly the same categorisation and coding process when looking at expenditure – the cost element of your transactions, where you’re buying from suppliers, whether for resale or for use within the business.

I tend to think of expenses as having a number of main categories:

  • Sales & Marketing costs – creating awareness such as building a website, or producing flyers
  • Building or premises costs – such as rent or maintenance costs
  • Staff costs – such as payroll and bonuses
  • Office-running costs – such as utility bills or software subscriptions
  • Professional costs – such as engaging an accountant, or solicitor
  • Financial costs – such as bank repayments etc.

Within those categories, we can create subcategories to provide additional analysis as we choose. You should choose the categories. The accounts should be working for you – not just for the bank manager, and not just for the Revenue.

Some companies have one ‘big’ expense type in their accounts, while others will chose to break a category down if they think it will help understand what’s happening in the business.   For example, some companies have one category for telephone while others split the telephone cost into mobile and landline. It all depends on what’s most useful for the business. And, crucially, if you have an accounting package then it’s no additional work to simply create a new code in your Chart of Accounts and add a new expense category.

Additionally, many software packages provide a facility to group costs by job or project. While it’s easy to see how this might be useful for a construction company or a project based company, it can also be applied cleverly for other companies.

For example, I have one haulage company who use “projects” to gather the expenses for each truck. In this way, they can easily track fuel, repairs and running costs etc, by truck and can then decide which trucks need to be replaced. It might also indicate if some drivers are more fuel efficient than others.

So think about the type of business that you have and what type of information would be helpful to you in running the business. It’s probably a whole lot easier than you think to code, capture and collate this information.

Putting it all into practice

We’ve outlined how to understand your inputs and outputs, and how to turn this data into insightful reports regarding the performance of the business.

The final step is to combine your basic accounting and financial reporting with a proactive focus on your performance – a topic we’ll cover in the last blog post of this series – “putting your accounting knowledge into practice“.

If you’re looking for assistance with your reporting and business information needs, please do get in contact with us and we’ll show you the ropes.

Get in touch to arrange a meeting with the AccountsPLUS team 

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How you can Get on top of your to do list

I was talking recently with a friend who commented that he doesn’t feel that he is achieving enough. He sat down at the start of the year and made a to-do list of all the things he wanted to get done. This list included ideas for 2 new products and improving his skills. He is half way through the year and he realises he has made about 20% progress.

We talked through the list and his approach to completing the tasks. As we spoke, I made a number of suggestions to him about how he could improve. I think these suggestions will apply to many people so today’s blog post is focussing on tips for improving success at getting on top of your
to-dos.

1. Review how you are spending your time.

The key questions here include

  1. are you working on the important stuff. Stephen Coveys Urgent/Important Matrix is helpful here?
  2. are you doing stuff that would be better done by someone else eg admin tasks?
  3. are you working effectively – do you stop/start items; do you do match your work to the time of the day?

2. Prioritise

I often quote Jim Collins’ phrase “if you have more than 3 priorities, you have none.” The key thing when making a to-do list is to identify for top three priorities for now. You should set these for a reasonable horizon – 8 to 12 weeks is a good timeframe. However, it depends on the size of your priorities. Maybe you need to break them down into bite size chunks. So if you have a large project, break it down into elements and decide what elements you want to achieve in the next 8-12 weeks.

3. Work a system

There are a lot of suggestions for systems out there – many of them quite complicated. But they all have a few key components.

  1. Declutter your head – dump all to-dos out of your head and onto paper or some system. Update the dumped list weekly. It can be useful to use a notebook or an app to record new ideas as they occur and save them for processing later. Your list will contain everything and will be big – essentials, nice to-do list, sometime items etc. You can sort and process those later. For now, just record them.
  2. Identify your overall priorities for your selected time period keeping in mind that you will have no more than 3 priorities. You will still have day to day things to get done but they tend to look after themselves.
  3. On a weekly basis, schedule your week to allow time to work on your priorities while spending time on your other routine but necessary activities. You may want to work on your priorities for a little time every day or it may make more sense to block out a large amount of time on a single day to work on them. Decide on that at the start of your week. Decide what you really need or want to go done and schedule that. If you haven’t enough time for them all, decide on the priorities and consider if you can outsource etc.
  4. On a daily basis, schedule your day so that you make time for your priorities. Your day will be made up of meetings and calls and work on specific projects. Schedule your day so that you get to work on those tasks at the most appropriate/productive time for you.
  5. Mark off as complete the things you get done. This makes your progress visible and gives a great sense of satisfaction. Review your day and learn from it. Did you achieve all you wanted to achieve? If not, what should you have done differently?

This system can be made to work for you. You won’t stick to it all the time at the start. There will be time when something pops up that sucks you in but as you review the progress you are making with the system and you realise that working the system gets more done, you will find it easier and more natural to adhere to it.

Have you any comments on the above. It would be interesting to hear your comments and to develop a pool of best practice ideas/suggestions.

If you have any questions on this feel free to email me at jim(at)accountsplus(dot)ie.

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PDCA or PDSA – What’s the difference?

I have been thinking recently about PDCA and PDSA.

When I first encountered Business Improvement Theory I learned about the Deming or Shewhart Cycle – usually referred to as PDCA. This is short for Plan-Do-Check-Act. As I understand it, Shewhart first came up with the concept but Deming popularised it.

The theory behind it says that when working on an improvement initiative, we should follow these steps.

Firstly, Plan the action or improvement.

Then, we should implement the plan (D), preferably on a small scale first

Next, we Check how the results compared with expections

Finally, we should Act ie decide whether to adopt the plan, abandon the plan or redo the plan with some change.

In the early days, we talked about PDCA a lot. As time passed, the name of the cycle gradually changed to PDSA where S stands for Study. So the phrase became Plan-Do-Study-Act. I didn’t really know why this happened but PDCA changed to PDSA.

More recently again, I notice that the literature I am working with is referring to PDCA rather than PDSA.

This got me thinking about the differences between the two.

My gut instinct is that I prefer PDSA. The best organisations will extract as much learning as possible from everything they do. PDCA doesn’t capture that philosophy as well as PDSA. For me, Check implies a Yes-No response but Study implies a much richer review or analysis of what happened with a view to learning as much as possible from the exercise. Study also implies that you could glean a lot from something that has not worked as expected, whereas PDCA doesn’t suggest that as much. I think the third step should be about more than just a check to see if you got what you expected.

For those reasons, I am happier thinking about it as PDSA rather than PDCA. Have you any thoughts? If you have send post a comment or send me an email to jim(at)accountsplus(dot)com.

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How to overcome the Knowing-Doing Gap

Many people go on courses and learn some very powerful techniques but don’t go on to apply the techniques. Some of these people are serial course/workshop attenders. They have all the knowledge. They can tell you how to solve your problems but they don’t seem to be able to apply it to themselves.

This phenomenon is common and is often called the knowing-doing gap. And it’s possible to overcome it.

The best tool that I have found to do this is one called the DVP tool, a tool often used by change practitioners. This tool helps you understand why there’s a gap and encourages you to create a strategy to overcome the issue. The tool proposes that a rough probability of success with any change endeavour can be estimated by rating three essential factors out of ten and then multiplying the three ratings.

The three rating factors are

  1. D for Dissatisfaction. This is the WHY or motivational factor of the tool. How dissatisfied are you with your current situation. If you don’t have a high level of Dissatisfaction then you will not be motivated to take action.
  2. V for Vision. This is the WHERE factor of the tool. Disatisaction can motivate you to get away from where you are but it doesn’t provide a direction or an end point. Vision pulls you towards change by providing a strong direction and pull towards the change. The vision is how you would like your situation to be in the future. Where there is no vision, there tends to be lots of activity but focussed on the wrong things.
  3. P for Plan. This is the HOW factor of the tool. A clear strategic plan with clear activities and deliverables can help increase the motivation for change. We use a simple one page plan to develop a practical one page summary of an action plan. The Plan shows clearly what will by done, by whom and by when.

So let’s say you have been on a time management course but you are not putting the learnings into practice, what you would do is rate each of the factors.

Let’s say you give 6 out of ten for Dissatisfaction, you give 4 out of 10 for Vision and you give 2 out of 10 for Plan, when we multiply those we get 48 out of 1000. That rating is so low that you can be pretty certain that nothing will happen. Dissatisfaction usually needs to be high for change to occur – a rating of 8 is recommended.

So next time you think of attending a course, firstly ask yourself how dissatisfied you are with your situation relative to the course. If you are not dissatisfied, then ask yourself what’s the value of doing the course.

Secondly, consider the possibilities. Maybe the course will help you build your vision of what might be possible. If you don’t leave the course with a compelling vision of how you can apply the course to your own situation, the workbooks will go and sit on the shelves.

Finally, you should have a practical plan for implementing the learning. On a good course this will be part of the material. If not, do it yourself later, in your own time.

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Why you should invest in Management Development

While attending a recent induction session for the SCCUL Mentors Programme, I became aware of a 2010 report by Forfás on Management Development in Ireland. https://dbei.gov.ie/en/Publications/Publication-files/Forf%C3%A1s/Management-Development-in-Ireland.pdf

The Report quotes findings from a McKinsey review of management practices across 14 countries which found that

  • Management Practice in the high value manufacturing sector is above average .
  • Agreggate management practices across all manufacturing sectors in Ireland lag performances amongst similar firms in the highest performing countries.
  • Mean performance in Ireland is also below global averages for almost all sectors of manufacturing other than the high value manufacturing sector.
  • There is considerable variation in performance by sector and firm size, and firm category. Irish firms employing between 50 and 250 employees are ranked just 12th out of 14 countries.

The Report goes on to highlight that there is a strong relationship between management practice and business performance. McKinsey found that improved management practice is associated with large increases in productivity and in output. The research findings suggest that a single point improvement in a firm’s management practice score is associated with an increase in output equivalent to that produced by a 25 % increase in the work force or a 65 % increase in working capital.

Statistics such as those make a very strong case for firms to invest in management development. Who would not want output increases equivalent to a 25% increase in the workforce? If the research is correct and we are starting from a low base, then it must be quite realistic to achieve single point increases in the management practice score.

A first step for any firm would be to carry out a Now Assessment – where are we now as regards management practice. From there establish where you want to be and then put an action plan in place to close the gap.

A very quick way of doing something like that would be to complete our GPS diagnostic which can be found here – https://www.accountsplus.ie/component/content/article/75-growth-and-profit-solutions-diagnostic.html.

If you have any questions about this blog post please contact jim(at)accountsplus(dot).ie

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Tools for organising ideas

Affinity Diagrams are a tool used to organise information by identifying some commonality. In improvement projects, they can be used to organise a large number of issues or ideas into logical groupings. Affinity Diagrams are usually created by recording ideas onto post-it notes and then physically moving or organising the notes so that they are grouped in a more useful way.

Mindmapping is also a tool used to represent information. The structure of the mindmap is designed to easily communicate linkages. With mindmaps, you start with a central theme. From this central theme, the main elements or branches of a subject radiate. From these elements or branches, you can have minor elements or subranches. There are many software tools to help create mindmaps including mindmanager, freemind etc.

I often combine mindmapping with affinity diagrams to firstly record a brainstorming session and secondly to organise the results of the brainstorm into what is essentially an affinity diagram.

Let’s say that I have to design a training workshop or write a report.

I start by opening a blank mindmap using my mindmapping software. I then brainstorm the topic recording each new idea as a separate branch on the mindmap. At this stage, the activity is purely about brainstorming – I don’t worry about structure or duplication or linkages. The mindmap looks like one central idea with many branches radiating from that idea but no sub-branches.

Once I feel that I have exhausted all my new ideas, I then start into organising the output that I have. Using the approach to creating an affinity diagram, I scan the mindmap and, where I see that two branches have something in common, I bring them together – firstly creating a new branch and then moving the existing ideas to be sub-branches of the new branch. I don’t name the new branches until I have completed the full re-organisation. I continue organising and grouping until I consider that I have organised my ideas as well as I can. At that stage, I review the diagram and put names or label on the new branches. Usually the labels are obvious and are prompted by the commonality or connection.

Sometimes, there is more than one way to organise or structure the ideas and I may rework the original brainstorm output until I am happy with it.

The resultant mindmap can be exported to become the outline of the training workshop or the report or article that I am working on. I find that once I have the ideas gathered and structured the remaining work of the project becomes much easier.

If you want to learn more about improvement and productivity tools and techniques, please contact me by email jim(at)accountsplus(dot)ie.

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AccountsPLUS now on Enterprise Ireland’s Lean Consultants Directory

AccountsPLUS are pleased to have been approved by Enterprise Ireland for Inclusion on their Lean Consultants Directory. The Lean Consultants Directory as been put in place to support Enterprise Ireland’s Lean Business Offer, details below.

Lean Business Offer

Enterprise Ireland has developed a Lean Business Offer which is designed to encourage clients to adopt Lean business principles in their organisation to increase performance and competitiveness.

Lean tools and techniques are helping companies across the globe to address competitiveness issues within their businesses by building the capability of their people to identify problems and improve operations.

The Lean Business Offer is made up of three levels of support:

  • LeanStart
  • LeanPlus
  • LeanTransform

Each level of support is characterised by increasing levels of capability in implementing Lean business principles and other best practice approaches to drive company awareness, adoption and integration of Lean tools and techniques.

LeanStart

LeanStart provides an introduction to Lean concepts and allows you to gain an understanding of what the tools and techniques can do for your company in a short, focused engagement. Companies can apply for grant support towards the cost of hiring a Lean consultant/trainer to undertake a short in-company assignment which will;

  • introduce Lean principles and Agile processes,
  • achieve immediate cost reduction targets, and
  • lay a foundation for future Lean or productivity improvement projects.

Assignments will typically be carried out over eight to ten weeks. Companies will be eligible to receive support for a maximum of seven consultancy days. Maximum funding is €5,000. For more detailed information or to apply.

LeanPlus

Companies looking to undertake a Lean project over a medium-term period can apply for LeanPlus grant support from Enterprise Ireland. A LeanPlus assignment is a medium-term business process improvement project which will result in sustained use of Lean techniques and related methodologies by the company, and will achieve significant measurable gains in capabilities and competitiveness. The LeanPlus assignment should;

  • deliver significant productivity improvement and cost reductions,
  • embed a culture of business improvement and lean techniques to a cohort of trained staff, and
  • introduce a programme to pursue company-wide improvement.

Assignments may vary in size and scope but will typically be completed within six months and will not exceed a total project cost of €75,000. For more detailed information or to apply.

LeanTransform

LeanTransform is a large scale, extensive and holistic company transformation programme delivered by an external consultancy team of international reputation. Lean Transform projects should:

  • deliver company-wide transformation in culture and productivity performance,
  • embed the competences necessary for on-going competitiveness gains in the company, and
  • result in sustainable improvement in the business and across its supply chain.

The LeanTransform initiative is primarily designed for larger companies with significant operations who can demonstrate to Enterprise Ireland that they have existing capability and resources to implement a programme of this scale.

Assignments will typically run for at least one year. The assignment is preceded by a scoping exercise. For more detailed information or to apply, go to LeanTransform.

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