Some say determining financial benefits is a senseless, hopeless, Non-value added endeavor that only produces disbelief and can result in not running a good project because it cannot be measured well, and wasting time on bean counting instead of fixing a problem.....
I The language of your leaders. Categories where financial benefits can be realized in LSS (Hard Benefits or Savings, Soft Benefits or Savings, Cash Flow Improvements)
a. Hard Savings – money that was being spent, but will not longer be spent. Traceable to Profit & Loss statement
i. Labor savings
1. Head count reduction (off the books)
2. Reduced shift work or overtime hours
ii. Reduction in contracted services cost
1. Toll manufacturing
2. Off-site warehousing/storage
iii. Reduction in Utilities: Electric, Gas, Water, Other Fuel
iv. Reduced Scrap, refuse and waste treatment
v. Improved product reliability/ reduced Warranty claims
vi. Interest accrued or avoided due to cash flow improvements (See Cash Flow Section)
b. Soft savings – time, labor or quality improvements that are highly valuable but not traceable to the Profit & Loss statement without management intervention & control.
i. Strategic value,
ii. Customer Satisfaction or "Good Will,"
iii. Opportunity cost savings,
1. The extra work that can now be done as a result of the project
a. Enhanced capacity – worthless without increased sales
b. Using labor to improve in other areas – very valuable, but again, still not traceable
iv. Nearly all COPQ
v. Risk or Liability Avoidance, Regulatory Requirements or Social Responsibilities
1. Safety, Environmental, Health
3. Import/Export & Transportation
4. Cradle to Grave responsibilities (consumer health & disposal)
5. Human/Labor Rights
6. Disaster Recovery, Emergency & Contingency Planning
vi. Cost Avoidance – unless it was already in the budget to purchase (debatable between hard/soft)
1. Avoid purchase of new equipment for greater demand
2. Avoid new hires or contracted services for greater demand
vii. Internal Real estate reduction,
1. $ per sqft estimates only matter if you can get money or stop paying for that sqft.
viii. Cycle Time, Transaction Time, Lead Time or Throughput Time reduction
1. Reduced labor requirement, no head-count reduction
ix. Downtime reduction
x. Labor hours requirements (without headcount reduction)
xi. Nearly all COPQ (below the water)
c. Cash Flow – improvements to reduce the cash-on-hand requirements to keep the business running – “life blood” of the business
i. Analogy: Movie “In Time” –Justin Timberlake, Olivia Wilde, Amanda Seyfried
1. All currency is “time” from people’s lives – You pay with time off your life, and you get paid with time added to your life. Business, especially small, uses time as it’s life currency. It pays its suppliers with life time, and receives payment from customers. With typical cash cycles in the 60 to 90 day range or more, a company needs to have enough “time” to live in the meantime. Companies without enough “time” to survive the cash conversion cycles die. First they stop paying their suppliers, and try to delay payments. Then they stop paying their employees, putting further cash burden on them... this is like cutting off the blood flow to your hands to save your heart or brain. Eventually, time runs out, and even though a company may be worth millions in assets on the books, without balancing “time” and cash flow, the company has no “blood” with which to operated.
1. All hard savings help with cash flow
2. Inventory reduction
3. Improved Cash-Conversion- Cycle time – (time between paying for materials/resources and getting paid for the product)
a. Lead & cycle time & transaction time reductions
b. AP & AR policies and terms
II Impact of financial implications to projects/programs
a. Oversold or estimated soft benefits lack credibility.
b. Oversold or estimated hard benefits create fear and resistance.
c. Undersold benefits fail to garner support and enthusiasm.