VERIFYING FINANCIAL BENEFIT
TURNING IMPROVEMENTS INTO DOLLARS
One of the long-term success factors for a continuous improvement program is to be able to demonstrate a financial benefit. Soft benefits can be very important but being able to document a clear cost-benefit will help ensure longevity. This document will provide you with the essentials for the validation process.
Maintain Integrity in the Financial Lookback
The procedures used for verifying the value delivered from improvements should be documented, agreed to by finance, approved by leadership and faithfully followed.
Guiding Principles
- The change to the process metric must be measurable and statistically significant.
- There should be a clear cause-and-effect relationship to the implemented changes.
- The benefit may be one-time or on-going. For on-going benefits, a common maximum period for claiming value is 12-months.
- Use conservative assumptions in the calculations.
- Avoid booking value from projections, rather realized financial benefits from look backs.
Establish a Baseline for the Process Metric
What is the improvement to measured against? Doing the work to establish a process metric(s), validating the measurement system and collecting historical data is the foundation of the verification. This should be one of the early activities of an improvement project. Estimation of the potential value of the improvement against a realistic goal justifies the effort.
Categories of Financial Benefit
After implementing changes to the process, validating improvement and translating the improvement to dollars, the value can then be booked.
Hard-dollar financial benefits from process improvement projects should be reported in one or more of the following categories:
- Revenue Increase
- Cost Savings / Opex reduction
- Capital Cost Avoidance
- Cost Avoidance
Revenue Increase is the creation of additional income from increased production that directly translates into sales, a price uplift, increased billable services, or profit from the sale of inventory.
Cost Savings is the reduction in expenses for running the process or the business.
Capital Cost Avoidance can include the elimination of the need to spend the capital or a reduction in the amount of capital needed.
Cost Avoidance is the elimination of budgeted future expenses.
Tracking the financial benefit
Projections from improvement projects should only be used to provide estimates, not claimed as value delivered.
Book dollars as follows:
- Financial benefits are counted in the month in which they are realized.
- One-time savings are counted when the savings are validated.
- Benefits should be recorded along with supporting documentation.
The creation of a robust trusted financial verification process is key to the sustainability and integrity of your improvement program.