I might not be the most financially-literate Lean practitioner out there. I'm fortunate to have an MBA on top of my engineering degrees, so I've had exposure to some accounting and corporate finance terms.
Not everybody has that education, though.
I reached out to Nick Katko, who I had previously interviewed as part of my Lean Blog Interviews podcast about Lean Accounting:
Nick graciously said yes.
By the way, the 2nd edition of his book The Lean CFO will be available soon.
Nick presented this webinar:
You can register now to view the recording, it's free.
“This webinar will explain how to make the true cause-effect relationships between continuous improvement and financial improvement visible throughout the organization. Integrating these relationships will improve the quality of business decision-making and leverage continuous improvement for financial success for the entire organization.”
Below is a quick preview of the webinar (and you can also listen to it through the KaiNexus podcast).
Mark Graban: Hi, everybody. Welcome to the “KaiNexus Continuous Improvement Podcast.” I'm Mark Graban. Today, we are doing a quick preview of our next webinar. It'll be our first webinar of 2023, and it's titled Connecting Continuous Improvement to the Bottom Line.
You can register by going to kainexus.com/webinars or look for the specific registration link in the show notes. If you hear this podcast after January 10th, you'll be able to access the recording the same way.
Again, look for link in the show notes. Pleased that we're joined today by the presenter of that webinar. He is Nick Katko. Nick, how are you?
Nick Katko: Thanks, Mark. Doing fine. I'm excited about doing this webinar.
Mark: I'm grateful that you're willing and able to do this. My colleague, Chris Burnham, it was his idea. He works with KaiNexus customers, and so he hears a lot of questions about business financial literacy and opportunities to learn more.
You were the person I thought of to reach out and join us for a session on this topic. Maybe, Nick, first off, I'm going to introduce you at the webinar, but here is a chance for you to do it in your own words. Tell us a little bit about you and your background.
Nick: My area of work in the overall lean community is on lean accounting, which primarily focuses on improving the information inside lean companies in order to measure and manage improvement and also connect improvement to the bottom line.
What I've learned over the years — I'm a former CFO, I'm a certified public accountant, I'm a finance guy — fortunately, I've learned a lot about lean and experienced a lot. It's the traditional view. You have operations, you have finance.
Finance, they do their own thing. They're focused on external reporting primarily, and then you have people that are focused on continuous improvement. It's important to bring both, and then you have executives. Let's look at those three groups.
It's important to have common information that each of these groups shares in order to be able to measure improvement, and then also connect to, what is the financial impact? What I like to say is that continuous improvement leads to financial improvement, which is a little bit different to me than the financial results that are reported every month.
What I mean by that is continuous improvement is a long-term thing. Financial thinking is traditionally short-term. We do something this month, we should see the results. That's not how continuous improvement works.
You have to recalibrate people's thinking, especially people that don't understand the details of continuous improvement, with numbers that show the impact. Also, they need to understand that just because you do an improvement event today, it doesn't mean you're going to see the financial impact this week.
The financial impact might be a little bit later. They still need to understand, what was the impact of this event. This is true across all industries. Again, a common set of numbers, understand the actual cause-effect relationships.
It's important for people to understand that operational improvement generates the financial improvement.
Mark: How would you describe the difference in that flow to the bottom line? A lot of organizations will focus on cost cutting, which is maybe thinking about the financial measure first as opposed to what you hear going back a long time in the Toyota literature and the lean literature, where cost is an end result.
Continuous improvement and cost cutting, I wouldn't think that all those are synonyms. How would you talk about some of the differences in mindset and approach?
Nick: Continuous improvement will reduce costs over time. It's a question of how you measure it. Again, if you're expecting to see expenses go down, you might not see that, but your expenses as a percentage of sales may go down, which is cost reduction.
This is where people have to understand what's a fixed cost, what's a variable cost, and how does continuous improvement impact those? The other thing that's missing sometimes in the analysis is continuous improvement generally creates more time or more capacity.
If you apply that capacity to serving your customers better, there is more of a revenue and contribution margin impact than a cost impact, and it's a whole lot greater. This is where it's important for people to understand this, and again, with the right set of information. It's possible.
There's typically about six different outcomes financially due to continuous improvement. You could increase sales. You can decrease your variable cost, decrease your fixed costs. Hope I remember all these. You can increase capacity, you can improve performance, you can improve cash flow. Those are the six.
If you understand there's six possibilities when you're looking at doing the analysis, if you create standardized work and work through, does it impact this, one, two, three, four, five, six, you get a good analysis.
Mark: Two examples come to mind, let me bounce this off of you. One might be, let's say, I'm manufacturing. If we make process improvements that reduce defect rates and scrap, or if we make a tweak to something where we're using less raw material, that seemed like that might be a very direct cost.
We are buying less material. Variable cost of producing. Then, it seems like it gets a lot more tricky when, let's say, with lean, we stop overproducing. Now, this whole overhead allocation thing and the cost may seem higher because we've produced less. Am I remembering this correctly?
Nick: Yeah, and that's a good example of what I would say a traditional financial or accounting analysis that basically doesn't work [laughs] in a continuous improvement environment. We'll talk about that. That's a whole webinar in itself, but we'll touch on it during the webinar.
One thing I really want to emphasize during the webinar is here's things to use, but also here are some traditional-type analysis that they don't always work, and to be careful. You have to be careful, because the thing about any kind of financial analysis is most of the time, people have been using them for a while.
They're comfortable with them, and so it's a change of a mindset. You have to learn how to use the new analysis and understand why it's important.
Mark: Nick, I'm looking forward to the webinar. You're here today, it was a quick preview of webinar that is also, in a way, an introduction to a rich topic. I'll point people to books that Nick has written or co-authored for an even deeper dive.
Those include practically…Practicing, my mistake, “Practicing Lean Accounting,” and the book that's now coming out, now available as a second edition, “The Lean CFO — Architect of the Lean Management System.” That's an interesting subtitle to refer to…
Nick: Lean Management Accounting System.
Mark: I encourage people to go check out the second edition. That book was first published nine-plus years ago, the Lean CFO. We'll put links in the show notes. What's the best website for people to learn more about you and your work, Nick?
Nick: It is www.maskell.com. That's the last name of my retired colleague, Brian Maskell. The website still works, and we [laughs] just kept it.
Mark: I've met Brian before, he's a good guy. I'm glad the work on still continues through you and others. I want to remind everyone again, please join us, join Nick Katko, who's going to be presenting January 10th.
Our webinar title, Connecting Continuous Improvement to the Bottom Line. There'll be a lot of opportunity for you to ask questions along the way, so we encourage you, of course, to attend live.
If you can't attend live, we'll send you the recording. You can register again by using the link in the show notes or go to our website www.kainexus.com/webinars.
Nick, thank you again in advance for the webinar, and thanks for doing the preview today.
Nick: See you, Mark, in a few weeks. Bye-bye, everyone.
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