Sunday, April 23, 2017

Budgets and Deficits in Government

I know that some of my friends are elected government officials or you are in the process of running an election campaign.  I’d like to offer some information to help you fully grasp the importance of fiscal awareness.  I’m not offering my opinion here.  These are facts and real-life circumstances.

I’ve worked as CFO for a government entity  The responsibilities essentially entailed everything related to the financing of that entity.  There were other important aspects of the job, but finance was the main function.

What is a Budget?
Budgets are part of all municipal, school district, county, state, and federal entities.  A budget is a fiscal plan outlining revenues and expenditures.  However, at its essential level, a budget is used to enact taxation.  A budget works in advance of the spending year; then actual revenues and expenditures are tracked and compared to budgets as that fiscal year progresses.  The estimates provided in a budget are based on both experience and the external factors affecting the governmental unit.  Officials enacting budgets must have an overarching and clear understanding of those external factors so that estimates reflect reality.

The Nature of Deficits
Deficits happen when actual expenditures exceeds actual revenue.  When budgets containing deficits are enacted over more than one fiscal year, the entity adds to the accumulated deficit.  Continually inflating the revenue side of budgets can quickly grow accumulated deficits.  The resulting structural deficits are devastating and can rapidly bring a government entity into a position of defaulting on obligations to employees, vendors, and other stakeholders.  Entities sometimes borrow to fill in budgetary gaps and provide working cash.  Borrowing brings interest into play thereby increasing expenditures even more.  Borrowing to fund operations multiplies the problems and very quickly becomes counter-productive.

Moreover, deficits are serious matters with severe consequences for the taxpayers.

The Largest Expenditures
In municipality, school district, county, state, and federal taxing entities, the expenditures that generally account for over 80% of the total operating expenditures are PERSONNEL AND STAFF related.  These costs include salaries, employer share of health insurance, Social Security, Medicare, workers compensation, unemployment compensation, and pension obligations.  All other expenditures account for approx. 20% of operating expenditures.

During the budget process, when expenditures exceed projected revenue, the entity has choices; either find new collectible revenue sources, cut operating expenditures, or a combination of both.  Enacting new revenue sources is a limited proposition in many entities.  Governments are then faced with cutting operating expenditures in order to enact a balanced budget.

The Essential Truth
When cutting operating expenditures, a budgetary deficit cannot be brought into balance by working solely on the 20% side.  The truth, albeit inconvenient, is that cuts to the largest portion of the budget, the 80% staff related costs, is the ONLY WAY to balance a large deficit budget.  Deep and extensive studies about staffing must take place.  Then staffing must be reduced.  It is just that simple.

Please don’t kill the messenger. As second President John Adams said, “Facts are stubborn things.  And no matter our wishes, desires, or the dictates of our passion, they cannot alter the state of facts and evidence.”

Saturday, April 15, 2017

The Limits of Rapid Prototyping

Rapid prototyping is the process of virtually testing parts, pieces, assemblies, and entire units using Computer Assisted Design (CAD).  At one time, the only method of testing was through building partial or full scale models.  In many ways, rapid prototyping has replaced modeling, and it shortens up the process from idea to assembly line significantly.  Rapid prototyping, however have its limits.

Case in point.  I use a wheelchair.  My current wheelchair is a new and innovatively designed unit with seating that offers full tilt, recline, leg articulation and seat lift.  The seat lift is engineered to allow the user to operate the wheelchair while the seat is elevated.  This way, the wheelchair user can be at eye level with a person walking next to them (hence the name iLevel). 

I drive an accessible van from my wheelchair.  While I was driving, the seat back reclining mechanism failed, causing the seat-back to recline.  This became a major problem given my lack of core strength and trunk control.  I was driving the vehicle when the failure happened.

With the help of my son, I was able to get the wheelchair home.  The technician temporarily propped the plunger unit with a piece of metal and industrial tie wraps so that the seat back would stay upright.  It will get a permanent fix after the Easter holiday.  The reason for the failure?  A nylon gear/spindle assembly that failed.

The problem is this.  A part failure on a major assembly of a wheelchair while it is being operated by the end-user can have significant consequences.  To a person with a disability, a wheelchair allows them to perform activities of daily living.  For this reason, an electric wheelchair needs to be nearly bullet-proof.  Going from idea to prototyping to manufacturing to end user earmarks the end user as part of the testing process.  This presents a unique problem for a person with a disability.  And it highlights the limits of rapid prototyping.

It is impossible to simulate the end-user experience by using a virtual experience.  And in the case of a wheelchair, the parts used in sub-assemblies must consist of high-level materials.  Rapid prototyping is limited with relation to the materials aspect of manufacturing. 

Moreover, it is very tempting for manufacturers to utilize assembly parts that marginally meet minimum requirements for normal use.   Electric wheelchairs are being designed and manufactured for people with a wide variety of disabilities.  For this reason, wheelchair manufacturers must exceed minimum requirements.


Sunday, March 12, 2017

Know Your Numbers

I enjoy watching Billion Dollar Buyer.  For those of you who haven’t watched the show, billionaire Tilman Fertitta looks for quality small businesses to possibly supply his many enterprises.  Another great business show on the same network is The Profit.

In the intro of Billion Dollar Buyer, Tilman confidently says, “Ask me anything about my business…....I’ll know it all”.  Although this seems like hubris, it isn’t.  He’s pointing to the importance of knowing your customers and knowing your numbers.  Throughout the show, his focused attention to his customers is evident.  And he knows his numbers.  Other factors come into play in these episodes as well.   Topics like understanding market position, growth potential, vendor relations, cash flow, and cost of sales. 

All the factors of running a successful business can come together perfectly, but if you don’t know your numbers, the rest can quickly evaporate.  Here are a few important points:

·         Learn the relationship between a Balance Sheet and a Profit and Loss Statement.  Understand that a Balance Sheet is a snap-shot of your net worth while a P & L measures contribution to net worth over a specified time.  A Balance Sheet is expressed as Assets and Liabilities while a P & L is expressed as Revenue and Expenses.
·         Cash flow is basically the measure of funds circulating through your checking account(s).  Cash Flow is what allows you to operate.  A full understanding of movement of cash is essential.
·         Cash flow has a huge relationship to Receivables.  I sometimes call it “chasing your money”.  One way to reduce receivables is to offer debit/credit card payment terms, and make it easy for customers to pay.
·         In a goods related business, paying your vendors on time is essential to keeping up with the flow of goods available for sale.    
·         Use accounting software.  Set it up yourself or be closely involved with deploying it.  Accounting software like QuickBooks© makes it much easier to understand your numbers.  If information is entered in a timely manner, you can get timely financial information.

Shows like Billion Dollar Buyer and The Profit provide great advice for small businesses.  Tilman Fetitta and Marcus Lemonis would certainly agree on this; having a true understanding of your numbers is essential!  

Sunday, February 19, 2017

Continuous Improvement in Work and Life

Continuous Process Improvement (CPI) might sound like a nebulous term.  In reality, however, CPI is intensely action oriented.  It centers around eliminating waste by making what adds value obvious and reducing everything else.  Although the discipline of CPI applies to work processes, I’ve found the same discipline applies to life.

The overarching personal mind-set:
·         Our purpose in this life is to become the best version of ourselves.
·         How well we achieve this purpose is measured by our effect on those around us.

Basic tenets of CPI:
·         Respect: Taking every stakeholders' problems seriously, and making every effort to build mutual trust. Active respect means taking responsibility for other people reaching their objectives.
·         Teamwork: Developing individuals through team problem-solving. The idea is to develop and engage people through their contribution to team performance.

The collective mind-set of CPI:
·         Challenge: Having a long-term vision of the challenges that need to be faced.
·         Kaizen: Understanding that no process can ever be thought to be perfect. Operations must be improved continuously, constantly striving for innovation and evolution.
·         Genchi Genbutsu: Going to the source to see the facts as clearly as possible for oneself, and then directing the processes based on those clear facts.

Using the tools of CPI (like 6-S, Andon, Just-In-Time) doesn’t necessarily mean you are practicing the discipline.  Organization-wide CPI requires leadership and the overarching mind-set outlined above. 

CPI is a balancing act, and few organizations truly achieve the full measure.

Sunday, February 5, 2017

Enhanced Productivity by Doing Less

For many years, I worked full-time as CFO of a local career school.  It was a demanding job that entailed much more than finance.  It required the ability to handle several situations simultaneously, and solutions to problems weren't always clear.  Our team operated in a culture of Continuous Process Improvement.

Occasionally, I could be seen in front of the building soaking up sunshine.  To some people, it looked like idle time.  It was!  However, when I would return to my desk, I found I could frame problems differently and countermeasures to them seemed to become more evident.

This strategy was based on a something reflected in Matthew May's book, Laws of Subtraction: LAW NO. 5 BREAK IS THE IMPORTANT PART OF BREAKTHROUGH.

Breaking away to get quiet allows for reflection and helps us get a higher level perspective on problems that seem insurmountable.  Breaking away also requires discipline, especially in this goal-oriented, constantly busy business culture.  But it is a discipline worth developing!

Sunday, December 11, 2016

Ten Things

1. Getting an “A” on a test isn’t an indicator of intelligence.  
2. Mastery is more about motivation than it is a test answer.
3. Life presents a continuous opportunity to learn. 
4. Your stuff won’t make you happy.  Giving of yourself will.
5. Challenge what you know and embrace what you don’t know.
6. Ask yourself what matters.  Do that!
7. If you find yourself asking if something is right, you already have the answer.
8. Even when you do your best, failure happens.  Learn and move on.
9. Guilt about the past serves no purpose.
10. There is a genuine you in there.  Find it, be it.


Touchdowns and Home Runs

We Americans love our sports.  We love home runs, touchdown passes, shots from the top of the key, and Dale Earnhardt style passes in the grass.  It’s those big plays that get our attention.  But as many coaches will tell you, it isn’t always the big plays that win the game.  In any sport, winning requires factors like mastery of fundamentals, consistent execution of small plays and yes, patience.  Most coaches will tell you that they would rather coach people with workable egos coupled with the ability and willingness to master fundamentals; to master execution consistently over time.

There are parallels from sports to operating organizations.  While the media shines light on organizations that “took the big swing” and became successful, the majority of organizations become successful not because of the big swings, but because they pay attention to the increments.  They know that having a shared passion for a mission isn’t enough.  They know that daily, focused and consistent execution usually wins out.  They know that when they strive for continuous improvement, sustainable success is more likely.

Toyota Motor Corporation is a great example.  The Toyota Production System, or TPS, is grounded in innovation and mastery of process.  TPS isn’t some methodology that can be copied in other organizations; rather, it is a culture….a culture of unlimited ideas and flow of information.  It has carried Toyota through difficult times. 

Matthew E. May, Author of “The Laws of Subtraction”, talks about this in his Elegant Solutions Manifesto.  “Chasing perfection through relentless improvement builds the capability needed to achieve cross-company innovation. There’s no downside to growing a strong portfolio of small ideas. Dealing in smaller currency lets you experiment more, get results quicker, and learn faster.”

So if you want your organization to be successful over time, take Toyota’s lead.  Get good at the small stuff!