Theory of Constraints POOGI Part 59: Do you have an Exit Plan? Why not?

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}


There is nothing as fundamentally important as having an Exit Plan. The purpose of exit planning is for owners to achieve their financial and lifestyle objectives after they leave their business. It covers when you plan to exit, how much you’ll want or need from a sale/transfer of ownership, and to whom you want to transfer (a third party, family, or employees/co-owners).  Some people refer to it as succession planning, transition planning or just selling my business.


Dr. Lisa: What’s Exit Planning have to do with TOC, Lean, Six Sigma and continuous improvement?

Brad: It is consistent with TOC’s three questions. What to change, what to change to, and how to cause the change. When a business owner decides how much he or she needs from the sale of the business by when, we can calculate the growth is needed to accomplish the objective. A business that has put in place excellent processes—the kind TOC, Lean, and Six Sigma provide—coupled with a management team that can operate without being dependent on the owner, is much more valuable.

Dr. Lisa: How is exit planning done?

Brad: First, the business owner works with an exit planning advisor to develop the framework for his exit plan. This is usually developed by answering a series of questions aimed at determining when he wants to exit, how much is needed from the sale/transfer of the business in addition to other personal resources, and to whom the business owner wants to sell/transfer the business.

Next, the exit planning advisor coordinates the business owner’s other advisors—like the CPA, Estate Planning attorney, financial/insurance advisor, and business consultant—to flesh out the plan. From then on, apart from course corrections, the plan is being implemented over time until the ultimate exit.

Dr. Lisa: Are most businesses ready to sell?

Brad: No, most are not ready to sell. And a business that is not ready to sell will either be sold for less than the business owner needs, or it will be liquidated.

Dr. Lisa: In real estate, it is well known that before you buy a property, you have an exit strategy. Is this true for businesses, too? Do most business owners go into business with an exit plan?

Brad: No, most businesses are owned and run by entrepreneurs that have grown their business over time. Most of these owners are totally consumed by running their business, and have not thought enough about their eventual exit from the business. This is unfortunate because it can take several years to make the business valuable enough to meet their financial and lifestyle objectives after they leave the business.

... to be continued.  (more on exit planning next time)
 
Here's to maximizing YOUR profits!
Dr Lisa Lang

(c)Copyright 2009, Dr Lisa, Inc. All rights reserved.

Theory of Constraints Thinking Processes (TOC Thinking)

TOC is a large body of knowledge. It’s very holistic.  Underlying all of it, though, are a set of thinking processes.  If you understand how to think, you can derive any number of the Theory of Constraints solutions.

TOC Thinking is a process to recognize, verbalize, and challenge assumptions (through the use of visual tools).

There are assumptions everywhere. Some are correct and some are incorrect.  Want to communicate better? Be really clear about assumptions.

Have you ever given instructions on what you wanted done and then been surprised or frustrated about things turning out differently than what you expected? That's assumptions at work.

3 Definitions of Assumptions:

• Accepted cause and effect relationships, or estimates of the existence of a fact from the known existence of other fact(s). [from businessdictionary.com]
• The act of taking for granted, or supposing a thing without proof; supposition; unwarrantable claim. [from 1913 Webster]
• Assumptions are beliefs or ideas that we hold to be true — often with little or no evidence required. [from HyperTextBooks]

More to follow ...

Theory of Constraints POOGI Part 58: We lost money on that job! cont.

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Brad: Who cares? Is this really that important? In the last 20+ years since Throughput Accounting was invented to replace cost accounting, not very many business owners have even heard of it, much less felt a need to change.

Dr. Lisa: True. Most just went out of business slowly. Like the frog in the pot when the heat slowly increased, and never jumped before it was cooked.

Brad: When I switched the label printing business I own from cost accounting to throughput accounting back in 1997, it was uncomfortable. The process took time and perseverance. And there wasn’t much help available for me back then. But I found the sweet spot where conventional cost accounting leads business owners to believe they’d be losing money on jobs, and where throughput accounting clearly indicated we were making a load of money.

Dr. Lisa: It is really unfair to competitors when you understand throughput accounting, and price accordingly. We call that “competing with blind kittens” because cost accounting is such an inferior technology.

Brad: Cost accounting was invented before the Model T. Why do business owners that are so up-to-date with other types of technology, and appreciate keeping up with the rate of improvement in technology, not think to look for improved technology in business methods?

Dr. Lisa: I don’t know the answer to that, but my guess is that they are more comfortable with new technology in their area of expertise and less comfortable with new technology where they are not an expert – financial management. And, even if they have some interest in this new Throughput Accounting technology it’s hard to give up the old until you fully understand the new. Hmmm…that sounds familiar.

Brad: Whoa, you’re right! It did take me a lot of time to make the change. I guess that does explain why it’s easier to stay with the old technology.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2009, Dr Lisa, Inc. All rights reserved.

Want to catch up with technology? Have Dr. Lisa present “Maximizing Profitability and Achieving a Viable Vision” to your company, and/or have us help you with a Pricing Project to apply Throughput Accounting to your business. Your increased profits are guaranteed, and well as competitor’s indigestion and insomnia.

Theory of Constraints POOGI Part 57: We lost money on that job! cont.

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Brad: So, the problem is that by using more time than estimated, there is less time left in the month to produce and ship the margin on subsequent jobs. Sometimes, what margin is shipped in total is less than the fixed costs for the month, and then there is a loss for the month.

Dr. Lisa: Yes, and that is the problem that most owners are trying to avoid. And the way we were all taught to do that is -- cost allocation. However, you can make sure that you make enough margin in total without allocating any costs and it’s actually simpler and more straight forward.

Just plot the Margin dollars you ship everyday (what we in Theory of Constraints Throughput Accounting call Throughput) and compare that to your Operating Expenses. And remember, if you work overtime, you’ve increased your Operating Expenses. Once you understand the relationship between Throughput and Operating Expenses, you have all the information you need to ensure you ship enough work in total to make money.



A company can lose money, but a job rarely does. Jobs aren’t unprofitable, and for that matter, products are rarely unprofitable and customers are rarely unprofitable. Companies lose money because the margin in a month does not cover the fixed costs for a month. Otherwise, the margin on all jobs, products, and customers in excess of that month’s fixed costs all collectively add to the overall profits for that month.


... to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2009, Dr Lisa, Inc. All rights reserved.

Jobs Lose Money? Theory of Constraints Throughput Accounting

http://www.ScienceofBusiness.com Goldratt Theory of Constraints Throughput Accounting is NEW technology relative to Cost Accounting. Discover why you don't really "lose money on a job".