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Plugging Your Cash Flow Leaks: Guidelines To Discovering And Plugging Them For Good

Guidelines to discovering and plugging them for good

May 7, 2008
By Jay Arthur


Companies across the country face the same challenge: Their cash flow leaks like a sieve and they have no idea how to fix it. 

may-2008Companies across the country face the same challenge: Their cash flow leaks like a sieve and they have no idea how to fix it. Sure, the executive team and managers may have an idea where the leak is occurring, but unfortunately, their hunches and gut feelings about the source of the leak are usually wrong.

As a result, companies invariably hit a “profit plateau,” meaning they get to a certain level of profit and performance and can’t seem to advance any further. So they resort to doing the same things they’ve always done to “fix” their company, but to no avail.

When the usual approaches don’t work, they ask employees for suggestions, they let people sell them “quick fixes” and solutions, and they invest in training for themselves and their staff. But again, nothing seems to work.


That’s when many companies go into crisis management mode and rely on heroic efforts and endless overtime to save the day and meet their customers’ expectations.

Sound familiar? Don’t worry; you’re not alone. Leaders and managers from companies in every industry echo the same sentiments. They’ve hit a certain level, run out of gas, and don’t know what to do.

Fortunately, the following guidelines will help you discover the cash flow leaks in your company and better understand how to plug them for good.

1. Mind the gaps

Most products and services suffer from the 3-60 Rule, meaning they are only worked on for three minutes out of every 60. And for many companies, this one rule causes a lot of leaks.

Here’s why: If you hold up your hand in front of you and spread out all five of your fingers, you’d have a good replica of how work flows in a typical company. You see the individuals (the fingers), and each has a distinct job to do in relation to the product. What you don’t see, however, is where or how long the product sits between fingers, or between John, Mary, Susan, and Joe.

In other words, your people are working on the product and they’re all busy, but they only touch it for a short period of time, and then the product sits…and sits…and sits before it reaches the next person.

All that sitting time costs you money in terms of delays and inventory shortages. After all, why should a product sit in production when it should be in your customers’ hands?

If you can bring the fingers together and squeeze down that other 57 minutes, you’ll be able to take advantage of the 15-2-20 Rule, which states that anytime you reduce delays by 15 minutes per hour you double productivity and increase profits by 20 per cent.

Therefore, go out on the floor and watch the product being made or sent to the various people who work on it. See where the product sits and ask why it’s sitting there. Time how long it sits with no activity. You’ll likely discover that your company suffers from Lazy Product Syndrome.

Often, people are trying to do work in big batches rather than employing the principle of one-piece flow, where they never set something down until it’s done.

Once you start this analysis, you’ll find that the 4-50 Rule likely applies to your company. This rule states that four per cent of the gaps cause 50 per cent of the delays and lost profit.

In other words, all gaps are not created equal, and you really don’t have to fix a lot to see a big improvement. So instead of trying to make your people faster and produce more, make your product faster. When you make your product faster you don’t need as many people, or your people will have more time to do more things that positively impact the bottom line.

2. Count and categorize your mistakes, errors, and defects.

Face it…your company makes mistakes.

Unfortunately, most people are reluctant to track errors and systematically under-report them. Why? Because our mistakes make us feel bad.

Additionally, many people are afraid that if they keep track of mistakes, management will come down hard on them. In reality, keeping track of mistakes, errors, and defects is a very useful thing. It helps you see where you can improve.

Therefore, look at all the errors that you and your team have made and find the pattern in them. Where are the mistakes happening? Does a certain department have more mistakes than others? How much are these mistakes costing you in terms of time, product waste, and rework? What’s the biggest error or defect that’s occurring?

Once you find the pattern, start with the worst or biggest or most frequent mistake first and fix the process, not your people. By doing this analysis, you’ll find that the 4-50 Rule once again holds true: Four pe rcent of the process produces 50 per cent of the defects and lost profit.

Before you start pointing fingers and blaming certain people for the mistake, realize that mistakes are almost always due to the process, not a certain person. The process lets the person make the mistake. Your goal is to mistake-proof the process.

For example, in many manufacturing situations, parts only fit one way, much like how your electrical plugs fit into wall outlets. There’s a fat end and a narrow end, which prevents you from plugging in your machines incorrectly. You need to think of your process the same way. When the process is mistake-proof, your people will be too.

Remember, no amount of training will make your people better until you fix the process. And when you fix the process, you plug a huge cash flow leak.

3. Measure and monitor.

When it comes to producing their products, most companies have a goalpost mentality. This means they have an upper end and a lower end for their product’s specifications.
Whether they’re making a shirt, a screw, or a microchip, they have tolerances for it being a little bigger, smaller, longer, shorter, faster, slower, etc. As long as the product falls somewhere in between goalposts, they consider the product “good.”

Instead of having this goalpost mentality, your company needs to adopt a bull’s eye mentality where they hit the target every time. Why? Because size and performance matter. If a product is too big, too small, too short, too tall, too fast, too slow, etc., it costs you and your customer money.

Hitting the target dead centre costs you no additional time or money, but as you move away from the centre target, the costs get higher and higher. And if you miss altogether, you obviously lose. Then you have to throw the product away or you have to rework it – all of which costs money.

Fortunately, the 4-50 Rule is true once again: Four per cent of the machines or materials produce 50 per cent of the deviation and lost profit. Find those machines or materials, fix or replace them, and you’ve just eliminated a huge cash flow leak in your company.

Stop the Sinking Ship

Every company has cash flow leaks, and every company is throwing money at the problem yet not plugging their leaks.

When you analyze your gaps, track your errors, and watch your product deviations, you can see that your leaks are confined to some small segment of your company. Once you fix that small piece, everything smoothes out and your company’s cash flow improves.

By doing these three suggestions, you can essentially double your profit without selling one additional item and without your sales force being any better than they are today. That’s when you’ll attain the profit, growth, and productivity numbers your company deserves.

Jay Arthur, the KnowWare Man, works with companies that want to double their profits by plugging the leaks in their cash flow. Jay created the “Lean Six Sigma System,”a collection of audio, video, books and software, is the author of “Lean Six Sigma Demystified” and created the “QI Macros SPC Software” for Excel. For information about how to plug the leaks in your cash flow, sign up for free lessons at: or call 888-468-1537.

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