Start Management in Practice How to use the PDCA Cycle to improve your financial management

How to use the PDCA Cycle to improve your financial management

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pdca cycle - diagram

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What is PDCA Cycle

In this article:

A little bit of the PDCA Cycle and how it can help you

The PDCA Cycle, which is also known as the Deming or Shewhart Cycle, is a quality management tool whose main purpose is the continuous improvement of your organization or an area of ​​it. This method is applied in 4 steps, see below:

If you want to understand more of the concept I recommend you read our article on the 4 steps of the PDCA Cycle. If you already know enough, throughout this post I will show you a practical example of how to use the PDCA Cycle to improve the financial management of your company.

PDCA Cycle

Needless to say, seeking continuous improvement should be a standard for all companies right ?! But the most interesting of this method is that it analyzes how to turn problems or errors of your organization into processes that work well and are aligned with the goals of the company as a whole.

Using the PDCA Cycle to Improve Financial Management of Your Business

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Before entering the 4 steps properly, let's understand the reality of a company that works with the creation and development of products. Imagine that it is a small factory that makes wooden toys and within a strategic planning one of the big problems raised was the exacerbated cost increase. From this scenario, it was decided to use the PDCA Cycle to analyze the financial management of the company as a whole.

Reality of financial management

The problem of high costs was coming from practically all areas and after an analysis of what was generating the increase in expenses, the following items were listed:

  • Fine for not respecting environmental laws
  • Excess inventory of ready-made products
  • Expenses with machines stopped or in maintenance
  • Expenditure on wood suppliers had increased significantly
  • Large liability with outgoing employees

From this scenario and with a knowledge of the reality of the business, we can begin to use the PDCA cycle. Make yourself aware that you could have a situation similar or completely different that the steps would be applied in the same way.

PDCA more than a methodology, a true anti-flame vest

Step 1 - Planning (Plan)

The first step of every PDCA cycle is planning. It is at this stage that you are going to raise one (or several) problem (s) that you want to solve. In our case the most relevant is the increase in costs and it is in that we will focus. For each problem use a PDCA Cycle Worksheet to keep the whole process more organized.

The next step is to determine what are the causes that may be affecting this problem. As each problem can have a number of causes, this is the time to list the main ones, as well as give the note to each of them according to the impact they have. The higher the impact, the higher the note, see:

PDCA Cycle - Planning - Financial Area

In our case, analyzing the situation that I had already listed, we can reach some more important causes (and why they impact on costs), in order of importance were:

  • Obsolete machine with slow production - requires more maintenance and repair expenses
  • High turnover - labor liabilities generate higher personnel costs
  • Excess raw material - too much purchase without necessity
  • Fines for excess pollution - operation outside existing environmental laws
  • Untrained employees - investment in training
  • Lack of performance indicators - which prevents correct tracking of spending
  • Lack of established processes - as in the case of orders for suppliers, increasing costs
  • Products stocked with expired expiration date - few products, but that generate a financial loss
  • New machine purchased - timely expense, which will not be repeated in the near future

The most important thing here is you understand what is most important and how they affect your reality because it is precisely through this survey that you will establish the necessary action plans to improve the situation found.

Step 2 - Execution (Do)

If you have done a good job of raising the causes for a particular problem, you can already put your hand to the mass and the most recommended way is to create action plans to solve each of the main causes.

PDCA cycle - execution - financial area

Just to illustrate, for the problem with requests to suppliers, the action plan created was to organize a new list of possible suppliers, Jorge was responsible for the area of ​​procurement management and the deadline for this item was 5 days beginning on 01 / 10 / 2015. In this way you can withdraw suppliers with bad quality or at a price that is not desired by the company. Likewise, for the lack of established processes a new routine for requesting budgets was created, it is necessary to budget with at least 3 suppliers before making a definite choice on a particular request.

The logic will always be this, and it is possible to create more than one plan of action for a cause, if necessary. After this step comes the follow up to know if the actions are being carried out or not.

Step 3 - Check (check)

It does not have much mystery here, since the mental effort has already passed. This is just one step in tracking what has been planned to be done. It is usually interesting to follow the completion of the action plans, in which date this occurred, whether it was as planned and whether it contributed to resolve the cause.

PDCA Cycle - verification - financial area

We can see above that the action plan of analyzing possible improvements in the machines was made late and did not help to solve the problem, that is, it did not generate a reduction of costs.

All these data are being compiled and can even be analyzed by graphs:

PDCA Cycle - Graphics - financial area

Step 4 - From (Action)

This is where you determine whether the whole improvement process has been positive or not. In my opinion the best way to do this is to use a clear and objective goal. In our example it could be the cost reduction in R $ 50.000. This dial will show you whether or not you have achieved the desired result.

PDCA more than a methodology, a true anti-flame vest

Let's look at an example of how each cause (and their respective action plans) contributed to our outcome:

  • Organize new supplier list - $ 5.000 savings with cheaper orders
  • Create new routine for budget requests - reduction of R $ 15.000 in new orders
  • Maintain the machine - R $ 10.000 of savings in unrealized repairs

In this case, the total saved was R $ 30.000 compared to the R $ 50.000 we wanted, that is, we were still R $ 20.000 below the target and with this, it can be considered that the problem has not been solved:

PDCA Cycle - share - financial area

That way, to have even more information, it's worth analyzing where the company made the most mistakes. Below you can see a compliance report, resolved causes and actions:

PDCA cycle - general analysis - financial area

With this data in hand, you are ready to restart the PDCA cycle process. That way you will have 2 important paths:

  • You transform the action plans and resolved causes into processes that will be carried out continuously in the company
  • Try new ways to resolve causes and problems that have not been resolved

Continuous improvement and process creation

This is how we get into the process of making the "wheel spin a second time". At that moment I believe that the most important thing is to remove the problems that have been solved and turn processes and leave those that continued as problems. In addition, it is worth analyzing the whole situation once more, as at times, new problems or causes may arise to be solved.

Assuming that after doing the 4 steps again we managed to achieve an economy of R $ 60.000 (R $ 10.000 above our established goal). At this point, in the fourth step, you can respond positively:

PDCA cycle - action - process implementation - financial area

Remember to look at all the other factors and results. Below we can see that even having a positive result, we still have improvement points, such as the completion of all actions within the established deadline.

PDCA cycle - positive general analysis - financial area

The Right Tool to Make the PDCA Cycle in Practice

I hope you have understood the whole process and how to follow each of the steps. If you have any questions, just drop them below in the comments. Throughout the article I have used our PDCA Cycle Worksheet to show the application in practice and it is itself that I recommend if you want to make this process of continuous improvement in your company.

PDCA Cycle

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