February/March 2006: by Steven Krueger

Lean manufacturing applied to finance

Just as lean manufacturing is a management system, the same principles can be applied to business and personal financial planning and the end result is the same; maximized efficiency with a dynamic model that is designed to adjust to a changing financial environment.

In this article we will examine how the 'tried and true' principles of lean manufacturing can be employed to create Best Management Practices for business and personal financial planning.

Eliminate Waste: There are many ways waste occurs with improper financial planning. For example, a common mistake business owners make is having four separate $250,000 life insurance contracts as opposed to a single $1,000,000 contract. By holding one single life insurance contract, you can reduce the cost of coverage dramatically. Additionally, by owning the life insurance contract inside a corporation you can reduce the cost by another 40%.

Minimize Inventory: Many investment portfolios take a fragmented approach that includes too many managers with too many stocks and /or too much duplication. This results in poor "investment inventory control" and substantial under performance.

Maximize Flow: The purpose of financial management is to ensure that you are able to allocate as much cash as possible where and when necessary to assure opportunities are not lost.

Empower Workers: Many business owners are unwilling to hand-off the financial work to people with accounting, legal, and financial planning expertise. As a result, they spend less time on their individual businesses and more time dealing with complex financial issues to which they have limited or no expertise or experience. Therefore, to optimize your financial situation seek advice from experts and hold them accountable for the results of their advice.

Pull from Demand: This principle involves taking action based on a set of clearly defined needs. As such, your team of experts should take the time to address your financial issues and apprehensions. If they understand your current financial situation, goals, and what is truly important to you (core values), then and only then should the solutions to your problems be found.

Do it Right the First Time: A long held business principle is that the business owner should have an exit plan the day the owner purchases the business. This means properly structuring your business in the early stages of ownership. Getting it right in the beginning typically includes tax efficient corporate structures that are designed to accommodate changes as required, regardless of future developments. For example, trying to add a spouse as a shareholder at a later date to multiply the capital gain exemption is often very difficult and instead should be considered when the business is purchased.

Abolish Local Optimization: A common mistake that many business owners make is that they sink all of their money into their business, including their retirement funds. This is cause for concern because if something were to go wrong with the business, the business owner would be left with nothing to fall back on. Even in the event that the business is doing well, come retirement there is no guarantee that the owner will be able to sell their business and may be forced to reduce their asking price in order to retire. Consequently, it is best to make decisions based on the big picture rather than on an isolated opportunity.

Partner with Suppliers: Use a team of professionals including financial advisor, tax lawyers and accountants that specialize in the owner/operator market. This area is highly complex and demands a high degree of specialization to produce required result.

Create a Culture of Continuous Improvement: Ensure that your financial plan is reviewed minimally on a yearly basis, or in some cases more often to increase efficiency and performance.

The above principles of lean manufacturing have been a catalyst for increased efficiency in manufacturing. Applying the same principles to your personal and business finances offers the same potential increases in efficiency and performance.

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About the author
Steven Krueger, CFP, is a Financial Planning Advisor with Assante Financial Management Ltd. He can be reached at 1-306-682-2240, or click to email Steven Krueger.

Disclaimer
Please contact a professional advisor to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.

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