1. Financial Training Update
Module
Objectives
Approach
Finance 101 – 1 Day
SSA Staff & Client Staff requiring general Finance introduction
Understanding of how Business Decisions impact Company Financials
Basics of Cost Accounting, Accruals, Accounting principles, Cash Flow understanding, Basic Financial Metrics
Financial Statement Understanding
New Effort
Simulation – group exercise - classroom
Finance 201 – 1 Day
SSA Staff & Client Staff who need to understand financial impact of LSS
Understanding of how and to what magnitude 6 Sigma projects impact a company’s financial performance & financial statements
New Development
Extension of Simulation from Finance 101
Group exercise - classroom
Finance Project Chartering – 4-6 Hrs.
SSA Staff & Client staff – writing good charters – financial benefits calculations
Ability to write a well scoped charter to include benefit calculation
MCs improve ability to charter, form, scope projects with clients
Update
Lecture/Workshop Exercises/Examples – classroom
Finance Valuation, Prioritization & Selection – 3-4 Hrs.
SSA staff & client staff – focus on project valuation considerations.
Understand Project Valuation by Financial Categories
Understanding of business and accounting problems around valuation
Creating a framework for prioritization
Finance Policy & Processes (Finance Champion Workshop) – multiple meetings
Client Finance Champion
Educate Client on the intricacies of the Financial 6Sigma Processes
Establish the rules of engagement aka the Finance Handbook
Workshop with FC – series of meetings over time
Fin Analyst Support Role – 1 Day
Client Financial Analysts
Introduction to Six Sigma & Orientation
FA Role
FA Responsibilities
Project Workshop
Lecture/Workshop Exercises/Examples - classroom
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2. Finance 101 1-Day - Agenda Introduction to Financial Statements
Income Statement
Balance Sheet
Cash Flow
Key Metrics
FASB & GAAP
Simulation – Set-up Company
Balance Sheet initialization
Assets, Liabilities & Equity sections
Introduction to A/P & Fixed Assets
Introduction to inventory
Income Statement initialization
P&L drill-down: COGS, SG&A, EBIT, Op. Inc.,PBT, NI, EPS, P/E
P&L Mechanics (formulas)
Introduction to Depreciation (matching principal, Accrual-based accounting)
Initial Cash Flow:
Mechanics of Cash Flow Statement
Operating Cash Flow definition
Net Change in Cash Position
Simulation – Operating The Company
First Month - Together
The Plant
Standard Costing
Factory Overhead
COGS
Remainder of P&L
Balance Sheet
Cash Flow – reconciling Cash
Key Metrics
Second Month – In Teams
Production Planning
Financial Results
Third Month
Unexpected Events
Future Enhancements:
Bad Debts (reserve accounting)
A/R Aging
Accrual Accounting (e.g. Tax)
Transactional Model
Industry Specific Models
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3. Finance 201 Project Ideas BS/Cash Flow: DSO reduction Cost reduction:
Reduce cost of Raw Material (QC for RM) – also inventory project
Supplier consolidation project (reduce RM cost) – also inventory project
Scrap reduction project (probably select which mfg. step to apply improvement to)
Setup time reduction project (probably select which mfg. step to apply improvement to) – also inventory project
Reduce Temp training time – also inventory project
Reduce office Sq Ft requirements
Reduce Mfg. Sq Ft requirements
MFG cost reduction (lower rate temp?)
Inventory Projects: - Also Mfg. efficiency
JIT purchases (less – or no - lead time on orders)
Improved scheduling
Demand planning
Obsolescence
Sales projects:
Price increase (through better advertising, features?)
Volume increase (sales force effectiveness)
Improve forecasting (perhaps see estimate of next month’s orders
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Six Sigma Academy International, LLC
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4. Sample Six Sigma project template
Project Name:
Reduce Office Space requirements
Problem Statement:
Office space usage is disorganized and inefficient – requiring more square footage than ….. Currently leasing 700 Sq Ft at a rate of XX/Sq Ft/Mo
Objective:
Implement 5s project/.controls to consolidate & reduce office space requirements by 20% before month-end.
Benefits:
XX Sq Ft reduction in office space, at XX/Sq Ft – resulting in a monthly benefit of XX
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Six Sigma Academy International, LLC
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5. Add accounting principals Matching Conservativisam
Add accrual accounting
Standard Cost sheet
Add Scenarios:
Demand for additional colors:
Impact on Inventory
Down time on line (changeover time)
Change in market requiring new products – resulting in inventory obsolescence
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Six Sigma Academy International, LLC
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6. Jan Feb Mar Apr May Jun Teamwork Production Start Company: Set-Up:
1/1/05 Incorporate
1/3/05 Open bank account
1/5/05 Invest $1,000
1/15/05 Order 1,100 units of Inventory (always received in following month)
1/31/05 Borrow $40K
Set-Up:
2/1/05 Buy mfg. equipment $5,000
2/1/05 Lease office space ($700/Mo)
2/1/05 Lease plant ($1,800/Mo)
2/15/05 Buy letterhead, other office set-up ($500)
2/1/05 Arranged Administrative Services ($500/Mo)
2/12/05 Received Inventory 1,100 units $7,700
2/12/05 Ordered 600 RM inventory units
2/12/05Received orders for 500 units from customers
2/20/05 Research/design product ($1,000)
2/22/05 Find mfg FTE – start 3/1/05 ($20/Hr)
Production:
Released 500 units form RM to production
Order 100 more units RM for next month
Receive orders for 700 more units from customers to be delivered next month
Production:
Receive 100 units of RM
Teamwork Production
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7. January 2005 – Start Company
1. 1/5/05 Invest $1,000 to start company.
2. 1/31/05 Borrow $20K at 7%APR over 5 years.
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8. February Balance Sheet
3. Ordered, received & installed Mfg.
equipment for $5,000.
4. Paid vendor invoice for Mfg. equipment.
Ending Cash balance requires explanation
Received 1,100 units of Raw Material (ordered in January). Owe suppliers $7,700.
Purchased & installed Mfg. Eq. ($5,000), less February Depreciation $42
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9. February P&L Factory Lease ($1,800) plus Depreciation ($42)
Paid one-time “research” fee ($1,000) to learn how to make Lava Lamp juice.
Office Lease ($700) plus Supplies ($500) plus Administrative Services ($500)
Interest on bank account balance (one 4%)
Interest expense on $40K loan (one 7% - assumes balloon payment at end of loan – no principal component)
No Taxes due (NOL), no carry forward/back
Copyright © 2006
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10. February Cash Flow
Net Income for period is the beginning of Cash Flow statement
Increase in Inventory Balance in a reduction in Cash
Non-Cash event
Increase in A/P is an increase in Cash
Cash used to purchase equipment
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11. February Cash Reconciliation
Cash Expenditures
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12. Annual Cost Of Goods Sold
Inventory Turnover
Inventory Turnover =
Annual Cost Of Goods Sold
Average Inventory
Note: Normally use annual numbers, but in this case we only have one month’s data. So we multiplied the COGS for March by 12 to come up with an approximation of annual COGS, and took the average inventory for the month for the denominator.
$86, ($7,234 X 12)
$8,704 ($7,700+$9708)/2
= 9.97
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13. Gross Profit Margin Gross Profit Margin = = 26% Gross Profit
Gross Sales
Purpose: Gross Profit Margin in an indication of a company’s profitability on product sales before marketing & administrative costs.
Gross Profit = $2,486
Gross Sales = $9,720
= 26%
Copyright © 2006
Six Sigma Academy International, LLC
All rights reserved; for use only in compliance with SSA license.

14. EBIT (annualized) = ($1,391X12) $16,692
Return On Assets
Return On Assets =
EBIT (annualized)
Total Assets
Purpose: Indicator of the effectiveness of use of assets to generate profit for the company.
EBIT (annualized) = ($1,391X12) $16,692
Total Assets = $41,256
= 40%
Copyright © 2006
Six Sigma Academy International, LLC
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15. March Production Planning Worksheet:
Fulfillment Ratio
Fulfillment Ratio =
Orders Filled
Orders
Purpose: Indicates ability to fill customer orders and effectiveness of production planning.
Orders Filled = 324
Orders = 700
= 46%
March Production Planning Worksheet:
February PPW:
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Six Sigma Academy International, LLC
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16. Six Sigma Academy International, LLC
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Six Sigma Academy International, LLC
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17. Financial Reports - April
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18. Financial Reports - May
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19. Financial Reports - June
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20. Current Ratio Current Ratio = = 8.6:1 Current Assets
Current Liabilities
Purpose: to assess the liquidity of the company – it’s ability to generate cash needed to maintain operations.
$36,340
$4,200
= 8.6:1
Copyright © 2006
Six Sigma Academy International, LLC
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21. Manufacturing Process
$7/Ea
WIP value = $9.08
FG value = $12.83
Raw
Mat’l
Lamps
Assembled
Lamps
Supplier A
Customer A
Fill Lamp
W/Liquids
Install Bulb
& Assemble
Shipping 3% 5%
Supplier B
10%
Customer B
9.6 Units/Hr.
Labor = $2.08 Ea.
Setup=30Min
5.33 Units/Hr
Labor = $3.75 Ea.
Setup=20Min
27Units /Hr.
Labor = $0.74 Ea.
Setup=10Min
8:00 – 8:30 Set-up
8:30 – 10:30 Produce 24 Lamps
10: :40 Break
10:40 – 11:00 Set-up
11:00 – 12:00 Assemble 6 Lamps
12:00 – 1:00 Lunch
1:00 – 4:00 Assemble 18 Lamps
4:00 – 4:10 Break
4:10 – 4:20 Set-up
4:20 – 5:00 Ship 27 Lamps
Labor = $20/Hr.
Copyright © 2006
Six Sigma Academy International, LLC
All rights reserved; for use only in compliance with SSA license.

22. Labor Reconciliation & COGS Calculation
Simulation Workflow
Input From Market
Team Exercise
Fortune /
Misfortune & Next Month’s Customer Orders
Production
Planning
Calculate
Financial Results*
Report Out
Production
Planning
Worksheet
P&L
B/S
Cash Flow
During Simulation:
Key Business/Production decisions, business strategy
Very brief operational & financial results
Plans for next month
End of Simulation: Earnings Report to Investment Community
Cumulative EPS
Balance Sheet summary
Cash Flow performance
Labor Reconciliation & COGS Calculation
Prior months Raw Material Orders received this month
Beginning Balances from prior month
Customer Orders from prior month due this month
* Note: Last month of simulation team calculates financial results
Copyright © 2006
Six Sigma Academy International, LLC
All rights reserved; for use only in compliance with SSA license.

23. Production Planning Worksheet
Team: Month: ________________________
Beginning # Units
+ Units In
- Units Out
Ending # Units
Ending Value $7/Ea.
Raw Material
Beginning # Units
+ Units In
- Units Out
Ending # Units
Ending Value $9.08/Ea.
LAMPS (WIP)
Assembled
Lamps (FG)
Beginning # Units
+ Units In
- Units Out
Ending # Units
Ending Value $12.83/Ea.
# Of Units Ordered
For Delivery Next Month
# Of Units Ordered
For Delivery Next Month
Supplier A
Customer A
Units Filled
Units Assembled
Units Received
Units Delivered
STEP 1:
Fill Lamp
W/Liquids
STEP 2:
Install Bulb
& Assemble
Shipping
Units Prod
Units Ship
Units In
Units Prod
Units Received 3% 5%
10%
Units Delivered
Supplier B
Hours (integers)
FTE
Temp*
Total
Regular Time
Over Time
Prod. Capacity
(# Units)
Hours (integers)
FTE
Temp*
Total
Regular Time
Over Time
Prod. Capacity
(# Units)
Hours (integers)
FTE
Temp*
Total
Regular Time
Over Time
Prod. Capacity
(# Units)
Customer B
Units Scrap
Units Scrap
Units Scrap
# Of Units Ordered
For Delivery Next Month
# Of Units Ordered
For Delivery Next Month
Make sure you do not exceed maximum hours.
Make sure you do not exceed maximum hours.
Make sure you do not exceed maximum hours.
Regular Labor = $20/Hr (normal work hours).
Over Time = $30/Hr.
20 Work Days/Month
Can not exceed 160 Regular Time Hours/Month per employee
Can not exceed 80 OT Hours/Month per employee
Using Temp costs 8 Hrs training per month
Temp cost = $28/Hr. normal work hours, $42/Hr. OT.
9.6 Units/Hr.
Std. Labor = $2.08 Ea.
5.33 Units/Hr.
Labor = $3.75 Ea.
27/Hr (for shift)
Copyright © 2006
Six Sigma Academy International, LLC
All rights reserved; for use only in compliance with SSA license.
Temp Training Hours
* Any use of Temp requires 8 Hrs. of training/Mo.
Copyright © Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license.

24. Production Planning Worksheet
Team: Month: _March 2005_________________
Raw Material
LAMPS (WIP)
Assembled
Lamps (FG)
Beginning # Units
+ Units In
- Units Out
Ending # Units
Ending Value $7/Ea.
1,100
Beginning # Units
+ Units In
- Units Out
Ending # Units
Ending Value $9.08/Ea.
-0-
Beginning # Units
+ Units In
- Units Out
Ending # Units
Ending Value $12.83/Ea.
-0-
600
620
383
673
# Of Units Ordered
426
324
# Of Units Ordered 50
1,027
194 59
350
$7,189
$1,762.17
For Delivery Next Month
$757.31
For Delivery Next Month
Supplier A
Customer A
620
383
Units Filled
Units Assembled
300
162
STEP 1:
Fill Lamp
W/Liquids
STEP 2:
Install Bulb
& Assemble
Shipping
Units Received
426
324
Units Delivered
653
Units Prod
Units Ship
Units In
653
Units Prod
300
162 3% 5%
10%
Units Received
Units Delivered
Supplier B
Hours (integers)
Hours (integers)
Hours (integers)
Customer B 20
FTE
Temp*
Total 33
FTE
Temp*
Total 43
FTE
Temp*
Total
Units Scrap
Regular Time 68 68
Units Scrap
Regular Time 80 80
Regular Time 12 12
Units Scrap
# Of Units Ordered
Over Time
Over Time
Over Time
# Of Units Ordered 50
350
Total 68 68
Total 80 80
Total 12 12
For Delivery Next Month
For Delivery Next Month
Make sure you do not exceed maximum hours.
Make sure you do not exceed maximum hours.
Make sure you do not exceed maximum hours.
Prod. Capacity
(# Units)
653
653
Prod. Capacity
(# Units)
426
426
Prod. Capacity
(# Units)
324
324
Regular Labor = $20/Hr (normal work hours).
Over Time = $30/Hr.
20 Work Days/Month
Can not exceed 160 Regular Time Hours/Month per employee
Can not exceed 80 OT Hours/Month per employee
Using Temp costs 8 Hrs training per month
Temp cost = $28/Hr. normal work hours, $42/Hr. OT.
9.6 Units/Hr.
Std. Labor = $2.08 Ea.
5.33 Units/Hr.
Labor = $3.75 Ea.
27/Hr (for shift)
Copyright © 2006
Six Sigma Academy International, LLC
All rights reserved; for use only in compliance with SSA license.
* Any use of Temp requires 8 Hrs. of training/Mo.
Temp Training Hours
Copyright © Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license.

25. Manufacturing Process
$7/Ea
Manufacturing
500 units
≈1 Month
WIP value = $8.67/Ea.
FG value = $12.42/Ea.
Cost Analysis
Cost In:
Material 30 units X $7 Ea. = $210
Labor 7 Hrs. X $20/Hr = $140
Total $350 30
$260.10 22
$273.24
$210.00 24
$208.08 6
$52.00
$298.08 2
$24.84 19
$235.98
500
$3,500.00
470
$3,290.00 3
$37.26
Lamps
Raw
Mat’l
Assembled
Lamps
Fill Lamp
W/Liquids
Install Bulb
& Assemble
Receiving
Shipping
10%
12/Hr
Labor = $1.67 Ea.
Setup=30Min
5.33/Hr (for shift)
Labor = $3.75 Ea.
Setup=20Min
27/Hr (for shift)
Setup=10Min
Shipping Cost $20/Hr.
8:00 – 8:30 Set-up
8:30 – 10:30 Produce 30 Lamps
10: :40 Break
10:40 – 11:00 Set-up
11:00 – 12:00 Assemble 6 Lamps
12:00 – 1:00 Lunch
1:00 – 4:00 Assemble 18 Lamps
4:00 – 4:10 Break
4:10 – 4:20 Set-up
4:20 – 5:00 Ship 27 Lamps
Labor = $20/Hr.
Copyright © 2006
Six Sigma Academy International, LLC
All rights reserved; for use only in compliance with SSA license.

26. Manufacturing Process – Impact to Financial Statements
$7/Ea
Manufacturing
500 units
≈1 Month
WIP value = $8.67/Ea.
FG value = $12.42/Ea.
Sales (P&L)
19 Units. $18/Unit = 30
$260.10 22
$273.24
$210.00 24
$208.08 6
$52.00
$298.08 2
$24.84 19
$235.98
500
$3,500.00
470
$3,290.00 3
$37.26
Lamps
Raw
Mat’l
Assembled
Lamps
Inventory (Balance Sheet)
Fill Lamp
W/Liquids
Install Bulb
& Assemble
Receiving
Shipping
10%
12/Hr (for shift)
Labor =$1.67 Ea.
Setup=30Min
5.33/Hr (for shift)
Labor = $3.75 Ea.
Setup=20Min
COGS (P&L)
27/Hr (for shift)
Setup=10Min
Shipping Cost $20/Hr.
8:00 – 8:30 Set-up
8:30 – 10:30 Produce 30 Lamps
10: :40 Break
10:40 – 11:00 Set-up
11:00 – 12:00 Assemble 6 Lamps
12:00 – 1:00 Lunch
1:00 – 4:00 Assemble 18 Lamps
4:00 – 4:10 Break
4:10 – 4:20 Set-up
4:20 – 5:00 Ship 27 Lamps
Labor = $20/Hr.
Copyright © 2006
Six Sigma Academy International, LLC
All rights reserved; for use only in compliance with SSA license.

27. Fortune Fortune Fortune Fortune Fortune Fortune Fortune
FTE Calls In Sick
FTE CAPACITY LIMITED TO 80 HOURS THIS MONTH
Industrial Accident At Supplier B
SUPPLIER B DOES NOT DELIVER ANY RAW MATERIAL THIS MONTH
Supplier A Installs New ERP System
SUPPLIER A DOES NOT DELIVER ANY RAW MATERIAL THIS MONTH
Fortune
Fortune
Fortune
Fire At Plant
PLANT ONLY OPERATES 50% OF THE MONTH
Customer A Discloses “Accounting Anomalies”
CUSTOMER A CANCELES ALL ORDERS FOR THIS MONTH
Change In Leadership At Customer B
CUSTOMER B DOUBLES ORDERS FOR THIS MONTH
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28. Fortune Fortune Fortune Fortune Fortune Fortune Fortune
Company Upgrades
ORDERS NOT RECEIVED BY SUPPLIER A – NO UNITS RECEIVED FROM SUPPLIER A NEXT MONTH
Fortune
New President Elected
TAX RATE INCREASES 5%
Company Pays Bonus !
PRODUCTIVITY DOUBLES IN MANUFACTURING
Fortune
Fortune
Fortune
“Malcolm Baldridge” Celebration Gets Carried Away …
SCRAP RATES DOUBLE
Temp Does Not Fit In
NO TEMP RESOURCES THIS MONTH
Clerical Error In Raw Material Order
NO RAW MATERIAL RECEIVED FROM SUPPLIER A THIS MONTH
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29. Fortune Fortune Fortune Fortune Fortune Fortune Fortune
Trendy New Coffee Shop Opens Down The Street
PRODUCTIVITY DOUBLES IN MANUFACTURING
Employee Lounge Raises Spirits
PRODUCTIVITY DOUBLES IN MANUFACTURING
Fed Raises Interest Rate
INTEREST RATE ON LOAN BALANCE RAISED TO 9%
Fortune
Fortune
Fortune
Hurricane !
PLANT SHUT DOWN FOR 2 WEEKS
Rolling Blackouts
PLANT SHUT DOWN FOR 2 WEEKS
New President Elected
LABOR COST DROP BY 5$/HR
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30. Income Statement (P&L)
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31. Income Statement (P&L) Terms And Definitions
Net Sales
The total dollar value of product sold (price X quantity) after discounts, returns, etc are taken out.
Cost of Sales (COS)
The cost of al the product sold. Includes labor, materials, shipping, and manufacturing overhead like engineering and quality. This is typically 60 – 80% of the value of sales. Also known as Cost of Goods.
Gross Profit
Profit after the cost of sales has been subtracted from sales. This is the first measure of profit and shows how basic manufacturing operations are performing.
Selling/General/Administrative Expenses (SG&A)
These are expenses not directly connected with making the product. They include management staffs, clerical support, sales and marketing, legal, human resources, at the division and/or corporate levels. Often referred to as “overhead” (OH).
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Basics of Financial Reporting

32. Income Statement (P&L) Terms And Definitions
Income from Operations:
This is a measure of profit after costs and expenses related to operating the business are subtracted from sales. It is a measure of how the overall business is running.
Interest Income Expense:
Interest may be income and/or expense. Income is from temporary investments during the year. Expense is interest paid on loans to finance the operation of the business. These two are added and subtracted from each other to give an overall interest value.
Income from Continuing Operations before Taxes:
Another measure of profit after all the expenses of running and financing the business are subtracted (COS, SG&A, Interest). It is another measure of the overall profitability of the business.
Income tax:
This is the tax the company pays on its profits. If the company has no profit or has a loss, it pays no taxes and may even get a credit to reduce further taxes it might pay.
Copyright © 2006
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Basics of Financial Reporting

33. Income Statement (P&L) Terms And Definitions
Income from Continuing Operations:
A measure of profit taken after all costs, interest, and taxes are paid.
Extraordinary Adjustments:
Special adjustments required because of paying off debt early, changing the way in which inventory is valued, how contracts are valued, etc. Not every statement or every year has these items.
Net Income:
The final “bottom line” of profits after all costs, expenses, interest, and taxes are paid and adjustments are made.
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Basics of Financial Reporting

34. Balance Sheet Copyright © 2006 Six Sigma Academy International, LLC
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35. Balance Sheet Terms And Definitions
Assets:
Everything of value owned by the company. Includes cash, inventories, buildings, equipment, etc.
Current Assets:
The part of all assets which will be converted to cash in a short time (typically a year). Includes cash, accounts owed by customers, inventories, bills paid in advance.
Cash:
Petty Cash, checking accounts, savings accounts, money market accounts, bank certificates, etc.
Accounts Receivable:
A current asset. Trade accounts, or amounts due from customers as a result of sales made on credit.
Often Accounts receivable are shown net of Allowance For Bad Debts. Allowance For Bad Debts is a reserve, an estimated amount the company provides for the possibility that some of the customer accounts will not be paid and will have to be written off.
Inventory:
A current asset. Includes finished product waiting to be sold, work in process, and raw material on hand.
Copyright © 2006
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Basics of Financial Reporting

36. Balance Sheet Terms And Definitions
Fixed Assets:
Physical assets that the company uses to conduct business, but not held for resale to customers. Fixed Assets have a useful life of more than one year – therefore are not Current Assets. Fixed Assets include property, buildings, and equipment.
Depreciation:
The value of a fixed asset charged as an expense for the current year. Represents the wear and tear as the asset was used to operate the business. While Depreciation Expense is reflected on the Income Statement, Accumulated Depreciation of Fixed Assets is sometimes shown as a separate line item on the Balance Sheet directly below Fixed Assets, or sometimes, Accumulated Depreciation is netted against Fixed Assets.
Goodwill:
An older term now called “ excess cost of adjustments over net assets acquired”. It is the additional amount we paid to buy other companies beyond their net worth (assets minus depreciation). Not every statement has this asset item.
Total Assets:
The sum of all current and fixed assets (less depreciation).
Liabilities:
Everything the company owes and has not yet paid – to suppliers, creditors, employees, taxes, etc.
Current Liabilities:
Bills which the company must pay within the year.
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Basics of Financial Reporting

37. Balance Sheet Terms And Definitions
Accounts Payable:
A current liability. Includes bills owed by the company to its suppliers of material and services.
Long Term Liabilities:
Debts and loans which will be paid off over several years.
Shareholders’ Equity:
The portion of the company “owned” by the stockholders. Includes money they invested (common and preferred stock at par value plus additional capital) plus profits kept in the business to grow it.
Retained Earnings:
The sum of all the profits kept in the business since it began operation. Becomes equity for the shareholders.
Copyright © 2006
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Basics of Financial Reporting