Before we embark on a Six Sigma Project we must do some financial calculations in the Define Phase
of DMAIC framework of Six Sigma to check whether the project can reap in profits to the
organization, given below are some of the popular measures.
Common Financial Measures: Revenue growth is the projected increase in income that will result
from the project that is calculated as the increase in gross income minus the cost. Revenue growth
may be stated in dollars per year or as percentage per year.
Conceptually margin refers to the difference between income and cost however there are multiple
financial concepts of margin which is used to measure the efficiency and effectiveness of an
organization’s financial capabilities and finesse.
Percent profit margin : This metric provides and overall sense of how efficiently an
organization converts sales into profits it is computed as given below :-
Percent profit margin= (Sales of a product or service- Cost of a product or service/ Sales of a
Product or Service) * (100)
= (Net Profit/Net Sales) * 100
Percent Gross Margin: This metric measures the efficiency of producing sales. It is computed
as Follows
Percent Gross Margin = (Gross profit/Net Sales) * 100
Percent Operating Margin: This Metric Measures how effectively an Organization Controls
Cost not related to production and sales of a product or service
It is Computed as Percent Operating margin = (Operating profit/Net Sales) * 100
Gross Profit = Net Sales – Cost of Goods Sold
Cost of Goods Sold = Cost of Raw Goods + Cost of Labour + Cost of Inventory
Net Profit = Net Income = Net Earnings = Bottom Line = Total revenue – Total Expenses
Operating Profit = Operating Income = Earnings = Gross Profit – Operating Expenses
Cost Benefit Analysis:
Top Management must approve funding for Projects that require significant financial resources,
therefore before a proposed project is initiated, a cost-benefit analysis using projected revenues,
costs and net cash flows is performed to determine the project’s financial feasibility. The analysis is
based on estimates of the project’s benefits and costs and the timing thereof. The result of the
analysis are a key factor in deciding which projects will be funded. Upon project completion
accounting data are analysed to verify the projects financial impact on the organization. In other
words the management must confirm whether the project added to or detracted from the
company’s financial wellbeing.
A cost-benefit analysis attempts to evaluate the benefits and costs associated with a project or
initiative. Two types of benefits can be evaluated: direct or indirect. Direct benefits are easily
measured and includes issues such as increased production, higher quality, increased sales, reduced
delivery costs and lower warranty costs. Indirect benefits are more difficult to measure and include
such items as improved quality of work life, increased internal customer satisfaction and better
trained employees.
The Simple formula for computing benefit-cost ratio is:
∑ NPV of all Benefits anticipated/ ∑ NPV of all costs anticipated
Note: NPV Stands for Net present Value where NPV is calculated using the formula P = F (1+i) ^ -n
where P = Net Present Value, F = Amount to be received n years from now also called as Future
value: and I = Annual interest rate expressed as decimal the formula assumes that the money is
compounded annually and n stands for number of years.
