Thermal effects can contributed more than 50% of the overall error in a machine tool and as precision requirements continue to grow the necessity of reducing this error source is essential. Today’s CNC allow to perform indirect compensation of these errors based on temperature measured in different points of machine tool structure. The efficiency of thermal compensation may be measured as a ratio between capability of machining process before and after applying thermal compensation. The proposed methodology of thermal compensation algorithm development is based at testing and FEA. The efficiency of proposed approach is illustrated by compensation algorithm, developed for different type of lathe. The application of thermal compensation allowed to increase capability of machining process more the two times. The accumulated experience in thermal compensation development provides ways for further improvement of lathe machining process capabilities.