What are the steps to design a finite state machine?

FSM design steps: 1) Understand problem and identify inputs/outputs, 2) Draw state diagram showing states, transitions, and outputs, 3) Create state table listing next state and output for each current state and input combination, 4) Choose state encoding (binary, one-hot, Gray code), 5) Derive next-state logic and output logic equations using K-maps or Boolean algebra, 6) Implement using flip-flops and combinational logic. Verification includes checking all state transitions, ensuring no unreachable states, and proper reset behavior.