Michael Manners Associates, a consultancy focusing on performance improvement in the SME market, management development, psychometric assessments, recruitment processes and sales training looks at the necessity of understanding all financial aspects (statistics) of your auto recycling business.
Benjamin Disraeli, the British 19th century Prime Minister once said: “there are three kinds of lies: lies, damned lies and statistics“. In the 21st century, we are bombarded by ‘fake news’, ‘alternative facts’, ‘post-truth’, ‘economical with the truth,’ all designed to obscure reality.
Business executives who selectively skew data with a blend of half-truths and lies to support a pet project create dangerous levels of obfuscation and such distortion can lead to disaster. Making a decision on false premises and then selectively choosing data to support that decision, even in the face of contradictory facts, is known to psychologists as ‘confirmation bias’ – just don’t do it.
For this article, I am going to make three assumptions. First that you have, study and understand monthly management accounts. Second that you produce annual budgets and have a firm grip of variances. And finally, that cash is under proper control.
In the auto recycling industry, there can be a strong desire to hanker for how things were done in the past, tradition, the way things were. However, processes effective then have been overtaken and there are better ways of doing things now. You need to implement best practice.
When making decisions try hard to put preconceived notions and personal prejudices behind you. Gather information from as many sources as possible because everyone has an angle and self-interest is real. There will be times when you are faced with a choice of two options neither of which is satisfactory and you can only select the least worst – too bad.
So now let’s look at what other data can help you make better and more informed decisions. Ones where you can see the wood from the trees that are not bogged down with an overload of confusing figures. You need to look at trends in your business. So go back over Statutory Accounts for at least the last five years and possibly more, then add data arising from each months’ Management Accounts for this financial year to date. Look for patterns to see if they are beneficial or detrimental and take the action dictated by the facts.
This first chart looks at what I call the Management Failure Index. No one likes to admit to failure but if it is real you need to do something about it. The assumption is that Net Profit should not be less than 15% of sales when depreciation is treated as Cost of Sales (so not strictly EBITDA) – this percentage is both arbitrary and a target. Some recyclers are already driving a coach and horses through it so they can call it their Management Success Index. They should, of course, set the benchmark at 20%. Whatever percentage you are achieving now set the target higher.
The chart below is purely to establish the principle behind it and is simply an illustration.
|
Period |
Sales £ |
Net Profit % |
Net Profit £ |
Failure Index £ |
Accumulative Failure £ |
|
Year 1 |
10,000,000 |
2.50 |
250,000 |
1,475,000 |
1,475,000 |
|
Year 2 |
12,000,000 |
5.00 |
600,000 |
1,794,000 |
3,269,000 |
|
Year 3 |
15,000,000 |
7.50 |
1,125,000 |
1,125,000 |
4,394,000 |
|
Year 4 |
18,000,000 |
10.00 |
1,800,000 |
900,000 |
5,294,000 |
|
Year 5 |
25,000,000 |
12.50 |
3,125,000 |
625,000 |
5,919,000 |
|
Year 6 |
30,000,000 |
15.00 |
4,500,000 |
Bingo! 0 |
The chart above in my mythical business shows that management has slowly got to grips with reaching the target profit to sales ratio but has lost the opportunity of benefiting from nearly £6m in the meantime. The ‘failure’ is, of course, the difference between actual net profit and the target of 15% to sales.
The important thing is to learn from your past and set demanding standards now and in the future. You do not want the ‘headmaster’s report’ to say of you ‘someone who sets low standards and continually fails to achieve them’!
The world does not owe you a living but you owe it to yourself and your colleagues to strive for excellence because it leads to survival and job security.
This next chart looks into productivity and is useful in determining staff levels and uses the same data as above for continuity.
|
Period |
Sales £ |
Total Headcount |
Sales per Employee £ |
Net Profit £ |
Net Profit per Employee £ |
|
Year 1 |
10,000,000 |
85 |
117,647 |
250,000 |
2,941 |
|
Year 2 |
12,000,000 |
90 |
133,333 |
600,000 |
6,667 |
|
Year 3 |
15,000,000 |
96 |
156,250 |
1,125,000 |
11,719 |
|
Year 4 |
18,000,000 |
100 |
180,000 |
1,800,000 |
11,800 |
|
Year 5 |
25,000,000 |
110 |
227,273 |
3,125,000 |
28,409 |
|
Year 6 |
30,000,000 |
120 |
250,000 |
4,500,000 |
37,500 |
Net profit per employee between years 3 and 4 in the chart above has not shown growth and we need to uncover why. Did management at that time depress profits because they were investing heavily in the business for instance? If so this would be a perfectly valid reason. Keep records and understand the consequence of decisions taken so you can look back with confidence and not just rely on memory.
Whilst it is vital to stay lean and mean through the good times and the bad, this chart demonstrates that you need sufficient numbers to cope with demand. It is somewhat counter-intuitive but increasing the headcount can be extremely cost-effective as this chart shows. Headcount has increased by 41% from years 1 to 6 but net profit per employee has increased by 1,175% in the same period.
The fact is that as turnover increases, the number of support staff such as directors/senior managers, accounts, HR and so on does not increase in direct proportion but it is the number of ‘directs’ that are necessary to carry out the work that does increase and they tend to be at the lower end of pay scales. Therefore the disproportionate impact on net profit of higher-paid staff is diluted by an increasing number of direct workers who are productive in product terms.
If your management accounts are very sophisticated down to divisional or departmental level, you can easily reveal where costs are not under proper control or where you are suffering a skill shortage such as pricing, eBay or telesales. If not you can only drill down from the overall picture.
Finally, we will take a look at total staff cost ratios, again using the same data as above for consistency.
|
Period |
Sales £ |
Staff Costs £ |
Staff Costs as a Percentage of Sales % |
Total Headcount |
Staff Costs per Employee £ |
|
Year 1 |
10,000,000 |
1,900,000 |
19.0 |
85 |
22,353 |
|
Year 2 |
12,000,000 |
2,100,000 |
17.5 |
90 |
23,333 |
|
Year 3 |
15,000,000 |
2,300,000 |
15.3 |
96 |
23,958 |
|
Year 4 |
18,000,000 |
2,700,000 |
15.0 |
100 |
27,000 |
|
Year 5 |
25,000,000 |
3,100,000 |
12.4 |
110 |
28,182 |
|
Year 6 |
30,000,000 |
3,500,000 |
11.7 |
120 |
29,167 |
In this chart, we can see that the percentage of staff costs relative to sales has decreased from 19% to 11.7% – a positive productivity gain. The staff costs per employee have increased over the period probably because of annual reviews, the increase in minimum wages, the introduction of mandatory pensions and recruiting key managers with a high proportion of performance-related pay.
Whatever statistics float your boat they should be:
- Relevant
- Easy to understand
- Give a clear picture of the current situation
- Used when making decisions
- Acted upon
- Not picked out selectively to support bias
If tables of figures do not cut it for you, show them as graphs, bar charts or pie charts if that improves communication and comprehension.
If trends are unclear use moving annual totals or moving averages to smooth out seasonal or other peaks and troughs.
If you would like to contact Michael to find out more please email him at michaelmanners05@gmail.com
