Ratio Analysis

For many years my employers participated in AGMA’s Statistical Analysis Program. Member companies would fill out monthly reports on sales and various costs. These reports would be consolidated at association headquarters and a statistical analysis sent back to the participants.

It was a great aid in reviewing various expenditures; we first got clued in to the tremendous increase in health care insurance costs through the ratio analysis reports. As an engineer, not an accountant, it was instrumental in teaching me that no matter how great a product design was the company wouldn’t last long if it spent money unwisely or disproportionally.

Unfortunately, I only learned this after making a move half-way across the country with my wife and newborn son, and taking on another mortgage. In a moment of true “stupiphany” — that instant when you realize just how stupid you have been — the 10% “returns and allowances” jumped out at me from my new employer’s monthly accounting report. Years of reading ratio analysis reports had me expecting a number less than one percent, so I raised my hand and asked if that was a typo.

No — it had always been around 10%. And why should the new chief engineer care? The polite thing to do was mumble an apology, which I did. The manufacturing and accounting managers never forgot my impoliteness though. I especially regretted that second mortgage payment six months later when salaries were cut 10%. Cash flow is definitely hard to maintain when every invoice is disputed because of quality issues.

I have posted before that sales is an activity that should interest every employee; it turns out that everyone should maintain an interest in accounting, too. When certain expenditures — such as health insurance — get out of line with their historical percentages, it won’t take long before company operations are affected. It would be great if each of us could just concentrate on being excellent in our own job and overall team success would automatically result.

With great team effort we eventually cut that 10% returns and allowances number in half. But it wasn’t enough to overcome years of damage and that company is no longer in business. Don’t let this happen to you!

About Charles D. Schultz 605 Articles
Charles D. Schultz is President of Beyta Gear Service and one of Gear Technology's technical editors.

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