Lean Financial Analysis - Fisher College of Business Financials DSH... · Charles G. Koch, CEO ......

1

Dave Hoyte, CMfgECHP Ops, an affiliate of

Castle Harlan, Inc.Castle Harlan Australia Mezzanine PartnersBranford Castle

.

Lean Financial AnalysisLean Financial Analysis

2Copyright 2010 D S Hoyte all rights reserved

Founded in 1987, Castle Harlan is a leveraged buyout firm headquartered in NYC and focused on middle market ($200M to $600M Revenue). Completed $10 billion in transactions investing in North America, Europe, and Pacific Rim (CHAMP)Experience in many sectors :- Energy- Industrial & Manufacturing- Consumer & Restaurants- Chemicals

Castle Harlan Overview


Portfolio company sample:Morton’s Restaurant GroupBravo and Brio RestaurantsPerkins Marie Callender’sBaker & TaylorAmes True TemperAssociated Packaging Pretium PackagingIDQ

Approx 40,000 employees & $10B revenue



Recent Example: United MaltWas a “non-core” division of ConagraEstablished business, purchased at a sensible priceStrong market positionDeveloped global customized product for microbrewers

Processes aimed at meeting spec by customerOperational excellence / process controlBolt on acquisitions

Sold Nov 2009 EBITDA grew from $27M to $114M60% CAGR in EBITDA (2006 – 2009)86% IRR4.5X MOIC



Why Profit by Product

“Profit and loss is the market’s objective measure of the value a business is creating. To succeed, a business must develop and continually improve profit and loss measures, and determine the underlying drivers, so it can understand what is adding value.”

Charles G. Koch, CEOKoch Industries, Inc.


Changing Face of CostsImpacted over time by

Technology / automationLess vertical integrationOutsourcing components to LCCLogistics complexityRegulatory overhead load

MIS overheadsEmployment law (reporting)

Ranges% Sales


GAAP Reporting vs. Ops InformationGenerally Accepted Accounting Principles (GAAP) are the requiredstandard for external reporting

The same system has been used for management internal (Ops) reporting, however it:

Lacks accuracy and granularity in apportioning overhead costs.

Simplistic approach for applying SG&A [selling, general, and administrative] expenses.

Labor hours, machine hours, or other activity are simplistic andinaccurate cost allocation drivers for most businesses (the allocation is used to “absorb” overhead as product cost)

New Approach: assign expenses from chart of accounts to products and sales channels in proportion to their resource consumption

Spend no time and effort on trivial expenses [ = “other”]OK to categorize easy to assign expenses of any levelGoal is approximately 90% accuracy of assigning costs


Applied Overhead Example

What is Plant Manager behavior after seeing Feb vs Jan???

9Copyright 2010 D S Hoyte all rights reserved 9

Absorption: Period Results “Opium”(Examples observed March 2004 in FGI Stores)


Basic Income Statement

Direct costs (assignable)

Conversion cost

Manufacturing cost

Indirect cost

Indirect cost


Product Cost Traceability Challenge


Overhead Costs are Significant

Three Divisions of a Portfolio Company


MaterialityInformation or magnitude that makes a judgment difference to an experienced decision maker

Relevant – there is a need to consider itSignificant – the amount mattersImportant for public disclosures

Materiality causes confusion between precision and accuracy

Precision is an answer calculated to several decimal placesAccuracy is an answer that is directionally correct for making decisionsWould it change your business decision if there were a 1% change? A 10% change? This quantifies the precision needed for materiality

Management reporting must be accurate, but does not need high precision

e.g. how much detail do you need on an automation project that has approx 6 year payback?


Accounting Concepts

DL @ standard

Material @ standard

Traditional AccountingBased on standard costs for labor and materials. Overhead costs are absorbed on DL or output, driving over-production, WIP, and hiding source of cost. SG&A is spread on revenues.

40-60%

Overheads, Fringes & Variances

ABC CostingBased on accurate assignment of all incurred costs to each activity and transaction that consumed them –people intensive!

True fixed on sq ft

Mat’l & DL @ Std

Assignable costs on actual usage

Directional CostingBased on standard costs for labor and materials. Overhead costs are assigned on usage or by sq ft, or by actuals, to the extent identifiable. SG&A costs are assignment of variable selling expense, time spent, or customer support.

“ABC Lite” I IIIII

Fixed Costs

Lean AccountingFixed costs are by sq ft used in each Value Stream; All other costs are actual for all resources dedicated to or consumed by each value stream – Lean maturity!.

Microscopic Accounting


Standard Cost Income StatementProduct Cost

(@ std)

Asset (as FGI)

Expense(as COGS)

PeriodCost

Prod’n

Stock

Sale


Overhead Costs

Single SKU: If a factory makes only one product all overhead costs are caused by it and traceable to it (O/H cost) / (units)

Multi Product: Assign costs by resources consumedTraditionally it is assumed that overhead consumption is highly correlated with the volume of production activity (e.g. DL hoursor machine hrs)Most overhead costs are not volume related (e.g. quality lab)Overhead costs can be assigned on their cost driversLook for correlation between cost driver and actual overhead consumption (e.g. electricity and machine HP) Products consume activities and transactionsActivities and transactions consume resources [costs]


Traditional Allocation

Are Machine or Labor Hours really the drivers of the overhead costs???


Allocated on Labor: Same Overhead Costs?

Door Trim Sub-assy

HVAC Sub-assy

10 operators

1600 sq ft10 operators

3200 sq ft


Allocated on Labor or Mach Hours???

Raw goods inward Finished goods shipping

Finished Goods Freezer

Fruit Line

Dry Mix

Cream Pies

Oven

Pie Shells

$$

$$


Fixed Overheads

Building leaseBuilding utilities (est 20% of total or meter separately)Building security Property hazard & liability insuranceBusiness interruption insurancePlant administrative and management salaries & benefitsCompany vehiclesTelephoneComputer services, MIS, software license maintenanceJanitorial and waste haulingOffice equipment rental or leaseLift truck leases and maintenanceFees and permits

Use “Industrial Mall” Concept:Charge by % production area (drives good behavior)

All are generally not individually significant, but are easy to group.


Environment Materials Manpower

Method Machines

Booth Balance

Downdraft

Dirt and Grease

on ceilings

Dirty Contaminated Air:

• Open Doors

• Machine Shop

• Negative Air

Pressure

Fibers

Old Material

Blend

Tack Cloth

Sandpaper

Solvents

Resistivity

Introduction of

Dirt

Technique

Newspapers

Experience

Training

Absenteeism

Hair / Clothing Covering

Hygiene

Clothing

Gloves UseFilter Changes

Air Cap Cleaning Procedure

Cover Change ProcedureOver-sandingCheck StrapsBurning / Hooks

Feather DustersBell CupsAir CapsPurge CyclesHydraulic LeaksManual GunsDuct WorkDe-Ionization Blowers

Automation Covers

Viscosity Urethane

Anti-Chip Viscosity

Gloves

Sealer from Body

Air filters

Target DistanceBell SpeedRegulatorsRobot ProgrammingBelanger Blowers

ConveyorBooth Balance

Equipment Cleaning

ProcedureTack OperationAir PressureControlProcessShutdown Procedure

Type of SanderLine Speed

Measurement

Dirt Analyst Spill-out AreaGQRS/AWSDirt CountsSpot Repair

Temperature

Humidity

Roof Leaks

Format Example Cause / Effect “Fishbone” Diagram


Cause / Effect Cost DriversVariable Overheads [by Dept]


Cause / Effect Cost DriversVariable Overheads (cont’d)


Cause / Effect Cost DriversSG&A


VLOOKUP on account

number

Mapping Accounts Example #1Variable Overheads

Fixed Overheads

Detailed Income Statement File1

2

3

4

5

6

7


Cost Assignment Matrix Example #2

Brief study of resources consumed by area

“Bulk Up” Exercise Machine


Volume Based Assignment of CostsVariable Overhead Costs assigned by Department or Value Stream

Dept Costs are subsequently assigned to product types and customer based on units processed through the department or value stream

$567,600 / 450,000 units = $1.26 per unit


Feature Based Assignment of Costs


Directional Costing Benefits

Improved cost management: prioritizing and fixing those things that really make the most differenceImproved quoting and pricing accuracyOperational and behavioral changes:

Improved profitability focus in sales and engineeringHighly focused cost management at plantsFixed costs on sq ft will drive better space utilization


Lean Financial Analysis

“Not everything that counts can be counted, and not everything that can be counted counts”

Albert Einstein


References:

Jones, V. Rory, (2008). The Executive Guide to Boosting Cash Flow and Shareholder Value, John Wiley & Sons, Inc.

Maskell, B. & Baggaley, B. (2004). Practical Lean Accounting, Productivity Press

Cunningham and Fiume, (2003). Real Numbers,Managing Times Press

Koch, Charles G, (2007). The Science of Success, John Wiley & Sons, Inc.

32

Discussion

Lean Financial Analysis - Fisher College of Business Financials DSH... · Charles G. Koch, CEO ......

Documents

Transcript of Lean Financial Analysis - Fisher College of Business Financials DSH... · Charles G. Koch, CEO ......