You may have several “categories” of costs in your Operating Cost:
Labour, Inventory, Energy and similar.
This will depend on the nature of your business. Cost Category Changes can be tracked and may indicate concerning changes in your method of operation.
The Cost Category/Revenue ratio:
- Shows the relationship between Revenue and Category Costs as a percentage.
- As it is shown as a percentage, this automatically compensates for any increase or decrease in Revenue or Costs.
Example:
Calculate a Cost/Revenue ratio of a cost category, for example, Labour to Revenue.
Year 1:
Revenue = $1000
Labour = $100.
Ratio is – Cost/Revenue or 100/1000 = 10%.
Year 2: If the same calculation gives you 20%, the cost of labour as a component of Revenue has gone up.
You are putting more labour expense into the product.
Consider why Labour has gone up:
- A wage increase is the first thing you would consider.
- Less efficient Labour; more is required to do the same amount of work.
- This might mean a change in work methods or machinery which is using more Labour.
When you have multiple possibilities like this, the 5 Why’s Problem Solving Technique can be useful to work out what happened.
Calculate your Cost/Revenue ratio’s. This will indicate problem areas within your business.
If any of your Cost categories are changing, add them to the spreadsheet that we discuss in the “Metrics” Lesson below.
This allows you to keep a watchful eye on them in the future.
Has the Cost Category analysis assisted?
- Revisit your accounting system and create separate line items for the following:
- The categories that are fluctuating the most.
- Also, the categories having the biggest impact.
This will make it easier to track this data in future.
Now, go to the Gross Margin Ration Analysis.
For more help understanding any issues relating to this Section of the Turnaround90 Campaign, use the 12Faces Diagnostic System to drill down to root causes of problems and find our suggested Treatments.