Consider an Expense to Revenue Ratios Report for Spending Decisions

An idea for more easily monitoring spending (expenses) and making more timely decisions about future spending is using a rolling expense to revenue ratio report.  Create a report that will show the current quarter’s expenses to revenue ratios for your expenses.  On the report, also present for the previous four quarters, the expense to revenue ratios.  Include an average of those four previous quarter ratios on the report.

Now use the report to determine how the current ratios (the just concluded quarter) compare to previous quarters.  The comparison should alert you to those expense to revenue ratios that are unexpectedly increasing, decreasing, or staying the same.  Think about the unexpected changes, or lack of change, as to the causes, the implications, and what actions (decisions) might need to be taken.

Such a report can be fairly easily created in the accounting system QuickBooks using the profit & loss standard report that is modified to show the percentage of income for each line item.  This report can easily be exported to Excel.    Create similar reports for the previous quarters and export those to a different worksheet in the same Excel file.  Be sure that all line items, including line items with zero activity in some quarters, are included in the QuickBooks profit & loss reports.  Using Excel's special paste feature allows copying and pasting so that current and previous expense to revenue ratios line up on one worksheet, from which comparisons can be made to previous quarters.

As a new quarter ends, update the saved Excel file with the new quarter’s data.

Rather than using traditional budgets, for quarters and longer periods, numbers which can quickly become irrelevant as conditions change, consider the rolling expense to revenue ratios report described above as a substitute for monitoring expenses.  The process should be easier.  Better decisions might be made in a more timely fashion.

The Equipment Effective Percentage Can Be Useful for Equipment Evaluation

Computing the actual percentage of time that a piece of equipment is in use compared to the total time that the equipment piece is available for use can help to evaluate the equipment piece's effectiveness.  Evaluating expensive equipment effectiveness can be useful for making better use of the equipment, in making purchase and sale decisions, and probably in other decisions related to the equipment.

The purpose of this blog is to provide an example of computing an equipment effective percentage.  Suppose a company has 2 concrete drills with different characteristics.  Drill #1 is less powerful but requires less maintenance time than Drill #2.  Drill #1 requires 4 hours of maintenance after 19 days of use, whereas Drill #2 requires 24 hours after 19 days of use.  However, Drill #2 is easier to operate, demanding less time the operator needs to take a break from using the drill.  The operator only needs a 5-minute break per hour for Drill #2.  For Drill #1, the operator needs a 15-minute break per hour.  The company has sufficient need for both drills to use them eight hours each day of the work year (240 work days; 20 days a month for 12 months).

The equipment effective percentage is a ratio of the actual use of the equipment divided by the available use (expressed as a percentage).  The available time for each drill is 1,920 hours per year (240 work days times 8 hours per day).  The actual use time for Drill #1 (from the facts above) is 1,392 hours per year [1,920 hours less 48 hours maintenance (4 hours per month times 12 months) and less 480 hours operator’s rest time (15 minutes per hour for 1,920 hours)].   The actual use time for Drill #2 (from the facts above) is 1,472 hours [1,920 less 288 hours maintenance (24 hours per month times 12 months) and less 160 hours operator’s rest time (5 minutes per hour for 1,920 hours)].

Knowing the actual use times for Drills #1 and #2, the equipment effective percentages (EEP) can be computed.  For Drill #1, the EEP is 72.5% (1,392 hours divided by 1,920 hours) and for Drill #2 the EEP is 76.7% (1,472 hours divided by 1,920 hours).  So, Drill #2 is in actual use more than Drill #1.  This may be surprising since Drill #2 has a much higher down time due to maintenance.  However, its much less down time due to operator’s rest time more than makes up for the higher maintenance time.

The equipment effective percentage is a way of evaluating equipment that can provide insights about the equipment use that may not be expected.  And, therefore, better decisions might be made.  The equipment effective percentage analysis can be applied not only to equipment but other assets that are in use.

Computing the Quantity Flow Through a Company Process Can Be Useful for Planning

Estimating an expected quantity flow through in a company process can be useful for effective planning.  A few examples of quantities that flow through a company process are customers, inventory, and requests.

If the flow rate of the quantity flowing through the process and the time of the process are known, the quantity that will flow through the process can be computed.  For example, how much inventory is needed (the flow quantity) for a future sales period?  If the flow rate (the sales rate) and the process time (the time during which the inventory will be sold) are know, the needed inventory (the quantity flow – the amount that will be needed during the process time) can be computed.    The inventory flow rate (the number of inventory items sold per period) can be based on historic values.  If during the previous 12 weeks, the average inventory flow rate (sales per week) is 10 items per week, then the expected quantity flow (amount of inventory needed) over the next 6 weeks would be 60 items (10 items per week times 6 weeks).

The equation for this computation is: Quantity Flowing Through the Process (QF) = Flow Rate (FR) times Flow Time (FT) or QF = FR x FT.

Although applying this equation to inventory (the quantity flowing through the process) and sales (the process) comes readily to mind, the equation can be usefully applied to many other company processes.  For example, suppose you want to estimate the number of sales orders (the quantity flow) that can be responded to over a period of time.  Knowing the past respond (flow) rate, an estimated quantity flow (number of sales orders) that can be responded to for a future period can be computed.  Some other examples that come to mind are the number of sandwiches that might be prepared per hour given a prepared rate and the number of patients that can be seen per day knowing how long it takes to see a patient.

A previous paragraph shows examples of computing quantity flows (QF) where flow rates (FR) and flow times (FT) are known.  But, the equation can also be used to compute either FR or FT, when the other two variables are known.  For example, if the inventory on-hand at the beginning of a period is known, the rate of sales (the flow rate, FR) can be computed in order to use up the on-hand inventory.  Or, how much flow time (FT) that will be necessary to sale a quantity on-hand (QF) at a given flow rate (FR) can be computed.   Another example is computing the number of guests arriving everyday (FR) at a bed & breakfast where the average stay is 4 days (FT), the bed & breakfast has 20 beds (FQ), and the bed & breakfast is always fully occupied.  Using the equation FR = FQ/FT gives FR equal to 5 (20/4) guests arriving each day.

Although a simple equation, QF = FR x FT has many useful applications for estimating quantities, rates, and times, from which more effective planning can be accomplished..