How much of your EBITDA are you actually losing?

Many companies have projects to capture and grow EBITDA. These programs have great names and teams pushing for value and success. However, the foundation on which this growth is based can be quite fragile.

Do you know how much of the EBITDA growth is leaking away through loss of productivity and plant stoppages? Your repair and maintenance budget should give you an idea. At least as a warning signal.

If you lose 30% of all EBITDA gains through leakage then any investment is expensive

There’s a simple, but very effective,  way to understand how much leakage you have, and then to find out exactly where it is. This can then lead to effective opex and capex investment and start the sustainable management of r&m budgets and controlled working capital of spare parts.

The initial step in this process requires a small but significant modification to the EBITDA bridge. I have already published a short article on this but as a brief summary,

The traditional bridge used for purely financial Reporting concludes that financial hedging and a reduction in fixed cost is necessary to grow or stabilise EBITDA.

But you have an EBITDA growth program so we need to take this value creation out of the bridge into a separate, transparent, column.

Through a further modification, into a managerial bridge, we actually can see where under performance, quality, outages etc are eating away at the management gain column of the value plan. This is leakage.

This slight modification highlights where we can actually manage the leakage. A financial hedge is non sustainable and costly. Managing quality and productivity is sustainable and cost effective. Once transparent we can see we transfer action ownership from finance to operations and thereby solve the issue.

The onepager is a simple excel based management tool that provides the operations people with insight into where they are losing money. It can be adapted for quality, maintenance, operation, safety etc but basically converts incidents into monetary impact. Used on a monthly basis, and through the collaboration between controlling and operations, it is designed to give transparency.

The onepager captures value leakage in a simple excel sheet used by operations

There is little additional work needed, simple a connection between operations and controlling using information they already collect.

The actions developed are monitored through the same control tower as for the value creation projects so again no additional work is created.

The value of this simple approach is in its transparency. It valualises smaller events and thereby:

  • Helps purchasing to ensure short term savings are not at the cost of long-term sustainability. Cheap materials can impact quality and reliability in the longer term which would be highlighted in the onepager as incidents.
  • Provides insight to operations on where value is created, or lost, enabling a prioritisation of actions based on EBITDA impact.
  • Helps identify systemic risk which can promote updating of procedures and operating practice
  • Supports best practice implementation and financial efficiency of mitigation actions. What could be expensive for one plant and therefore not viable can, when seen to improve the whole company, become an opportunity.

The result of this small, but effective, change is that

  • Leakage is reduced. Meaning that any EBITDA improvement action can capture its full estimated affect rather than a smaller percentage. Typically calculated by management companies at 30% this approach supports the capture of at least 50%.
  • Operations are stabilized giving a direct impact to non-tangible assets such as stakeholder value, customer satisfaction etc.
  • The needed annual productivity increase of 3% to stay ahead of competition
  • Opex and capex spend is effective. Meaning we move from model A (opex repetitiveness), through B (extrapolation model) to arrive at C (Transformation model).

Passionate Risk Manager. Accomplished thought leader with more than three decades of industrial and financial experience. Visionary and functional Opportunity Strategist. Doing things right ... but differently.

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