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ADVICE ON TRANSPORT PROBLEMS

11th June 1965, Page 81
11th June 1965
Page 81
Page 82
Page 83
Page 81, 11th June 1965 — ADVICE ON TRANSPORT PROBLEMS
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Which of the following most accurately describes the problem?

Management and Control (2)

LAST week in this series a start was made on summarizing briefly some of the papers presented to the PERA Conference on "Financial Management And Cost Control" held in Melton Mowbray recently. This summary is concluded here.

In view of the fact that similar comparative studies are known to have been undertaken by some transport operators, the paper given by Mr. H. Ingham, director, Centre for Interfirm Comparison Ltd., entitled "What can we learn from Interfirm comparisons of costs and asset utilization?", was of special interest. Incidentally, the Centre for Interfirm Comparison was established in 1959 by the British Institute of Management in association with the British Productivity Council to promote interest in, and to conduct interfirm comparisons for management.

In the view of the centre, Mr. Ingham insisted, it was essential that the content of Interfirm Comparison (IFC) should appeal to those at top management level in the firms concerned because of the following reasons. A stimulus to self criticism at top level would have the strongest impact on the development of the firm concerned, whilst top management was in the best position to decide on remedial action and to see to its implementation. Additionally, top management was in the best position to decide whether the firm concerned should take part in an IFC. The results obtained from an IFC were designed to indicate how the overall success of a business compared with those of similar firms, why it differed, what aspects of a firm's policy and performance needed attention and what specific policy questions needed to be tackled in order to improve the overall profitability of the firm.

Managing Director—a Special Position

In particular Mr. Ingham dealt with the special position of the managing director of a firm and why the aid provided by WC of management ratios was of particular value to him. He was the man who primarily bore the responsibility for the success of an undertaking now and in the foreseeable future. It was up to him to ensure that the available assets were profitably used. To this end he must plan the operations of the business in such a way that a sound balance between capacity and sales was, achieved and maintained. This was not only a matter of planning and control but also of human relations. Whatever the size of the business, the man at the top must be able to select capable and loyal colleagues who could work together as a team and who could be trusted to arrive at the right decisions within their respective spheres of activity.

But even though the managing director must be able to make effective use of the specialists needed by the firm. he must not forget that he himself was a specialist before he reached the summit. Being at the top he must become and remain a generalist. If he could not do this—if he remained primarily a salesman, production engineer or scientist—he might upset the balance of the team. This could have undesirable effects on the undertaking as a whole.

This meant that the man at the top had to deal with tasks and problems which were different in kind from those of technical, commercial, research or financial managers. and he therefore needed management aids which differed from those available to functional management. One of those was the guidance provided by IFC.

Inter-firm Comparisons—Substantial Variations

Examples given by Mr. Ingham of some Interfirm Comparisons revealed substantial variations. Thus, for example, the ratio of operating profit to operating assets in terms of a percentage varied in the case of five firms examined from 20-1 down to 7.5. Similarly, operating profit as a percentage of sales varied between 19-3 and 9-3, whilst direct labour costs as a ratio of sales varied between 9.1 and 12-7.

In recent years the transport industry had been involved in some consolidation despite the large number of small operating units which still existed. In dealing with the 1139

financial implication of planning for growth, Mr. R. F. 1VIedlicott, director of Kleinworth, Benson Ltd., merchant bankers, had this to say regarding growth by mergers. It was a method frequently employed in post-war years and it would at first seem as if such operation did not necessarily in any degree contribute to growth. Indeed the essential function of mergers and their contribution to growth tended to be obscured by the publicity given to the speculative opportunities thereby presented. When the motives and consequences of growth by merger were examined, however, it was found that in most cases they did not contribute to national growth and sometimes in a marked degree.

A Principal Motive for Take-overs

One of the principal motives for take-over bids, Mr. Medlicott continued, was buying assets at a discount. The fact that they had been bought at a discount generally implied mismanagement in the hands of the previous owner and subsequent growth when they passed into stronger hands. Sometimes mergers were undertaken purely for

trade advantages, such as horizontal or vertical integration, securing access to markets and sharing a sales organization, and mergers of this type also undoubtedly contributed to growth and efficiency. Take-over bids motivated by the removal of dividend restraint or the elimination of competition, or the desire of companies with surplus cash resources to diversify their activities did not, however, necessarily contribute to economic growth and sometimes had a contrary effect.

At the time of a take-over there was naturally much speculation as to the underlying motives and it was therefor informative to hear from a merchant banker of the procedure involved; merchant banks were intimately concerned with amalgamation and sometimes took the initiative in bringing two suitable companies together. Such banks were consulted in regard to terms and to-Co-ordinate the drafting of documents for issue to shareholders. In regard to take-over bids they normally ,acted as agents for the offerer or as advisers to the offeree company. In the former case, they would actually make the offer on .behalf of the offerer and in the latter case would. advise the. directors of the offeree company as to whether the offer should be accepted or rejected; their advice usually would be quoted in a letter of recommendation or rejection. All mergers required prolonged and detailed negotiation, -and preparation in such negotiations had become a major part of the function of the new issue department of merchant banks.

Management Accounting that Works

Under the forceful title of " Management accounting that works" Mr. R. FL S. Meacham, secretary, Moore's Plant Ltd., had several pertinent comments to make. Changes in clothes took place within a comparatively short period, but it was usually possible to detect a long-term trend and this applied to many other aspects of life. So it was not surprising that one should find similar patterns of change throughout our thinking on economic, political and social affairs. This was a good thing because only through change could we achieve progress. But there was a danger that purely temporary fashion could be mistaken for long-term trends and importance attached to things and ideas because they happened to be new.

This was especially trite in the field of business. New ideas tended to become crystallized in words or phrases which were bandied about very freely but quite often with little regard for their true significance or implication. Too often it was forgotten that what was called a new idea was nothing more than a new expression of something which had been known and acted upon for a considerable lime.

Keys to Success?

The risk was always present that a particular procedure or technique would be hailed as a key to success. This was true of time study in the early days; it was true of costing and budgetry control in the years between the wars and in the past 20 years it had become true to a very large extent of management accounting. This might not be very serious in academic or professional circles -whefe the precise meaning of many " shorthand " descriptions----and the shorthand "thinking with which it is associated--were clearly understood, but it was certainly very serious when they were used loosely and—as they so often were—as a status symbol.

There were powerful pressures, Mr. Beacham insisted, these days for any firm which prided itself on being up to

late to employ the most advanced mechanical or electronic !quipment in its offices and workshops where it may not ilways entirely be appropriate or economic. There were qually powerful pressures to induce such firms to employ he so-called new techniques of management, including nanagement accounting.

Management was the one and only dynamic force within my enterprise. It had been described as the process of notivating and controlling business activity to secure .ertain predetermined objectives. For all practical iurposes, the overriding aim would always be to earn a eturn on the capital employed which was sufficient to irovide both a reasonable reward for those who had put ip their money and their livelihoods at risk and a sound iasis for development in the future.

What was reasonable and what was sound could not be educed to quantitive terms and must always be matters if personal opinion. The fact remained that setting the ibjectives and assessing how far they were being met vas a matter of measurement and primarily, though not lithely, for measurement in terms of money, which, for all ts faults, was the only serviceable common denominator ye had. As it was the function of accounting to record the acts of operation, it was to the accounting records that nanagement must look for guidance.

Many managements, especially in small and mediumized businesses, were not figure minded and had difficulty n recognizing the need for accounting and in understandrig the relevance of its reports. This placed the accountant .t a disadvantage—he had to try to educate such a managenent to an appreciation of the services he could render nd this involved tactful persistence rather than technical skill. It was very easy in such circumstances for the accountant to retreat into what used to be called "the counting-house ". It was equally easy for him to usurp the function of management itself by imposing his own interpretation of the facts upon those who were supposed to be exercising judgment and making decisions. The relative strength and weaknesses of the various personalities involved would have free play and the outcome would be chaos rather than control.

The Most Fundamental Demand

If budgetary control was to work it must make certain demands upon the undertaking which adopted it. The most fundamental demand, Mr. Beacham continued, was that there should be a clear and precise expression of policy in both general and sectional terms; it was impossible to express in quantities and values a policy which was no more than a generalization. Budgetary control was a technique which used information in a certain way—it was not a process which produced information. That was left to the ordinary accounting and costing routine. It was essential, therefore, that these should in fret produce the right information at the right time for the right people.

Many attempts to introduce budgetary control had fallen down simply because the facts were not available and no form of control could be grafted onto inadequate accounting procedures. On the other hand, some effort had failed for just the opposite reason. The more facts that were recorded the greater the mass of paperwork which accumulated, so making extraction of the data required even more difficult.

FROM THE POSTBAG A debatable point is raked by a northern operator who asks about the Om of vehicle loading on operating costs.

For the purpose of compiling standard tables of operating costs, as distinct from costing the operation of a particular run with all the relevant factors known, many arbitrary decisions have to be taken in the interests of simplification. One of these relates to the average loading of vehicles under review, and as an arbitrary figure this is assessed at 75 per cent in the case of The Commercial Motor Tables of Operating Costs. But even having accepted this figure it could, of course, be derived from 100 per cent loading on the outward journey and 50 per cent on the return or any other combination of the several journeys which a vehicle might make in the course, of say, a week.

It should be borne in mind, however, that because of the relatively high unladen weight of many commercial vehicles and because the main effect of variations in loading are on fuel consumption—only one of 10 items of costs, albeit a major one—the overall effect on the total operating cost is not as much as might at first he supposed as between fully loaded arid partly loaded. vehicles.

MONEY MATTERS

Same Again Dividend from Ribble

F°R the year ended March 31 last net profit of RIBBLE MOTOR SERVICES was £630,474 compared with £630,006 in the previous year. Thus, with the total being much in line with the 1963-4 trading period result, it was no surprise to the market that the dividend was maintained at 121%. The final recommended payment is 81%. The Ordinary shares of this company are quoted on the London Stock Exchange. They changed hands recently at 35s, 3d.

Backing up an excellent set of results for the year 1964 recently announced by WESTERN MOTOR HOLDINGS, comes the chairman's annual review—a document that must cheer many, if not all, members. Mr. C. Mumford comments that the profits of the motor division of the group should not materially be affected by the dropping of r.p.m.

Of the operational groups Mr. Mumford states there are indications that it may be possible to acquire further businesses; these possibilities are being "energetically pursued ". These Ss. Ordinary shares were introduced to the London Stock Exchange a year ago. At around their present price of 14s. 6d. they yield almost 6% based on the latest 171% dividend covered 2.1 times.

Good results from Hargreaves

HARGREAVES GROUP is a well-diversified business with an important stake in road haulage. For the year ended March 31 last this important group has announced that the trading surplus amounted to £1,505,282. This compared with £1,274,822 the previous year.

Shareholders are to receive direct benefit by way of a larger distribution. The proposed final dividend is 2s. per £1 Ordinary stock unit (as forecast) and makes the total for the year 3s. per unit. This is an increase of 6d. compared with the previous year. And the outlook is regarded with optimism. The directors state that they consider the group will "continue to develop profitably and on sound lines ".

These results were well up to market expectations. With the trading outlook for the group looking to be set fair the current yield of a shade more than 7% at their present price of 43s. would seem N allow for the known uncertainties and indeed seem to me to be conservatively valued. I expect to see this group make further progress during the current year and these Ordinary units appeal to me as a good buy.