As the owner of any for-profit organization, whether it is the corner store, a car dealership or a logging company, your financial goals include making a profit. So why is it that so many logging businesses continue to generate losses or at best, break even?
There are a number of reasons that could explain a bad year from, "The quality of fibre from the woodlot was terrible" and "The rate wasn't fairly negotiated" to "I couldn't get all the wood out of the bush last year." While those may all be very good explanations, the fact of the matter is, you lost money and that's not good.
No matter how you rationalize it, the evidence suggests that for some logging companies, a lack of proper planning is one issue causing them to fail at generating a reasonable profit. While most companies would argue they do perform some level of planning, it is often not sufficient. Think of this in terms of hockey. The Canadian Olympic hockey team will head over to Russia this winter seeking a gold medal. The team will be comprised of the best hockey players Canada has to offer. However, they will no doubt have a 'game plan'. The talent alone will not win them the gold, the talent must be managed to ensure success.
So let's talk about that same concept in relation to your business. First of all, how do you define success? For our hockey team, it will be winning the gold medal. For you, it might be defined by many things, but one thing that should always be near the top of the list is generating a reasonable profit. For most businesses, a reasonable profit would be defined as receiving proper reward for the risk taken. For the logging industry, the risks are high: large capital investment is required, there is market uncertainty and volatility, there are many factors affecting your productivity and the work is dangerous. So, a reasonable profit should be higher, such as 10, 20 or even 30 percent.
Crunching the Numbers
Start the planning process by taking a close look at the total expenses to cut your block (your 'costs'). This must include 'All Expenses' and you should convert this to a cost per unit measure. Here are just a few things to consider:
- Analyze your past financial statements
- Walk your cut blocks and take note of the conditions (hours of work and volume of production are crucial)
- Assess the machinery needs, and change your line-up if necessary
- Look for options to hedge yourself against variable expenseslike fuel
- Analyze your wood movements and ensure everything will get delivered to your buyer on time
- Link your productivity to profit, resulting in clear and easily defined production targets for staff
- Build in a buffer for those 'unexpected' problems
Once you develop a good understanding of your costs, the rate you need to receive becomes obvious. It is the rate that generates a reasonable profit (total revenue in excess of your costs). Sounds easy right? So what happens when you need $20 / m3 but the offer is only $16 / m3? You really have three options:
- Review your expenses and ensure you are operating as efficiently as you can, without jeopardizing the safety of your crew or appropriate levels of productive capacity.
- Request a meeting to negotiate a higher rate and come to the meeting with facts to support your position.
- Do not take the contract.
The first two will take some time and energy, but are easy to initiate. However, number three is where many contractors struggle, "If I don't take the contact, my competitor will get it" or "I just need cash flow to keep paying the bills". Neither of those are great business reasons to accept a contract that is not profitable. If you are operating as efficiently as possible, your competitor likely has the same costs as you and therefore, if they are willing to deliver work below cost, let them. They won't be around for long. Taking on a contract to 'pay the bills' provides a short-term fix but creates a much larger problem in the future. If the industry cannot bear the cost of proper returns, you are not required to participate.
Effective business planning can help you achieve greater success. A good business advisor can help you understand what the numbers mean and how you can create a solid plan to achieve greater success over the long haul. Before you start any contract, have a plan that says you will make a reasonable profit. The logging industry is loaded with honest hardworking people just like you. The value that logging contractors provide to the economy is enormous (2011 Canadian GDP for all forest related industries was $23.7 billion) and therefore you should demand the appropriate level of respect and compensation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
