3. Action 10 Ratio and Trend Analysis

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Feb 20, 2024

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HR Planning 58815 – Action Item 10 Ratio Analysis and Trend Analysis: Puslinch Pottery Updated Year Operational Index Sales ($ thousands) Number of employees Employee Requirement Ratio (Sales per Employee) also called the Business Index BI ratio 2017 2,800 155 18.06 2018 3,050 171 17.83 2019 3,195 166 19.25 2020 3,300 177 18.64 2021 2022 2023 The information in black is from your historical years. The information in red is for your future years Look at our first year of historical data (now it is 2017), let’s read across on this table: ◦ we see that in 2017, this company earned $2,800 (million). ◦ $2,800m = $2,800,000 ◦ Notice that the company had 155 employees in 2018 ◦ Therefore, we can calculate the ratio of sales to # of employees . 2,800,000/155 = Do this. (to 2 decimal places) ◦ Answer = ◦ What then is the interpretation of this statistic? It is saying that in 2018, each employee was responsible for $18,064.52 worth of sales. This is ratio analysis. i.e. we are measuring the relationship between sales and the # of employees

Next comes Trend Analysis –, then Steps for an Effective Trend Analysis 1. Select the appropriate business/operational index 2. Track the business index over the same time period. For our example we will be using HR Planning Notebook 5.1. The years of historical data in this table, and based on the changes we made earlier when we were reviewing ratio analysis, are 2017, 2018, 2019 and 2020 3. Track the workforce size over the same time period as for the business index – so years 2017, 2018, 2019 and 2020 4. Calculate the ratio of the business index to the workforce size – called the employee requirement ratio or the BI ratio. Important note: the BI ratio is calculated only for the years of historical data. For the future years [per example: years 2021, 2022, 2023], we do not know the # of employees so we cannot calculate the BI ratio Notice in our example on p.108 that these figures are given in the column to the right. The BI ratio = sales/# of employees = 18.06 (2017), 17.83 (2018), 19.25 (2019) and 18.64 (2020) 5. Calculate the demand for labor (i.e. # of employees needed) for future years. The # of employees needed = sales/BI – but we have options in terms of which BI to choose. a) We can choose the BI for the last year of historical data. In our case, this is 2020 b) We can choose the average of the BI’s for all the years of historical data. In our case our historical data runs from 2017 to 2020. So, we could add together all the BI’s for these years, divide by the # of years [4], and this gives us the average BI

c) (New) We could also choose some other year from history based on looking at the business climate in that year, and aligning our future projection based on the BI for that year. Action Item 10 – Fill in the following chart Year Operational Index Sales ($ thousands) Number of employees Employee Requirement Ratio (Sales per Employee) also called the Business Index BI ratio 2017 2,800 155 18.06 2018 3,050 171 17.83 2019 3,195 166 19.25 2020 3,300 177 18.64 2021 ? 2022 ? 2023 ? i. Calculate sales for your future years 2021 to 2023 by doing the following: Calculate sales for 2022 by increasing sales for 2021 by 6%; Calculate sales for 2023 by increasing your calculated sales for 2022 by 6%; Calculate sales for 2024 by increasing your calculated sales for 2023 by 6%. Now you have different (new) sales figures for our future years. Round off your sales to the nearest whole number ii Next, we need to determine the # of employees needed (i.e. demand) to meet these new levels of future sales. Here we will use the 1 st 2 options described in class.

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So, a. Calculate the # of employees needed using the BI for the last year of historical data b. Calculate the # of employees needed using the average BI ratio Year Sales (round off to whole numbers) a) # of employees needed based on BI for last year of historical data b) # of employees needed based on average BI index 2021 3300+6%= 3498 3498*18.64= 188 3498*18.45=190 2022 3498+6%= 3708 3708*18.64= 199 3708*18.45=201 2023 3708+6%= 3930 3930*18.64= 211 3930*18.45=213 With this information, we can then look at our existing workforce and determine if we will have the persons in place to meet this demand. Note – Average BI ratio = 18.06+17.83+19.25+18.64/4 =73.78/4 = 18.445 or 18.45

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