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PROFITABLE FOREST ENTERPRISES IN AUSTRIA: PROBLEMS - DATA - INSTRUMENTS

by

Wolfgang Sagl

Professor, University of Agriculture and Forestry, Vienna

1. OBJECTIVES OF ENTERPRISES

This analysis is based on theory and experiences from Austrian forestry, which can be classified predominately as a private profit-oriented system.

Modern management must address three objectives: economy, ecology and human resources.

Under market economy conditions the goal of an enterprise is to make profits, since only the long-term economic balance between performance and result can secure sustainable business. Moreover, private owners are in the long run interested in an enterprise only if they can expect adequate profits, that is a positive, instead of negative, difference between financial receipts and expenses; a plus instead of a minus.

By means of a management analysis the preconditions for such an objective are investigated; also the degree of such an expectation, on the basis of an evaluation (expressed in monetary terms) of all efforts and performances rendered, can be examined. This objective applies to shoe factories as well as to forest enterprises.

Regarding a private enterprise, these connections substantiate a market economy, which, in spite of all its social and ecological deficiencies, provides wealth, security and a comfortable existence to a great segment of the population. Economic and social history provide evidence of the interaction between society and economy, and demonstrate mutual influences, enhancements, disturbances, and developments and their positive or negative interaction.

The utilization of forests by mankind is as old as the simultaneous appearance of these two objects of creation. Forestry in the modern sense exists in Central Europe for about two centuries. As an economic sector this is a relatively long period, considering how many sectors emerged, disappeared and how few new products succeeded in the market over this period. Today we have both the opportunity and challenge to shape forestry for the future of mankind.

The most important economic objectives of Austrian forest enterprises are sustainable income, liquidity, and capital resources.

2. SOCIO-ECONOMIC FRAMEWORK

The socio-economic characteristics are: the legal structure of forest property (who is responsible and carries the risk); size of forest enterprises; public and private interest in the forest and conflicts of interests; legal fields of all kinds (e.g. taxes, etc.); and disturbances (e.g. social demands, etc.).

In profitably operated enterprises management responds by:

- adapting the legal structure to tenure and size of the enterprise;

- adapting the tenure and user rights to the size of the enterprise;

- adapting the external policies to the legal situation and the social environment;

- adapting the internal policies to the objectives and the socio-economic environment;

- creating differentiated but coordinated management (of the performance and profit potentials).

3. OPERATIONAL ANALYSIS AS A BASIS OF STRATEGIC AND OPERATIVE MANAGEMENT

3.1 Operational analysis

This is the collection of information on operational data, the presentation of findings, and analysis of strong and weak points, and reasons for elaborating concepts for the strategic and/or operative management. Operational analysis is a process which includes forecast and feedback, and is based on an analysis of the past, present, and future, in order to shape operational potentials, structures, and processes for an improved end result.

3.2 Frequent areas of operational analysis in a forest enterprise are:

- material and monetary objectives, degree of achievement, adjustment of measures and of objectives;

- evaluation of working methods as to their efficiency;

- evaluation of the working organization: labour costs, gains, extent and cost of external services;

- marketing timber and returns;

- marketing other products and returns;

- marketing services and returns;

- management and office organization;

- management system;

- information system; and

- cost/profit analysis.

3.3 Examples of an operational analysis

Comparative operational analysis is one of the most important management instruments. Some examples are:

Figure 1. Spruce/Fir saw timber sales. Fed. Forest Enterprise

Source: Annual Report 1990. Fed. Forest Enterprise

Figure 2. Average piece-rate earnings and performances of power saw.

Table 1

Comparison of forest tenure categories 1992

 

Fed. Forest Enterprise

Enterprises over 1.200 ha

Enterprises between 500 - 1.200 ha

Rural family farms

Silviculture

306.2

342.8

529.6

392.0

Wood harvest

1 364.1

1 941.8

2 136.9

1 985.6

Logging equipment

397.4

316.8

324.9

0.0

Buildings

156.5

207.4

280.6

0.0

Overhead costs

2 056.5

1 438.1

1 738.5

928.2

         

Wage costs

1 384.3

1 249.1

1 490.2

99.0

Salary costs

1 548.6

905.3

1 013.2

0.0

Entrepreneurial earnings

0.0

6.8

44.3

1 717.4

Materials and energy

187.0

255.4

307.8

460.1

Outside services

452.3

1 232.4

1 410.2

209.7

Taxes and dues

161.2

135.7

190.4

74.4

Other expenses

140.4

155.3

186.6

491.7

Depreciation

406.9

306.9

357.8

253.5

         

Total expenditures

4 280.7

4 246.9

5 010.5

3 305.8

         

Earnings from timber and minor produce

4 339.7

5 024.2

6 097.8

3 313.3

         

Profit

59.0

777.3

1 087.3

7.5

Operational analysis indicates the following characteristic features of the economic situation in forest enterprises:

- current increase of the salary cost share (30 years + 41 percent)

- decreasing wage share (-21 percent);

- increasing outside service percentage (in production and harvest + 8 percent);

- current real increase of administrative overhead costs;

- considerable annual fluctuations with a continuous downward trend in profits.

This permits evaluating various degrees of rationalization and identification of future organizational problems.

Strategies to overcome these structural weaknesses:

- further internal considerations;

- excess felling to maintain liquidity (= mostly reduction of assets);

- innovations in various fields; particularly this strategy has to be thoroughly dealt with by science and practice.

In contrast to agriculture, from the forest management viewpoint, cost of loans is no problem since investments are largely financed from internal earnings if additional capital is needed, such as for machinery or other capital needs. Bank interest rates on loans may far exceed the return even of high-yielding forest enterprises, so that financing by means of loans should be considered only for particularly productive increases and cost decreasing investments (short amortization period).

4. STRATEGIC MANAGEMENT

The basic concept of strategic management is the analysis and dynamic adjustment to changing conditions. The possibilities of profit potentials, through sustained achievement, are more likely to occur from the synergetic application of profit factors - also known as key factors.

The strategies must be oriented, first of all, on conditions of marketing the products as the basis for profit-oriented management.

The following table is a survey of potential strategies of a general type, which, when applied to forest enterprises, take special meaning, just as the listed evaluation criteria.

Table 2

Strategies and their evaluation

 

evaluation criteria

Strategies

possibility

risk

chances for implementation

time horizon

financial requirement

Strengthening of the hereditary business (= wood production)

         

Growth

         

Shrinkage

         

Diversification

         

Specialization

         

Cooperation

         

Horizontal integration

         

Vertical integration

         

Financial dispositions (participations, Stock exchange, etc.)

         

5. COST MANAGEMENT

One of the most important tasks of management is to control costs and cost structure. Following are some examples from practical cost accounting, which are part of the whole accounting system.

Cost Structure

Austrian forest enterprises > 500 ha. Source: Forest Report.

Figure 3. Time comparison 1983-1992 of the cost centres in A.S./m³

Cost structure shows management which cost centres are the most important and how to influence the cost structure and its prognosis.

Table 3

Categories

1 000 ha of timber land

I

Production forests

1 489.3

II

Protection forests

A. Site protection

1. Forests under forest limit

2. Zone of mountain pine

3. Erosion conservation

61.8

44.5

12.5

3.8

1.3

III

Special purpose forests

1. Forests damaged by pollution

2. Forests with special society tasks

3. Protection of water resources

4. Others

1 031.9

739.2

212.8

10.6

69.3

Cost accounting - critical items

(fixed costs - variable costs - receipts)

1. Data

 

Ø price per m u.b.

Ø proceeds minus harvesting cost

Planned cut 15 500 m³ u.b.

   900,-

700,-

Volume felled '92   16 800 m³ u.b.

   800,-

600,-

Harvesting cost/m³ u.b.

200,-

Fixed costs

10 000 000,-

15 % silviculture

1 500 000,-

5 % roads

500 000,-

5 % buildings

500 000,-

75 % administration

7 500 000,-

2. Break-even point

Total turnover   =   15 500 * 900   =   13 950 000,-

Total cost   =   15 500 * 200   +   10 000 000   =   13 100 000,-

Break-even point   =

13 100 000 900

=   14 555 m³ u.b.

3. Fixed cost recovery

Volume felled

m u.b.   =

Fixed costs
Ø price - harvesting costs

=

10 000 000 900 - 200

=   14 285 m³ u.b.

4. Fixed cost recovery with Ø price/m³ u.b.

Ø price   =

Fixed costs
Planned cut

=

10 000 000 15 500

=   645,-

5. Admissible fixed cost with 0 profit

K' fix   =

Planned cut * (Ø price per m u.b. - harvesting costs)

=

15 500 * 700

=   10 850 000,-

K' ' fix   =

15 500 * (800 - 200)

=

9 300 000,-

6. Break even point (volume felled)

Total cost

10 000 000,-

Variable cost

16 800 * 200

3 360 000,-

Total

13 360 000,-

13 360 000
      800

=

16 700 m³ u.b.

Receipts 100  *  600

=

60 000,-

Total results of a forest enterprise according to volume felled

1989 - 1991 (A.S./m³)

Table 4

Results of forest enterprises related to volume felled

1989

1990

1991

RECEIPTS timber

minor prod.

other

915.79

5.23

0.33

964.30

2.78

4.01

887.72

4.79

3.68

 

+921.35

+971.09

+896.19

     

EXPENSE fixed

timber harv.

269.27

220.53

172.27

243.56

501.89

251.53

 

-489.80

-415.83

-753.42

       

PROFIT

+431.54

+555.26

+142.77

     

calculated interest

22.98

13.07

29.25

management earnings

7.36

4.24

0.00

depreciation

19.12

11.80

25.45

 

49.46

29.11

54.70

       

CASH-FLOW

+481.00

+584.37

+197.47

INVESTMENTS

- 16,40

- 7,22

- 18,17

INCOME

+464.60

+577.15

+179.30

6. MANAGEMENT PROCESS

6.1. Formal structure

Management is a functional (i.e. oriented to certain fields and contents) process, that is, a sequence of management-relevant decisions and actions.

Figure 4. Phases of the management process. Source: Wild, 1982

The formal structures of the management process can be demonstrated by means of a model. The management strategy should be the immediate solution of problems in this process.

6.2 Management fields and instruments

Management areas are problem areas; management instruments are methods used by managers in individual enterprises to identify and solve problems.

A comparison of enterprises partly shows great differences in the concrete management process and the actually applied management instruments. However, on the basis of equally similar problem areas, generally useful basic patterns of the connection between management areas and management instruments can be found.

The following table shows a general survey of the major aspects without going into details regarding management instruments. This survey should also reveal strong points and weaknesses of enterprises and managers with a view to profit-oriented management of forest enterprises in individual cases where there is an urgent need for basic and advanced training.

Table 5

Management areas, management instruments

Management areas

management instruments

Production

(biological, technical)

forest management

planning of operation system

medium and short-term implementation

planning (annual planning)

analysis of environmental compatibility

Means of operation

procedural planning

financing plan

investment calculation

analysis of environmental compatibility

Organization and personnel

organizational structure

planning of personnel demands

organizational development

management concepts and means

job evaluation

Management of income,

costs and gains

accounting

cost accounting

financial planning

liquidity planning

analysis of break-even point

controlling

marginal analysis

wage system

Sales - marketing

analysis of business scope

planning of sales, proceeds, profit

financial - liquidity planning

security of quality

public relations

Information system

information analysis

formalization degree

technologies

information, cost/benefit analysis

Overall management

development of strategies

guiding principles

entrepreneurial culture

integration of partial plans

financing

liquidity, budgetary planning

controlling

profit policy and taxes

public relations

This survey also reveals that a series of instruments are believed to be problem solving in various management areas. This and other findings show the interrelation between all management areas. Many managerial mistakes are caused by an insufficient consideration of this phenomenon, which is frequently found in organized systems.

The management areas listed can be summarized in two major groups:

1. Subject-oriented management such as financing, production, etc.

2. Person-oriented management, such as personnel development, management concepts, etc.

Under item (2) the specific problem fields of personnel management are: motivation, management style, management partition and personnel administration.

Since it is generally believed that the personnel of an enterprise is a key factor for profitability, these issues have to be taken into account in a profit-oriented management of forest enterprises. The frequent attitude that personnel is only a cost factor is extremely one-sided and therefore a priori contradictory to the strategy of a sustainably profitable management.

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