Is Your Cooperative Understaffed?

At a recent board meeting, the question was raised of whether the Cooperative was “understaffed?” Not an easy question to answer, and it is only half of the question. The other half is: “How productive is the personnel group we employ?”

When considering whether or not your cooperaitve is understaffed, take a look at the coop’s profitability. As we discussed last quarter, if you are generating adequate local savings, you probably have the right number of employees and those employees are being productive. But we can dig a little deeper by examining a ratio I often discuss at board meetings – the labor income ratio.

The labor income ratio is an efficiency ratio that measures how well things are done, in this case personnel performance. It is computed by dividing personnel costs (salaries and benefits) into gross revenue generated. The lower the ratio, the better. It’s a simple concept, but difficult to manage.

There are several factors that can affect your ratio compared to other cooperatives. One is sale mix – grain and supply. Cooperatives with a higher percentage of grain business are less labor intensive and usually report a lower ratio than a cooperative with a higher mix of agronomy business and services. Petroleum businesses usually report the highest ratio. Smaller companies usually have higher ratios than larger ones because they have less volume to spread the cost over. Other factors can also affect this ratio. The drought this past year played a significant part in the ratio results for recent year-end closes. Fewer bushels to sell meant less margins generated. Overtime hours may have been reduced, however you can’t just reduce and rehire staff as you need people, so a majority of the personnel cost remained. The key to a cooperative’s success is the people you employ.

Generally, the rule is that it takes a ratio of 42% to break even locally. As that percentage decreases, local savings increases. Again, the concept is simple – more revenue generated with less personnel cost means higher profitability. Achieving that result is a challenge. A general guideline range is 30% - 40%, with grain cooperatives at the lower end and cooperatives with a bigger supply mix at the higher end. The following table shows the percentage of personnel cost to revenue that our clients have averaged over the past three years:

•Sales up to $50 million = 43.86%

•Sales $50-$150 million = 33.44%

•Sales $150-$300 million = 29.59%

•Sales over $300 million = 34.18%

Personnel costs are a big investment every cooperative makes annually. Getting the most from that investment is a great challenge. If you would like assistance in analyzing the labor income ratio for your cooperative and discussing ways to make improvement please let us know.