Value added audit at plant manufacturer Michels
by Martin Jürgens, Dr. Götz-Andreas Kemmner, Hans-Peter Jachertz
Value creation audits are used in insolvency and restructuring projects to determine the real earning power of a company or project. In the case of the insolvent automotive supplier Michels, the value of an ongoing major project was determined as at the date of sale. However, the value added audit is not only suitable for restructuring cases: Healthy companies can use it to check the profitability of ongoing major projects and their own project cost accounting. If credit lines have to be provided for project financing, a value added report provides detailed information on the technical and commercial status of a project.
Creditworthiness is often based solely on the balance sheet. Companies are a bargain on the stock market if the net asset value in the balance sheet exceeds the market value. Auditors examine whether the commercial regulations that result in the balance sheet are correct. However, the value of a company is not only determined by its substance, but essentially by its future prospects. Venture capitalists are already more familiar with this view: in their investments, which incidentally rose again by 50% from Q1 to Q2 2003, they rely primarily on the so-called emerging markets (such as the former telecoms and internet…) in harmony with market research results, but in the seed phase there are often more soft than hard facts available. Really hard facts are provided by the value creation test, which is standard in insolvency and restructuring measures. However, it is also ideal for healthy companies of any size: it ensures a reliable profit calculation in the cost jungle of large-scale projects or complex production processes through fundamental stocktaking in real production operations and sound analyses down to the fitter’s time sheet and uncovers additional profit potential through optimization measures. In the Michels restructuring case, we carried out such an investigation on behalf of the insolvency administrator. In normal day-to-day business, it serves as an expert opinion on creditworthiness or for assessing the commitment of venture capitalists, who are currently increasingly looking for SMEs with interesting projects and products due to their poor past experience: As many as 45% of the most important VC companies are currently flirting with investments in this area or are already actively involved. However, entrepreneurs who are about to make or are making major investments and do not require additional capital also benefit from these analyses: when profit margins are low, it is important to know that you are always operating in the green. In the Michels case, a project value in the eight-figure range was determined as of the date of sale. The order value of the overall project, which was approximately four times as high, was compared with an extrapolation. It turned out that the currently achievable profit margin was 60% lower compared to an initial projection in summer 2002. With these figures, creditors and acquirers were able to complete the deal
The value added audit at Michels in detail
The project to be evaluated comprised 19 automated production cells for an automobile manufacturer. Assemblies such as side wall, floor and engine compartment structural parts for a new model are to be manufactured in them. Pressed parts are automatically fed, moved, clamped, welded and glued. In addition to completely new cells, existing production cells are also being converted in parallel with the production of the current model.
The challenge for internal project controlling
Due to simultaneous engineering throughout the entire forward sourcing chain, ongoing change requirements for the assembly parts in terms of shape, material and coating constantly lead to changes in the design of the new and existing cells. The need for change is further increased by the requirement to be able to produce not just one part in a cell, but different variants of this part. Countless change requests led to new project calculations up to the valuation date, which always consisted of a mix of existing and new calculation bases and were always in flux. Controlling the figures was made even more difficult by the fact that the need for change had to be coordinated not only between the car manufacturer and Michels, but also with numerous upstream suppliers. At the same time, project controlling had to disentangle the close networking between different project and specialist departments so as not to get caught up in this network itself. All in all, many sources of error can arise here. For this reason, the plausibility and accuracy of the existing calculation had to be checked. This is common in restructuring cases. However, this also pays off for healthy companies, because we always find “blunders” in calculations. At Michels, they amounted to around two million euros, which were uncovered together with Controlling and Project Controlling. In our experience, deviations of this magnitude are not unusual in projects of this size. It can therefore be assumed that similar deviations can be detected in comparable projects.
Recording the status quo and project evaluation
Parallel to the plausibility and accuracy check of the calculation, the technical project status on the construction sites was reviewed in order to ultimately determine the remaining project costs. The extrapolation was based on the actual costs of the project. For this purpose, it was necessary to clearly delineate which commitments to suppliers had already been entered into. The value normally taken from the ERP system had to be scrutinized in the Michels case, because material receipts become actual costs when goods receipts are posted from commitments, whereas services only become actual costs when the invoice is posted (possibly weeks later). This makes it difficult to delimit and thus evaluate the project on a specific date. The evaluation of the project status was made more difficult by the fact that some services had already been provided by suppliers on the construction sites for which no offer had yet been submitted, i.e. which had not even been booked as commitments but should have already represented actual costs. Finally, due to various insolvency-related events, two separate clients were being run in the SAP system, which made the audit even more difficult.
While at Michels, as is usually the case, the commitments in the area of controlling were monitored by business people in SAP, the extrapolation in the Excel world of project controlling was carried out by engineers. Communication between technicians and business people, which is not always easy anyway, led to a major break in the flow of information. In Michels’ case, however, important information from both systems had to be merged, but they did not fit together.
The difficulties described above are just a few examples of the problems that can arise when calculating complex, fluid projects – certainly also in healthy companies. However, since a value-added audit costs far less than the cost deviations detected in good time, such an investment makes sense in ongoing projects in order to take countermeasures in good time. Once the project is completed, you usually have to be satisfied with the final costing. The necessity and cost-effectiveness of using a value-added audit increases with the size of the project. In order to recognize whether a company has problems with project cost accounting or not, a short audit, which we have developed on the basis of our experience, helps. If you have to laboriously gather information from several departments to get your figures, this is already an important indicator that you have problems with project cost accounting and may urgently need a value added audit. But even if you can determine the supposedly real value of your current project at the touch of a button, you should not feel too confident that your calculations are correct.
Many profitable projects have already been lost in the no man’s land between business management and technology.
