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Identifying risks through the eyes of our clients

An analysis model heralds a new approach to performance and risk assessment.

One of UHY’s member firms, Govers Accountants/Consultants, was founded more than 80 years ago in The Netherlands in the very heart of what is nowadays called the Brainport region, a hotspot within south-east Netherlands’ top technology zone. 

There, sophisticated supply chains keep products moving in high tech, health, automotive and food industries. The companies that operate these supply chains are well represented in the Govers client portfolio.

“The leading thread that has always run through the history of our firm is the recurring question about the story behind the success of companies: what is it that makes the difference between poor, good and great performance?" asks partner Paul Mencke.

“What do the annual accounts of companies tell about the reasons behind companies’ performance? Are there any universal patterns hidden in the financial data, and what lessons are there to be learned?"

Faced with these questions, 30 years ago he and fellow partners developed their own unique approach, known as the financial analysis HARR® model. 

This model rearranges the profit & loss accounts of companies – and often produces surprising perspectives. Managing partner Peter Dubbers says the firm’s model “enables us to make the analysis very quickly, while supporting the outcome of the analysis with a wide variety of business knowledge".

To appreciate the model, it’s important to explain its conceptual aspects. “We make a distinction between the transaction activities of the company on the one hand, and the supporting activities on the other hand," says Mencke.

Figure 1 shows the conceptual distinction within companies between the transaction area (where the primary activities take place) and the organisation area (supporting activities). The logistic movements within the company are shown in yellow arrows. The orange-coloured arrows show the opposite flow of money.

The model shows the divide between primary and support activities of companies; stresses the value-added margin as a key element in business; and shows the connectivity of companies with their suppliers and their clients.

The transaction area is the place to discuss topics like the strategic position of the company in the supply chain, stock control, cycle time reduction, cash conversion, and reduction of waste.

The organisation area of the company is the place to focus on productivity, a lean approach, production automation, robotising and 24/7 concepts with unmanned hours. 

While the ratios within the transaction area differ per industry and per company, Mencke found through empirical research that the ratios within the organisation area follow more universal rules. Labour costs have a natural maximum of 60% of the value added, and both the cost of capital expenditure ‘Capex’ and ‘Other’ costs have a natural maximum of 20% of the value added. 

As an example of the model, Mencke compares the 2007 figures of two European airlines. Air France-KLM as an established party; Ryanair as the challenger.

Rearranged in the HARR® model format, the analysis shows the higher productivity of Ryanair:

1. 9,679 passengers per employee per year at Ryanair, versus only 715 at Air France-KLM

2. The less overhead (‘point-to-point routes’, instead of ‘from anywhere to everywhere’), identical cost of capital expenditures and eventually a huge gap in profits.

Dubbers points out that the cost of capital expenditures includes both on- and off-balance investments.

“Our approach rightfully ignores the question whether tangible fixed assets are bought or rented", he says.

The model helps UHY’s Dutch member firm deliver value for its clients. “By looking at our clients through our clients’ eyes, we identify risks that we wouldn’t discover through a standard audit approach", says Mencke.

“With the high level of wages in our country, Dutch companies can’t compete on labour costs anymore. It is very important to develop business formats with high labour productivity.“

“By using our HARR® analysis model, we are able to visualise the financial results of the introduction of production automation, robotising, 24/7 concepts. HARR® can be used to review the separate results of specific years. 

“But the approach is even more powerful when used on the results of a longer period to identify trends, or when used to compare companies as part of merger and acquisition processes."

HARR® is an acronym for the Dutch words ‘Huur’ (Rent), ‘Afschrijving’ (Depreciation/Amortization), ‘Rente’(Interest) and ‘Resultaat’ (Profit).