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Chapter 6. Statement Analysis > Summary - Pg. 123

Statement Analysis 123 The result, if Anderson's assumptions pay off, is that she can actually increase total headcount and cause New Way Tours' EBITDA to turn positive, even during its traditionally money- losing summer months. The assumptions involved are optimistic--particularly the notion that making some em- ployees full-time salespeople will double the per-employee gross profit. But even if the per-employee increase in gross profit is only 50%, the results would increase the profit in good months, and re- duce the loss in bad months. NOTE This sort of headcount analysis is closely related to the concept of leverage , which is dis- cussed in greater detail in Chapter 14, "Planning Profits." The common ground between leverage and common-sizing on the basis of headcount is that you seek to keep certain costs constant as variable revenues increase. In large corporations, common-size analysis on the basis of headcount is done frequently and is especially tricky. It often happens that one division reduces its headcount so as to decrease its expenses, hoping that as it does so its revenues will not suffer. It can also happen that the employees who leave that division find employment in another division of the same large corporation: usually, one that is not currently under pressure to reduce its expenses. The net result is that, although one division might improve its profitability through a reduction in expenses, another division's profitability suffers because of an increase in expenses. Then, the corporation, considered as a whole, has probably not improved its profitability. However, it has managed to disrupt people's lives, and probably to increase costs, such as those for training, that do not directly produce revenue. Therefore, when divisions report that they have reduced headcount and consequently increased their profitability, it is incumbent on them to estimate the effect of doing so on the corporation as a whole. Although this estimate is often a difficult task, it is a necessary ingredient of an accurate