Safety Pays!
Estimating the Financial Impact of Accident Prevention Investment
Employers may want some justification by comparing the costs of a potential accident against the investment in prevention measures. They may require you to calculate the savings if the recommendation is approved and the sales volume required to cover the costs if an accident occurs. Let's use the scenario below to discuss a method to do this.
Scenario
ABC Contractors is a roofing company that has suffered several fall accidents over the previous two years. We want to convince the company to approve a one-time investment of $10,000 that provides training and fall protection to help prevent a serious injury accident. To do that, we need to calculate the return on investment (ROI), the savings if the investment is approved and contrast the savings with the sales volume required to pay if an accident occurs. Based on OSHA Safety Pays Program Estimated Cost data, the total accident costs for a serious injury is estimated to be $100,000.
To justify the investment, we need to contrast the impact of the accident on profit against the investment in accident prevention based on the given information:
- Gross Sales: $10,000,000
- Gross Profit: $600,000
- Net Profit Margin: 6% (.06)
- Estimated Total Accident Costs: $100,000 ($50,000 Direct Costs; $50,000 Indirect Costs)
- Investment: $10,000
Recommendation Approved
What is the future Return on the Investment (ROI) a $10,000 investment is approved and future similar accidents are prevented?
- Return on Investment = (Total Accident Cost / Investment) x 100 = Return on Investment
- Return on Investment = ($100,000 / $10,000) x 100 = 1000%
The high ROI illustrates the substantial financial benefits of investing in accident prevention training that prevents future accidents.
What is the impact of the investment on the company's net profit margin if the recommendation is approved?
- Net Profit After Investment = Net Profit Before Investment - Investment
- Net Profit After Investment = $600,000 - $10,000 = $590,000
- Net Profit Margin After Investment = $590,000 / $10,000,000 x 100 ≈ 5.9%
The investment has little impact on the company's profit margin with a decrease of only .1% (6% down to 5.9%).
What will be the additional sales volume required to cover the $10,000 investment.
- Additional Net Profit Required = Total Accident Costs / Net Profit Margin Before Accident
- Additional Net Profit Required = $10,000 / .06
- Additional Sales Volume Required ≈ $166,667
To cover the cost of the accident, the company would need to generate approximately $166,667 in additional sales.
Recommendation Not Approved
What will be the company's profit margin if the recommendation is not approved?
- Net Profit After Accident = Net Profit Before Accident - Total Accident Costs
- Net Profit After Accident = $600,000 - $100,000 = $500,000
- Net Profit Margin After Accident = ($500,000 / $10,000,000) × 100 = 5%
The company's profit margin will decrease by a full percentage point (6% down to 5%) if management does not approve the recommendation.
What will be the additional sales volume required to cover the $100,000 cost for the accident.
- Additional Net Profit Required = Total Accident Costs / Net Profit Margin Before Accident
- Additional Net Profit Required = $100,000 / .06
- Additional Sales Volume Required ≈ $1,666,667
To cover the cost of the accident, the company would need to generate approximately $1,666,667 in additional sales.
These calculations emphasize the financial benefits of the proposed investment in accident prevention training and the potential negative impact of not making the investment.
Knowledge Check Choose the best answer for the question.
1-13. If the employer makes an investment of $1,000 to correct a hazard that is certain to cause an accident that will cost the employer $28,000, what will be the Return on Investment (ROI)? Hint: (COST ÷ INVESTMENT) X 100
You forgot to answer the question!