Working capital, investment payback, scale and benchmarking

A sawmill's money is tied up in logs, lumber drying and finished stock, and in long-lived equipment. This lesson covers the cash side: stock, investment appraisal, economies of scale and how to benchmark.

Working capital

Cash sits in three places: the log yard (bought ahead to secure supply), work in progress (green lumber going through drying) and finished goods. Carrying cost is financing rate × stock value × time. Stock also carries price risk: inventory gains or losses can dominate reported profit in volatile years, one reason Finland's 2021 median net margin (14.8%) looked so unlike the other years.

Worked example (illustrative numbers, not market data). The mill of lessons 3 and 4: 50,000 m³ sawn a year, finished stock at an invented cost value of 250 euro/m³, financing at 6%.

• Annual cost value of output: 50,000 × 250 = 12.5 million euro.
• 60 days of finished stock: 12.5 million × 60 / 365 = 2.05 million euro.
• Interest per year: 2.05 million × 6% = 123,000 euro, more than the whole base profit of 100,000 euro.
• Every 10 days of stock is 12.5 million × 10 / 365 = 342,000 euro of capital, about 20,500 euro of interest a year.

No verified benchmark for inventory days in European sawmills exists in the sources.

Investment appraisal

Match the investment to the constraint. Scanners, optimisers and sorting target recovery and value; kilns and heat recovery target energy. Capacity expansion needs log supply secured at a price leaving a positive contribution.

Worked example: simple payback (illustrative numbers, not market data). A scanner and optimiser upgrade costs 1.0 million euro and adds one point of recovery. One point of recovery on 100,000 m³ of logs is 1,000 m³ more sawn timber. Each extra m³ sells for 260, costs about 29 more in energy, consumables and logistics, and displaces about 24 of residue revenue, so the net gain is 260 - 29 - 24 = 207 euro per m³. Annual gain 1,000 × 207 = 207,000 euro; simple payback 1,000,000 / 207,000 = 4.8 years.

Payback is a screening tool, not a decision rule. It ignores later cash flows and the time value of money. With asset lives of 15 years or more, net present value (NPV) and internal rate of return (IRR) across a full price cycle are better guides.

A sensitivity case from Sweden

A Swedish student report (Hoflund and Snögren 2011, SLU) built a hypothetical saw line, stating the figures are not literal. Assumptions: investment 150 million SEK, 15-year life, 10% discount rate, about 416,667 m³ of logs and 200,000 m³ of sawn output a year (yield 200,000 / 416,667 = 48%), logs at 700 SEK/m³, sawn timber at 1,600 and by-products at 400 SEK/m³. NPV was about 158 million SEK, IRR about 25.9%.

The lesson is the sensitivity: NPV falls to zero if the log price rises by only about 49.8 SEK/m³, which is 49.8 / 700 = 7.1% of the baseline, or if the sawn price falls by about 104 SEK/m³. The two thresholds are the same event seen from two sides: log cost per m³ sawn is 700 / 0.48 = 1,458 SEK, and a log increase of 49.8 raises it by 49.8 / 0.48 = 104 SEK.

Economies of scale

Larger mills tend to have lower unit costs. A Swedish study (Månsson 2003) found average scale elasticity above 1; in North America (ResourceWise 2019) the largest mills (300 to 500 million board feet a year) were not substantially cheaper than other large mills (175 to 300 million). Log supply radius, haulage and single-site risk offset scale at some point.

Benchmarking: four rules

• Define each KPI exactly (log volume basis, shift pattern, residue treatment).
• Compare like with like (product mix, log size, species).
• Look at distributions, not averages.
• Run a gap analysis: what is closing half the gap to the best quartile worth per m³?

Start with internal benchmarking (shifts, lines, periods), then peer groups.

Financing

Lenders look at debt service in a downturn, not an average year; a plan that works only at the top of the price cycle is not bankable. No general sawmill support scheme was verified; check current call documents.

Key points

• Carrying cost = rate × stock value × time; in the illustrative mill, 60 days of stock cost more than the base profit.
• Simple payback is 4.8 years in the scanner example, but payback is a screen; use NPV and IRR over a full price cycle.
• In the Swedish fictitious case, a 7.1% log price rise (about 104 SEK per m³ sawn at 48% yield) wipes out NPV.
• Benchmark with exact definitions and like-for-like samples.