Five Characteristics of Troubled Firms!
John C. Stewart, Executive Director, NPRC
NPRC maintains the largest and most accurate data base in the printing industry, especially when it comes to key financial ratios. Just like Farmers Insurance Company that notes, “We know a thing or two because we’ve seen a thing or two,” we feel the same way when it comes to knowing what works and what doesn’t work in the printing industry!
So we thought we would provide five key attributes that really help to distinguish between the profit leaders and the profit laggards in our industry. For some readers, one or more of the practices noted below will be almost “second nature,” while others will either skip the advice entirely, or rationalize why that characteristic doesn’t apply to them.
(1) Monthly Financial Statements – There’s no question about it – troubled firms are the least likely to receive and analyze monthly financial statements. Some owners appear to go through the motions of getting financial statements, but then rarely take the time to really look them over! Some of the most troubled firms I know are likely to go months without obtaining a current profit and loss statement or a balance sheet.
Successful owners are far more likely to spend at least a couple of hours each month going over various expenses and ratios, using a yellow highlighter to denote areas that need work. Every owner should have at their finger-tips key ratio goals for categories such as payroll, cost of goods and overhead expenses. Note that “payroll” should include all direct and indirect payroll expenses, but should exclude that attributed to a single owner. Successful and profitable owners can typically quote these key ratios, while less successful printers end up making wild guesses.
If you have no idea what the “top” companies in this industry report for these key expense categories then you need to make a small investment and purchase the latest Financial Benchmarking Study from NPRC. This report is all about how to increase your profitability. The Executive Summary by long-time industry guru Larry Hunt is by itself worth ten times the price of this report. To purchase, visit the NPRC Bookstore.
(2) Low Productivity as Measured by SPE – How many employees, including working owners, does it take to produce $XXX in sales. This critical ratio is one of the simplest of ratios to calculate in our industry, and yet it is also the most telling as well!
To calculate your SPE, divide total annual sales (actual or projected) by the total number of employees (including all working owners and partners) required to produce those sales. Yes, that includes outside sales reps whether or not they receive a salary. The more accurate your numbers the more valuable the resulting answer will be. Count part-time employees proportionately. If an employee averages about 20 hours per week, then count he or she as a one-half or .5 employee.
In a recent survey of approximately 210 printing firms, the SPE ranged from 20 firms reporting an SPE of less than $100,000 to 52 companies reporting an SPE of $155,000 or more. To put this in some “real world” terms, let’s take a look at two firms – both producing $700,000 in sales.
• One $700,000 firm requires/reports using 7 employees to produce its sales – An SPE of $100,000! Plain and simple, a firm reporting an SPE of $100,000 or less is simply over-staffed, as well as most likely inefficient as well. That SPE number is also significantly below the industry average of approximately $135,000! Owners of firms with below average SPEs are likely under-paying themselves due to excessive payroll. Low SPEs also tend to impact the value of a firm when it comes time to sell – if it sells at all!
• While a second firm reporting the same $700,000 in sales produces its sales with only 4.5 employees, or an SPE of $155,500. Although the SPE calculation totally ignores what employees are actually paid, a closer examination tends to indicate that employees working for high-SPE firms also tend to be paid significantly higher and also tend to be far more efficient and talented at what they do.
(3) High Payroll Costs – Unfortunately for many owners (it’s not always their fault), total payroll costs are sometimes hard to find on the typical profit and loss statement. This is often the fault of CPAs and accountants, as well as in-house bookkeepers, who fail to consolidate payroll expenses under one heading.
We often see direct payroll expenses under a payroll heading, but then discover that other related payroll expenses such as health insurance, payroll taxes and unemployment taxes are listed below under overhead expenses. Ideally, you should be able to look at your financial statements and quickly determine the total amount spent each month, as a percent of sales, for total payroll, excluding your own payroll, taxes and benefits.
The previously mentioned Financial Benchmarking Study contains some very reliable payroll ratios, including ratios based upon various annual sales categories, but also a quartile report which provides total payroll for the top 25% firms (in terms of profitability) and compare that ratio against the bottom 25%.
If your total payroll expenses are in the 32-34% range or higher (excluding your own payroll) you have a serious problem on your hands, at least in comparison with the rest of the industry. On the other hand, if your total payroll is in the 26-28% range you should pat yourself on the back because those ratios would be considered outstanding in this industry.
P.S. Payroll is consistently the single largest expense in operating a modern-day printing firm, and has been the largest expense ratio for more than 35 years. If you fail to proactively address this category, it really won’t matter much about steps taken elsewhere on your financial statements.
(4) Failure to Monitor Industry Pricing – Our industry is somewhat unique in that it has available to it so much in terms of valuable financial and pricing data – information that can really help a firm compare its performance and pricing practices against others in the industry. Without many of these studies, a printer could easily find himself misled by the comments of customers who sometimes remark, “I like what you folks do, but your prices are just too high sometimes.”
How is a printer to react when he hears something like that? Well, before you go off and start lowering all your prices, or instituting more discounting, there are at least two things you can do. The cost will be relative small and the ROI could be huge, in terms of both raw dollars as well as peace of mind.
First, if you’re concerned about pricing and where you stand compared to competitors you could visit the NPRC site and check-out an article we posted about 15 months ago titled, “Hiring Someone to Shop Competitors.” Click here to read the article. Conducting a thorough, detailed survey of competitors can be a real eye-opener, but you can’t do it on the cheap. Hire someone, as the article explains, and do it right.
I have seen some top-notch surveys conducted by printers I know and every time I see the results they tend to refute many of the myths regarding pricing within individual markets – even in very small markets where only 5-6 printing firms exist.
Second, visit the NPRC Bookstore and check-out the list of pricing studies we have published in the past 24-36 months. The pricing data we report is extremely accurate with an average margin of error of +/- 4% or less for most items. And please don’t dismiss this suggestion by saying that most pricing is local and not national and therefore what we report may not have any bearing in your local market! Wrong, wrong!
We can report with absolute certainty, based upon hundreds of individual market surveys, that pricing tends to vary far more within your own individual market than it does from one section of the country to the next. We can report with great assurance that while the national average price for a simple product such as 1,000 #10/24 envelopes printed in reflex blue (no bleeds) may vary by no more that +/- 4%, prices for that product within an individual market can easily vary by as much +/- 35-40%. +/- of the reported average price!
We just checked pricing on this product and even after eliminating outliers, the pricing for 1M envelopes varied between a low of $104 and $280, with an average price of approximately $158. that type of variation occurs even within the smallest of markets.
(5) Tolerating “Bad Apples” – With more than 400 on-site, individualized consulting visits under my belt, I can report that I can’t recall visiting a mid-size or larger firm (5 or more employees) that didn’t have within their midst at least one “bad apple.”
Ironically, while it was not that difficult for me to spot the bad apple, the owners were often totally oblivious of the bad apple, or the real-world impact that the bad apple was having on the rest of the staff. Not surprising too was the fact that virtually all of the remaining employees could name the ‘bad apple” in the company, agreeing almost 100% of the time on who that employee was!
Rest assured, your employees are uniquely equipped to identify who the bad apple is and how he or she is impacting the profitability of your firm. They know it, even if you don’t! Unfortunately, even the good employees, just like the owners, sooner rather than later start making up excuses for the bad apples, and why they continue to be retained.
“Bobbi’s a single mother who brings her personal problems to work and shares them with other employees as well as our customers! Sometimes it’s like a soap opera out there in the shop. As a consequence, a lot of time is wasted.”
“Martin is a recovering alcoholic but every once in awhile he goes off the wagon. We always seem to have our fingers crossed as to whether he will show up, especially after the holidays.”
“Steve isn’t the most reliable. However, when he shows up he is very productive, but I can’t always count on him. There is always something going on in his life that interferes with work.”
“Cathy is incredibly talented, but has a terrible personality when it comes to dealing with customers, and I’m at my wits end in how to deal with the situation. I’m embarrassed to admit that I have been putting up with this for more than seven years!”
“Mike is probably one of the best operators I have when it comes to knowing the equipment, but he makes a lot of mistakes as well. He’s just not very good when it comes following procedures.”
I could go on offering up a dozen of the more popular excuses I have heard over the years when it comes to tolerating employees that in any other more profitable firm would have been terminated months if not years ago. I guess that’s the difference, among many, between how the “profit leaders” in our industry manage their businesses as opposed to the “profit laggards.”
If you have any questions about this article don’t hesitate to drop me an email at firstname.lastname@example.org.