$130,000 SPE – The Magic Number!

By John Stewart, Executive Director, NPRC

Is your firm going to survive or prosper in the next five years, or will it become another mediocre firm clinging to a few “old timer” customers while eagerly awaiting retirement, forced or otherwise?

The answer may very well be found in your current sales per employee (SPE)! Meet or exceed an SPE target of $130,000 and you’re likely to be one of those firms that survive and prosper. Allow your SPE to drop below that mark and you are likely going to face increasingly serious problems in the next few years.

First, let’s precisely define how to calculate SPE. Divide your total annual sales (actual or projected) by the total number of full-time equivalent employees, including all working owners, used to produce those sales. You’ll be wasting your time doing this calculation if you do not do it properly.

“Unfortunately, we also know of printing firms selling the same mix of products and services as our first example, that will often require 8 to 8.5 employees to produce that same amount of sales.”

SPE, more than anything else, is an important productivity ratio that indicates how many employees does it take to produce $XXX in sales. The converse is true as well. You can use SPE figures to estimate the annual sales you can expect X number of employees to produce.

As an example, SPE data we have available notes that $1,000,000 sales can be produced by an employee team of 6 to 6.5 employees. Unfortunately, we also know of printing firms selling the same mix of products and services as our first example, that will often require 8 to 8.5 employees to produce that same amount of sales.

Properly Counting All Employees

As part of the calculation, you need to count all “employees” whether or not they are on the payroll. Do not rely strictly on your payroll reports to make this calculation. An example of this would be where you have a husband and wife both working in the business but where only one of them actually draws a salary. Yes, you should also include outside sales representatives as well as in-house bookkeepers. If your father retired from the business but now comes in and works about 20 hours a week then he too should be counted as a 1/2 or .5 employee.

You must accurately account for all part-time employees. If a graphic artist or bindery operator consistently works 30 hours per week they would be counted as a ¾ or .75 employee. On the other hand, if you have an employee that consistently works 50 hours per week then they would count as 1.25.

The only exception to the process for counting employees occurs when we are dealing with working owners. The reality is that owners are typically expected to work 45-50 hours because they are in fact the “owners.” However, in situations where one or more owners or partners, feel compelled or are obligated to work 60-70 hours or more each week then it is time to start counting them as more than just one “body.” If in fact an owner is consistently working in the 60-70 hours per week range then we suggest they should at least be counted as 1.5 employees!

Industry Overview of SPE

Below is a broad overview of sales per employee statistics in the printing industry. Whether or not our numbers reflect the industry at large is subject to debate. We speculate that our industry surveys tend to attract slightly more successful printing firms than exist at-large, and thus our average and median numbers may not be reflective of the industry. Nonetheless, the numbers clearly indicate that SPEs of $130,000 and higher are easily achievable, and we can’t help but wonder why so many owners appear to be willing to tolerate SPEs of $120,000 and below.

If your firms is indeed struggling with SPEs in the $100,000 to $120,000 range you need to make “improving your SPE” a major goal for 2019-2020!

Counting Owners Properly

On the other hand, an owner who consistently works 55-65 hours we would suggest that a more accurate SPE calculation might result if we count the owner as at least a 1.25 employee. Yes, there is some subjectivity in the calculation when dealing with owners and we will just have to live with that.

Nonetheless, SPE is the most frequently tracked productivity ratio in the printing industry and we have been tracking and recording it for more than 25 years. Virtually every pricing, productivity and financial ratio study published during this time has tracked that ratio.

SPE QUARTILES – WHERE DO YOU RANKWe calculated the sales per employee of all participants based upon the information provided, and then ranked the data from high to low. Next, we divided the list into four approximately even breakouts or quartiles. Last, we averaged the SPE for each quartile breakout. The results are depicted above. If your SPE falls into either the bottom (red) or the 2nd quartile ((gold), your SPE number falls into the bottom half of the industry and should be a source of  concern. On the other hand, if your SPE is in the $130,000-$175,000 range you deserve a pat on the back. (This chart and caption appeared in the 2019-2020 Sweet Sixteen Digital Color Pricing Study published by NPRC.)

“We estimate that close to 50% of the industry (see graph above) is failing in terms of SPE, and many of those firms will most likely not make it another five years.”

We estimate that close to 50% of the industry (see graph above) is failing in terms of SPE, and many of those firms will most likely not make it another five years. There is little or no chance for firms with SPEs of $115,000 and below to pay the owners a reasonable salary and generate the excess earnings required to maintain or boost value as well as provide the funds required to finance upgrades in equipment. It just can’t be done with SPEs that low.

Higher Profits, Better Ratios

If your calculated SPE is $130,000 or higher it typically places your firm in the top two quartiles in the industry in terms of profitability. Printing firms in the top half of the industry generally report lower cost of sales ratios (30-26%) and lower payroll costs (28-30%). As a result of running leaner firms and better operating ratios, owners of firms in the top two quartiles report significantly higher owner’s compensation ratios in the 19-27% range.

Looking at the other side of the coin, we know that approximately 35-40% of the firms in our industry (based upon the feedback and results of our numerous industry surveys) report SPEs of $120,000 and below. That can be reaffirmed by examining the bar graph above.

Causes of Low SPE

There are many reasons for low SPEs, and we can only speculate for a few of them. Below is a brief listing of some of the causes we have encountered over the years as a consultant:

Build it and they will come – One cause of low and declining SPEs stems from firms acquire one or more highly productive pieces of equipment (like large, expensive and very productive digital printers or presses) only to maintain their current employee staffing. It is indeed rare these days to expect that demand will increase as the result of acquiring a new piece of equipment. The “Build it and they will come” approach is rarely an accurate assumption, at least in the short-term of 12-24 months. The original assumption in most cases is that the new equipment will produce more product than before with lower labor costs, and yet labor is rarely adjusted downward.

“…many of these owners fail to recognize the benefits that can be realized from new technology, especially as it relates to allowing them to reduce overall payroll costs.”

Failure to Invest – This is almost the exact reverse of the “Build it and they will come approach” noted above. Many owners continue to report and tolerate excessively low SPEs because they prefer to stick with what they know, rather than invest in new technology. They are fearful of new technology and often shy away from new investments in equipment, fearful of taking on new financial obligations. While the latter is a legitimate concern, many of these owners fail to recognize the benefits that can be realized from new technology, especially as it relates to allowing them to reduce overall payroll costs – i.e. produce more with fewer people! The number of small, medium and large firms that have reduced their offset press footprint and transitioned to 70-100% digital production continues to grow virtually every month. As a consequence, some have reported significant reductions in payroll costs.

The 80-20 Rule is another source or cause of low SPE ratios. There are many variations and applications of the often-quoted “80-20 Rule,” but one of the more common examples states that 20% of your employees cause 80% of the employee problems. That means in the typical company employing ten individuals, approximately two of those employees appear to cause most of the problems. Poorly managed printing firms tolerate employees that would never “make it” in more productive firms.  It is ironic that an educated outsider can often spot those “bad apples” within a few minutes or at most a couple of hours. How or why it is that owners continued to turn a blind eye to these employees and tolerate them year after year is beyond comprehension.

Tolerating Mediocrity – This may indeed sound cold-hearted and that may indeed be true, but time after time I have visited firms where there was a great reluctance to terminate employees that by any reasonable measure should be terminated. The owners typically recognize the need when it is pointed out to them, but they are rarely willing to act. By the way, most employees in these companies also recognize the bad apples as well but they are most often reluctant to share their beliefs with management.

As always, we encourage your feedback. Send us your experiences, especially if you have increased your overall productivity and SPE. We’d love to hear from you. We can of course treat any stories and tales you provide with 100% anonymity.

 

 

Characteristics of Leaders & Laggards

Learning to Distinguish Between The
Leaders & Laggards in the Printing Industry

By John Stewart, Executive Director
National Printing Research Council (NPRC)

I’ve been actively involved in this industry since the early 1980’s working with association such as NAQP, NAPL, NPOA and NPRC. I’ve published or co-published virtually every statistical study produced in our industry, ranging from wage and benefits and pricing studies to studies dealing with compensation practices for outside sales reps to what I consider the most valuable of them all – the biennial financial benchmarking studies.

My expertise as an observer of our industry’s history also stems from the fact that I have conducted more than 400 on-site consulting visits both in the U.S., Canada, Australia, Ireland and even Brazil. Most of these consulting visits were conducted in the late 1990s and early 2000s.

Ironically and to a large extent, I can still recall the physical attributes of almost every shop I ever consulted with as well as the major recommendations I made following the visit. As the popular Farmers Insurance commercial suggests, “We know a thing or two because we’ve seen a thing or two.” I truly have seen it all, but the one more humorous visits I can recall was a consulting visit to a printing firm in Brazil where I encountered press operators using gasoline as a press wash while smoking cigarettes.

Characteristics of Winners vs. Losers

With the foregoing out of the way, and hopefully having established some credibility with you the reader, I would like to share with you what I consider to be some specific characteristics that distinguish highly efficient and profitable firms from firms found at the other end of the spectrum.

Success or failure in this industry can rarely be blamed on cut-throat competitors, brokers, the local economy or even on employees.

I will note that, more often then not, the primary cause of failure in this industry falls entirely on the shoulders of the owners. Success or failure in this industry can rarely be blamed on cut-throat competitors, brokers, the local economy or even on employees. The blame belongs precisely where it should – The owner.

Monitoring Productivity via SPE

As many of the studies that I have published, it is shocking to see a histogram depicting sales per employee in our industry, and observing the fact that sales per employee (SPE) can range dramatically from a low of $80,000 to more than $200,000 at the high end.

Tell me your annual sales and the total number of employees (including yourself, partners and spouses) and I can closely predict where you will fall in terms of real profitability. SPE in turn will also provide a good indication of the ultimate value of your firm if  it was put up for sale tomorrow.

According to the just-released 2019-2020 Financial Benchmarking Study, (visit the NPRC Bookstore for further information about this study)the average SPE of our 177 qualified participants was $139,595. The median SPE was almost identical. Firm’s falling into the bottom quartile reported SPEs in the $119,000 range while those in the top quartile reported an average SPE of approximately $144,000.

It never ceases to amaze me how poorly some printers perform these days!

Owners of troubled printing firms constantly make excuses for poor performance. The solution for boosting and improving SPE is two-fold – Terminating excess or unproductive employees and boosting the firm’s overall productivity and efficiency.

Unfortunately, all I hear most of the time from owners of troubled firms is excuses, excuses and excuses. Owners are simply afraid to make changes and constantly rationalize as to why certain suggestions can’t be implemented at their firms. Offer specific suggestions for major improvements in their SPE and owners balk and claim, “It simply can’t be done at my company.” 

The truly sad thing is most of these owners will never, never change, and will ultimately end up closing their doors because they will never find a qualified buyer for their firm willing to pay them anything close to what they think their business is worth. In the best case scenario, many, many printers will end up closing their doors, selling off their equipment, and selling the customer list for mere pennies on the dollar.

Poor Financial Reporting

Profit leaders in our industry are far more likely to receive monthly financial statements, including a P&L and a balance sheet. Even more important than the statements themselves is how they are formatted.

No profit & loss statement should come across your desk without a column of “expense ratios” appearing directly to the right. If total cost of goods (COG) is $440,000 I want to immediately know what percent of gross sales does that figure represent? Is it in the 31-32% range (that’s bad) or is it 29% or lower (that’s good).

Comparing the performance of leaders against laggards in our industry.

Far more critical is taking a look at total payroll expenses (excluding what is paid to a single working owner). The most financially troubled firms in this industry report payroll ratios of 34-38% and higher, while the best performers in our industry report keeping payroll ratios in the 25-29% range.

Check-out the percent of owner’s compensation being withdrawn in the industry.

If your bookkeeper or CPA is providing you with financial statements that lack comparative ratios adjoining your column of expenses you need to fire them immediately. There is no excuse for failing to provide “ratios” next to “expenses.” It shouldn’t be a question of “well you never asked.” That was and is their responsibility to provide you with the proper tools, whether or not you asked for it. And, these “ratios” are indeed the most important tools you can use to help you analyze your business.

Of course, the worst sin of all is to see owners of troubled firms receiving properly formatted financial statements month after month and yet seeing them take no action. What the hell are they waiting for. As you can surmise, I have little sympathy for owners who sit on their ass every day checking their Facebook accounts and reading their Twitter feeds.

Owner’s used to ask me what guarantees I would offer and I used to respond. I will refund the entire consulting fee if I can’t turn your company around, but you have to give me total authority to implement all of my recommendations. And that authority would include terminating your son or daugher-in-law and raising prices across the board. Guess what, too many timid owners out, almost all of whom where afraid to give me that authority.    

It’s All About Pricing – NOT!

Profit laggards (those making less than 6% owner’s compensation) are far more likely to be willing to match or lower prices than those offered by profitable firms – firms reporting owner’s compensation of 25% or more.

 Sometimes a printer will tell me that, “I don’t try to be the lowest priced printer. Instead, I try to be sort of in the middle.” And yet, when challenged, many of these printers simply know very little about local or regional pricing. Troubled printers are far more likely to be swayed by customers telling them that their prices are a bit high, too often responding to the customer by saying, “Let me look over the quote we provided and see if we can’t shave it a bit.”

In my experience talking with some of the best and most profitable firms in this industry, they tend to have an attitude that their first price is also their best price, and they make no apologies or excuses for the fact that their quote is may indeed be higher than other quotes obtained by a customer. They know the value of their product and will not quibble.

Imagine visiting a high-end restaurant and when the waiter comes to your table, you point out the price of the eight ounce filet mignon on the menu and asking him if he could do a bit better on the price. Even worse, imagine telling him that all three of your guests are going to be ordering filets and surely they can lower the price a bit!

For additional information on pricing in our industry, we invite you to visit the NPRC blog where you can find two articles of interest:

Major Pricing Variations A Myth (Page 1 of Blog)
Shopping Your Competitors (Page 2 of Blog)

For those who always seem to get hung up on price and believe it to be the most important criteria when it comes to selecting one printer over the next, I suggest that the next time you are at the grocery store and explain, if you can, how Philadelphia Cream Cheese is consistently priced 30-40% higher than the store brand sitting directly next to it? Better packaging, marketing, shelf placement, great recipes? Whatever your excuse or answer, it can be applied to printing products as well.

 

A survey print buyers conducted years ago found “Price” ranked #5 in terms of importance.

P.S. A study of print buyers conducted a number of years ago by RIT sought to determine the importance of various factors in making a decision to use or select one printer over another. They prepared a scale that ranked eight various factors in the selection process. Guess where “price” fell? Pricing was ranked #5. What factors were more important? Dependability was #1, and was followed by Print Quality, Turnaround Time, and Ease of Doing Business – all ranking above “Price.”  

Failing to Practice the 80-20 Rule

 Learning to spend time wisely (The 80-20 Rule) is another characteristic that seems to distinguish the best run printing firms from the also-rans. Owner’s of top tier firms seem far more disciplined that owners of troubled firms.

One perfect example of the 80-20 rule suggests (at least roughly) that 80% of your employee problems are caused by 20% of your employees. A very small number of employees cause most of the problems… they call in sick, make most of the mistakes, and seem to be the root cause of much of the turmoil in a company. In you have 10 employees there’s a very good chance that two of them cause most of the problems in your company. Terminating these employees can make a major improvement in most companies.

Another example? Approximately 20% of your overhead items account for 80% of your expenses. If you’re motivated to cut expenses and improve profitability, don’t spend time worrying about the reducing the cost of office supplies, trash removal, travel and marketing. Concentrate instead on some of the “biggies” like auto operating expenses, building rent (Yes, that too can be renegotiated), lease expenses, repairs & maintenance, and even utilities. Successful companies find a way to reduce these types of expenses, while troubled firms once again just rationalize and make excuses.

Too Much Time On Social Media (A personal a rant <g>)

There is no doubt in my mind, that there is at least an inverse relationship between profitability and the time spent by many owners on social media. While I cannot point to hard statistics to back up this claim, Just observing printers from close up and afar I see so much time being wasted in this industry on social media such as Facebook, Twitter, WhatsApp and Instagram, just to name a few. I would also include various printing related listservs to this list as well.

I believe a significant percentage of our political and social discord in this country can be directly traced to what is published and shared on these sites. I think many owners and their families would be far better served by reducing participation in these various social network sites.

It is embarrassing these days to go out to a medium or high-end restaurant these days and to observe two adults and two children all with their heads down sending out text messages and reading the latest posts on Facebook. Not only is it rude and impolite, it is a terrible waste of intellectual talents.  Enough ranting!

I used to own a cell-phone jammer (Yeah, yeah, I know they are illegal – who cares) and I could destroy an evening for a family like that, but unfortunately it only worked G3 Networks. When they went to G5 the jammers got more expensive and harder to purchase. When it worked, it was so much fun watching folks suddenly losing reception and then holding up their cell phone higher in the air somehow thinking this would boost reception. 

Enough for now. Have a great week.

 

 

 

Printing Association Releases 2019 Goal Sheet

Interested in boosting profits and becoming a “Profit Leader” in 2019? If your answer is “Yes,” we suggest you Click Here and download NPRC’s latest publication – The 2019 Financial Model & Goals sheet.

Click JPG to Download 2019 Goal Sheet

At a quick glance, you’ll discover what the top 25% in our industry are reporting in terms of :

  • Cost of Sales
  • Payroll Expenses
  • Operating Expenses
  • Owner’s Compensation
  • Sales Per Employee

The data provided is based upon statistical data reported in various research studies and reports published by NPRC during the past 18 months. For additional information about our industry, visit NPRC’s website at www.printingresearch.org and scan the various articles under our “blog” tab.