(Members Only) Why Do Owners Ignore Poor SPE Ratios?
The failure of many printers to recognize and grasp the real implications of having a low sales per employee (SPE) ratio continues to amaze me. Having a low or below average SPE ultimately ends up impacting the value of the business and more importantly so, the ability of owners to achieve the levels of excellent income that are still achievable in this industry.
I’ve been conducting industry research studies for more than 30 years now, and almost without exception, and regardless of the specific subject matter, we have always made an attempt to track and report Sales Per Employee (SPE) statistics.
SPE may not be quite as detailed or precise as a net profit figure drawn from a “profit & loss” statement, but what it lacks in sophistication it more than makes up for in ease and speed of calculation. We ask two simple questions:
- “What are your total annual sales?” (Yes, that includes brokered sales; however postage income is excluded), and
- “What is the total number of FT equivalent employees, including all working owners and spouses, used to produce these sales?”
We then divide the entry for question #1 by the answer for question #2 and we end up with our SPE figure. The first thing to note is that SPE, unlike a net profit figure, does not consider specific salaries or wages. It doesn’t care about whether the spouse or partner is withdrawing a salary and if so what that figure is.
As an example, if your spouse just comes into the office 20 hours each week to do bookkeeping, invoicing or accounting, he or she would definitely be counted as a half-employee. Even if that works is accomplished at home they would still count as a .5 employee. Other than that, we don’t care whether they are withdrawing a salary or not.
What it really comes down to is how many bodies does it take to produce $XXX in sales. What we care about is determining how many employees does firm A need to produce a specific level of sales and be able to compare that to how many employees do firms B and C employ to produce those that same level of sales.
Great Variations in Reported SPEs
Based upon literally thousands of survey responses over the years, we know that there is a tremendous variation in SPEs between companies producing the same mix of jobs and utilizing similar pricing. What is far more important, however, is that we know there is almost a direct, linear relationship between SPEs and profitability. Firms with higher levels of profitability tend to report higher SPEs. If your SPE is high we can predict with a high degree of reliability that your profits will be above average as well. Of course, the reverse is equally true – firms with a low SPE also tend to show very low profits as well.
As an example, based upon our industry surveys that there are firms in this industry producing $750,000 (about the median sales level in this industry) employing 5.25 employees (SPE of $142,857), while there are other firms in the same market producing the same level and mix of jobs, that employ 7.25 employees (SPE of $103,448) to produce that same $750,000 in sales!
We’re known for our blunt talk and assessments so we want to offer you the following table and hope you take this to heart and take some corrective actions if they are warranted:
Where Do You Rank
SPE Level Rating
Less than $90,000 Extremely Poor/Dangerous
$90,000 – 100,000 Very Poor
$100,000 – $110,000 Below Average
$110,000 – $120,000 Marginal/Fair
$120,000 – $130,000 Average
$130,000 – $140,000 Above Average/Good
$140,000 – $150,000 Very Good
$150,000 – & Above Excellent (Very achievable)
As for the relationship between SPE and profitability, we can also turn to the 2014-2015 Financial Benchmarking Study published by QP Consulting, Inc. (full disclosure – that’s my firm) and turn to page 73. There you will find an analysis of 136 firms divided into four profitability quartiles.
The lowest quartile, firms with average profitability of less than 5%, report an average SPE of $114,858. At the top quartile, what we term ‘profit leaders,” we find the average profitability being reported at 24.6% and a sales per employee of $142,372. The difference in SPE between these two extremes is nothing less than dramatic. Looking at the SPE results in a different way, if we had two companies each with seven employees, the firm with the higher SPE would be able to produce almost $210,000 more in sales than the firm with the lower SPE. The excess profits or contribution to margin represented by an additional $210,000 in sales would be exceptional and would easily explain why we note the linear relationship between SPE and profits.
Causes of Low SPE
Remember, SPE is a very simplified method for measuring productivity. An entire book why some firms consistently have high productivity while others report such low numbers.
Ironically, wage and salary levels often play a part, but it not in the way some owners might imagine. Knowing that payroll costs are the single high expense category in the printing industry, some owners concentrate on paying the lowest levels possible to their employees. Ironically, we have discovered in many situations that the most profitable firms in this industry often (not always) pay the highest salaries and hourly wages in the industry – The trick is that they invariably employ far fewer employees. They seek out the best, most productive employees, pay them above average wages, and expect high levels of productivity. Firms with low SPEs typically employ two employees where one employee could suffice, but neither of the two are that proficient or reliable at what they do, so the employer gives in and accepts two where only one is required.
Low SPEs can also be the result of outdated equipment. Today’s market is filled with highly productive equipment that one could only dream about 15 years ago. Owners who expect high levels of productivity need to provide their team with equipment that can do the job…. Not just get by, but really produce the jobs as efficiently and as quickly as possible. Owners who are trying to just get by and run their operations on the “cheap” are often times causing irreparable harm.
Tolerating Problem Employees
Tolerating employees who in many cases should have been terminated years ago is another major problem in this industry. Carrying an employee an owner (and the rest of the employees in the company) knows should have been terminated for cause, or possibly no cause, continues to be a problem among some companies in this industry.
Ironically, the employees in a company are often fully aware of the “problem” employees long before the owners is willing to admit that they have a problem. The occasional “no show,” the employee that calls in sick every three weeks, the employee who admittedly has a drinking problem, the employee who virtually everyone suspects of being “high” on drugs – these are the employees that need to be terminated.
There is no such thing as an irreplaceable owner, and of course the same thing applies to employees. In many cases, companies who end up terminating one of those “bad apples” often discover that the terminated employee doesn’t even need to be replaced. One additional benefit of terminating an employee such as we have discussed, is that the savings in payroll costs can often free up more than enough cash to finance that piece of equipment that was previously on a “wish list” but never seemed possible.
Occasionally, owners will argue that, “Yeah, I know my SPE doesn’t look as good as it should be, but we really are very profitable.” Well, of course we know anything is possible. It is possible to have a low SPE but be profitable as the result of exceptionally low wages, or cost of goods or overhead expenses. But that is generally the exception to the rule.
More likely, however, is that the owner either does not understand profitability, or he is calculating it improperly. The most common types of mistakes I see that end up resulting in unrealistic profitability reports include the following:
- Owners who include both their spouse’s salary and their own when calculating profits. You can’t do that!
- Another mistake occurs when the owner also owns the building out of which he operates but chooses not to charge his business a fair market rent, thus lowering the firm’s overhead expenses and raising the profit. You can’t do that!
- A variation of the above where the owner owns the building and somehow decides that the rental income he receives is part of his profits or owner’s compensation. It doesn’t work that well, and a savvy buyer knows that.
- Another mistake resulting in over-stated profits is failing to include interest and depreciation expenses on the P&L for purposes of fully detailing expenses and profitability.
All in all, owners often tend to delude themselves and others, year after year, into convincing themselves they are highly profitable and yet even a casual examination of key industry studies such as the previously mentioned 2014-2015 Financial Benchmarking Study (See our Bookstore) would reveal that, compared to their peers, they are not nearly as profitable as they believe.
You must be logged in to post a comment.