Like it or not, there is an enormous chasm between printing firms when we measure them based upon their sales per employee (SPE).
On the one side, we have firms reporting average SPEs of $160,000 or greater while on the other side we have firms reporting average SPEs of $126,000 and below – sometimes much lower!
Although the differences in SPE between those at the top and those at the bottom are significant, the differences in profitability reported by each group are even greater. When we take a close look at the numbers and how they play out in terms of various ratios related to profitability and productivity, we quickly observe that relatively modest increases in SPE can lead to increasing “excess earnings” by as much as $200,000!
It is also clear that moving an additional $200,000 to the bottom line can increase the value of a firm by $700,000 to $800,000 or even more, since a typical multiplier used to arrive at valuations will typically be in the 3.5 to 4 range. Mind you, when we talk about firms producing “excess earnings” of $200,000, we are not talking about firms with sales of $3-4 million, but rather about firms who reported 2016 annual sales of just about $1 million in 2016.
SPE – A Quick Definition
Although we’ve done it seems like a thousand times, let’s quickly define SPE in the simplest of terms. Sales Per Employee (SPE) is arrived at by dividing total annual sales (or monthly sales annualized) by the equivalent number of employees required to produce those sales. The latter would include all working owners and partners as well as outside sales representatives. Technically, it also includes a spouse who may work in the business but does not even draw a salary or paycheck.
SPE can be calculated quickly and is used to compare overall productivity between one firm and the next. SPE is an expression that allows someone to compare, in relative terms, the productivity of one firm against another.
Let’s take a look at two firms each producing $1 million in sales and each relying on approximately the same sales mix. When we calculate our SPE for each firm, we will discover that one company will be able to produce $1 million in sales with approximately 6.5 employees, while another firm just down the road or across town, producing the same mix of products, will require almost 9 employees to produce those same sales?
By the way, every time we initiate a discussion of SPE we consider leaving the definition of SPE out of the article, assuming everyone already knows what we are talking about. And yet hardly a time goes by when we don’t get at least one or two private emails asking us to define the term. That happened recently when I released a column titled “Stewart Shares Key Takeaways Uncovered In Latest Financial Ratio Report.” (See NPRC Blog at www.printingresearch.org)
The ink was hardly dry on the column when we received two private emails asking us to explain the term. We answered the emails privately, but couldn’t help but wonder how many other basic financial terms such as “current ratio” and “excess earnings” did these owners not understand as well?
The Lack of Financial Oversight
There are worse things than not knowing what SPE stands for. I am still appalled by the number of owners who do not receive monthly financial statements. Almost as bad are owners who do receive monthly financial statements but give them only a cursory 15-minute look before heading back to the bindery to resolve some problem with the booklet maker.
Equally challenging are owners who receive monthly financial statements that fail to provide a column of ratios expressing each expense item as a percent of total sales. You cannot properly or adequately manage a business of any type by simply looking at a column of raw dollars – You need ratios for each expense item if you wanted to make informed decisions.
“I think I am ranting now, so I have to move on before my blood pressure rises to the dangerous level.”
How the heck an owner can analyze his or her operations without having access to an adjoining column of financial ratios is beyond me. When I receive financial statements and ask owners why their statements lack ratios some just shrug their shoulders, while others tell me they don’t know how to get Quickbooks or some other accounting package to generate them!
Every accounting software program can produce these ratios, you just need to know where to click. Shame on owners who don’t get this basic type of information. I think I am ranting now, so I have to move on before my blood pressure rises to the dangerous level.
Comparing (2) $1 Million Dollar Firms
Let’s use data obtained directly from the latest Financial Benchmarking Study published by the National Printing Research Council (NPRC), and translate a few of the ratios we’ve already mentioned into real world examples. Let’s examine what we already know…
We already know that firms in the top 25% of the industry (the Profit Leaders) in terms of net owner’s compensation reported average sales in 2016 of approximately $1 million. We also know that these firms reported an average SPE of $156,000. Using those two numbers and working backwards it means that the average firm in the top quartile employed approximately 6.4 employees to produce that $1 million in sales.
Relying on similar data for firms in the bottom profitability quartile, we know that these firms actually averaged slightly more in sales ($1.1 million) in 2016 but reported a SPE of approximately $125,000. Once again, working backwards, we can calculate that firms in the bottom quartile employed an average of 9 employees (or 2.6 more employees) to produce almost the same level of sales!
“The only noticeable difference is that the firms in the bottom quartile report brokering out significantly more in sales (18% to 11%) than do firms in the top quartile…. somewhat ironic considering the fact that companies with more employees still end up turning to outside firms to help them produce some of their annual sales!”
So, now we have two groups of printing firms with one group falling into the top quartile and the other group falling into the bottom. One group is able to produce its annual sales with approximately 6.4 employees, while the other group requires approximately 2.6 more employees to produce only slightly more in sales – $1 million vs. $1.1 million!
Breakout SPE* EXCESS EARNINGS*
Top Performers $156,000 $200,000
Bottom Performers $125,500 $(3,100)
* $$$ amounts are approximate. See study actual entries.
We also know that firms with the highest SPEs (those in the top quartile) also report “excess earnings” of almost $200,000, while firms in the lowest SPEs actually report negative “excess earnings.” By the way, it is “excess earnings,” and not the net value of assets, that plays the primary role in determining the value or worth of a company. If you are reporting little if any “excess earnings” then your company is worth very, very little to others!
What about profits per employee? It’s the same story as above. Companies who find themselves in the bottom in terms of profitability oftentimes report negative profits per employee, while those at the very top produce profits per employee of $30,000 or more! (Note, these terms are clearly defined in the 2017-2018 Financial Benchmarking Study.)
By the way, it is interesting to note that the job mix (source of sales) for these two quartiles is almost identical, meaning that each of these groups report approximately the same percentages for sales in terms of sales for pre-press (graphics), offset printing, digital printing (color and BW) and even mailing services.
“The latter is somewhat ironic considering the fact that companies with excess employees still end up turning to outside firms to help them produce some of their annual sales!”
The only noticeable difference between those firms in the top quartile and those at the bottom is that firms at the bottom report brokering out significantly more in sales (18% vs. 11%) than do firms in the top quartile. The latter is somewhat ironic considering the fact that companies with excess employees still end up turning to outside firms to help them produce some of their annual sales!
Should Employees Wear Signs?
Wouldn’t it be great if employees were required to walk around with signs on their back identifying their levels of productivity or competency? Signs like, “Bad Apple,” “Generally Expendable,” “Somewhat Lazy,” “Company Gossip or Trouble-maker,” “Many Personal Problems,” “Pot Head,” or “Family Member – Can’t be Fired.” Ok, I will admit that might be a bit extreme, but wouldn’t be great if those problem employees were “tagged” with signs like that, if for no other reason to remind the owner who he needs to terminate! Start with a family member!
Not to be too simplistic, but sometimes the most obvious cause of low SPEs is in fact the result of employing too many employees to produce the work in question. Yes, it is that simple. I believe I have consulted for more small to medium size companies in the industry than any other consultant, and I can tell you that “excess employees” was and continues to be near the top of the list when it comes to reasons for either low profits or low productivity.
Although the sample “employee signs” mentioned above are somewhat “tongue-in-cheek,” they are in fact the types of signs (figuratively speaking) that I encountered in many of my shop encounters. Take me to a firm employing approximately 8-10 employees and I will almost guarantee that the company has at least one “bad apple.” How do I determine that? Hell, in many cases the other employees will tell me, if not directly then in answering “Yes” when asked if the company they work for employs at least one bad apple employed!
“Of course, one of the worst causes of low SPEs in this industry is the employment of family members who otherwise couldn’t get a job as a ticket taker at a local cinema.”
There’s almost always an employee with serious personal problems, all of which seem to be brought to the workplace. Some employees have abused drugs and alcohol in the past, which of course is Ok, if they have sought treatment and are “cured.” It’s the employees who continue to show up high for work each day or repeatedly come in late or call in sick that need to be terminated, but owners too often seem reluctant to take these types of remedial steps.
Of course, one of the worst causes of low SPEs in this industry is the employment of family members who otherwise couldn’t get a job as a ticket taker at a local cinema. Sometimes it is a brother-in-law, uncle or worse case of all a son or daughter who joins the firms with a heightened sense of entitlement! Arrggg! I would never, never, never hire a family member unless they had at least 3-5 years of on the job experience working for someone else.
The biggest problem with employing family members is that the basis for their pay is often different than for other employees. Most employees are paid on the basis of their value to the company. Family members are often paid based upon what they need or are entitled to, not on what they contribute to the business.
Your Employees Already Know
Believe me when I tell you that your employees already know if you have an employee (family member or otherwise) that should have been terminated months if not years ago. They’ve seen the favoritism, the coddling and they’ve heard all the excuses offered up by the owner about why Cathy or Mike have not been terminated. After a while, they too start caring a bit less and maybe not working quite as hard as they used to because they perceive, rightfully or not, that if the owner doesn’t seem to care why should they.
It is a rare company indeed, certainly those with SPE levels in the $120,000 – $130,000 range, that doesn’t have at least one excess employee! Assuming we are talking about an $18 per hour employee, his or her termination would free up more than $38,000 in excess cash – some of which could be distributed as raises of $2,000 for each of six or seven remaining employees and still put $24,000 into savings, or available for lease payments for that digital press you’ve been looking at.
Pricing & Equipment Can Produce Low SPEs
It is important to note in this discussion that excess employees are only part of the problem. Pricing techniques and practices can also play a role in contributing to lower SPEs. No matter how good a team and no matter how hard they work, if the prices they are quoting are lower than they should be it will automatically result in a lower than expected SPE.
However, while firms with higher SPEs do in fact typically report charging more for their products than do firms with low SPEs, the differences in pricing remain somewhat subtle.
Low SPEs can also be the result of poor equipment selections or the unwillingness of owners to listen to their employees when it comes production problems and suggestions for fixing them. Owners who insist that their employees “make do with what we have” or owners who simply fail to reinvest in their businesses are almost always going to end up with lower SPEs than some of their peers in the industry.
Knowing Which Ratios to Use?
Owners who have come to rely on the biennial financial benchmarking studies turn to different sections of the study depending upon their experience and expertise. However, you don’t have to be a financial wizard or former CPA to benefit from the study.
The 2017-2018 NPRC Financial Benchmarking Study is basically divided into four key sections.
- Executive Summary by Larry Hunt – The summary written by industry author and financial guru Larry Hunt is a great “short” read about this industry, including where it has been and where it is going in terms of profitability and other key ratios. Spending 15-20 minutes reading this section alone will advance your knowledge of this industry ten-fold.
- Profit & Loss Statements – Broken down into various breakouts based upon sales, product mix, and profitability (including profitability quartiles), this section is packed with useful profit and loss statements that can be used to compare your firm’s performance against others. Compare ratios for expenses such as depreciation, rent, interest, accounting & legal and a dozen other expenses as depicted in the study and compare them to your own P&Ls.
- Balance Sheets – Similar in breakouts provided for profit and loss statements, this section includes a variety of balance sheets allowing you to compare current and long-term assets, in both really dollars as well as ratios, against current and long-term liabilities.
- 2016 Key Ratio Extractions – This section of the study provides a number of breakouts, each of which provide 29 key ratios that you can compare against those for your own firm. Ratios and breakouts include average sales, COG, payroll and overhead expenses, as well as owner’s compensation, excess earnings as well as discretionary income.
Interested in reading more about the new 2017-2018 Study? Visit the NPRC website at www.printingresearch.org. This just-released study is available at a record low, low price of ONLY $115 and includes S&H. It is sold on a 100% money-back guarantee.
Sorry, this study is only available as a hard copy – no PDFs! Even though it is considerably more expensive to provide and mail hard copies, we believe this study is simply too valuable to be transmitted and stored electronically. This study needs to be printed and readers need to be encouraged to use paperclips and yellow highlighters to truly benefit from this study.