$130,000 SPE – The Magic Number!

By John Stewart, Executive Director, NPRC

$130,000 SPE – The Magic Number! If your firm is going to survive or prosper in the next five years, you must currently have an SPE of $130,000 or higher. If your firm fails to achieve that SPE the chances are good you will soon become just another mediocre firm. There are too many firms today that are simply holding on to a few “old timer” customers while the owners are 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.

Defining SPE

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 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 rely upon states that $1,000,000 sales can be easily produced by no more than 6 to 6.5 employees. Unfortunately, we also know of printing firms that will require 8 to 8.5 employees or more to produce the very same mix of products and services.

Properly Counting All Employees

As part of the calculation, you must 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 when 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 also 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 above 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 typically 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. Owners typically recognize the need when it is pointed out to them, but they are rarely willing to act. By the way, most employees already know who the  bad apples are, but they are typically 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.

 

 

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