Are Grants & Loans Really Necessary for Survival?

By John Stewart, Executive Director, NPRC

Are printers counting on government grants and Loans to survive the Covid-19 crisis?  Well, checking out various printing industry list servs, it certainly appears that many printers are indeed doing just that!

Instead of returning to the basics and concentrating on improving key financial ratios such as SPE, payroll and profits per employee many printers seem to be spending the better part of their days worrying how to fine tune loan applications and mastering SBA regulations.

Ironically, more printers appear to have mastered the myriad of new government regulations involved in securing PPP and EIDL loans and grants far better than they have mastered their own financial ratios. To be blunt, I have seen more posts in the past two weeks about how to secure various government loans than I have seen discussions in the past two years regarding  achieving higher SPEs and best practices for lowering payroll costs.

Most profit leaders in this industry (the top quartile in terms of profitability) appear well prepared to deal with the challenges that Covid-19 represents. Sure, there will be struggles and bumps along the way, but there is little doubt that they will survive and prosper both in the short term and the long term. Profit laggards, on the other hand, were ill-prepared to weather even a small financial storm, long before Covid-19 even existed. Now they find themselves in a cash and profit crisis mostly of their own making.

Sure, receiving a loan for $20,000, $50,000 or even $100,000 or more sounds great, but if that loan or grant is viewed as making the difference between “closing your doors” and your surviving to see 2021 then I would seriously question the financial strength and stability of your firm, Covid-19 not withstanding!

If you’ve been running a marginal or below average firm for the past two or three years, or possibly even longer, any loan or grant that you receive will end up being nothing more than a small band-aid where a tourniquet is required instead. Covid-19 related loans and grants are not likely to save firms that are foundering financially. At best, the inflow of new money will simply prolong the inevitable.

I talk to profit leaders all the time, and virtually all of them admit to me admit to me that while the loans and grants they have received are certainly helpful, they note that their firms are not dependent upon them for their survival. Some are treating these loans as “icing on the cake.” Ironically, because they are profitable to begin with, the loans and grants these firms will receive will end up making them even stronger in terms of profitability in 2020 and 2021.

Don’t misunderstand me when I talk about “icing on the cake.” Yes, even the strongest companies in our industry surely welcome the help, and they will indeed put these grants and loans to good use. Weaker firms, however, will likely use the money to patch holes in a sinking ship – a ship that was sinking long before we ever heard of Covid-19. In fact, many troubled firms will end up using the influx of cash to patch holes above the water line, instead of the more serious ones down below.

Don’t misunderstand me when I talk about “icing on the cake.” Yes, even the strongest companies in our industry surely welcome the help, and they will indeed put these grants and loans to good use. Weaker firms, however, will likely use the money to patch holes in a sinking ship – a ship that was sinking long before we ever heard of Covid-19.

Six months from now – I strongly suspect that that many of the troubled firms that so desperately need government grants and loans to survive will have blown through those funds faster than a speeding bullet, and six months from now they will be once again desperate for more loans and grants. As always, this industry, like all industries, has “profit leaders” and “profit laggards.” The difference between the two groups is that the former know there ratios inside and out and recognize that they are indeed in that top quartile. On the other hand, the “profit laggards” are generally poorly informed as to the types of key financial ratios it takes to operate a profitable firm in this industry, and thus struggle along, week to week, month to month.

In turbulent and uncertain times such as  we are facing today, it is more important than ever that you understand the kinds of key financial ratios required to survive and prosper. Granted, “increasing profitability” may be a bit “pollyannish” during the Covid-19 era, but the last thing you want to encounter these days is a slow, yet subtle decline in key ratios.

One fact we know for sure – Six months from now “profit leaders” will continue to be “profit leaders,” while many of the “profit laggards” of today will be struggling even more so than they are today, regardless of any loans or grants they may have received.

Granted, “increasing profitability” may be a bit “pollyannish” during the Covid-19 era, but the last thing you want to encounter these days is a slow, yet subtle decline in key ratios.

We’ve been publishing Financial Benchmarking Studies for the Printing industry for more than 30 years and we have tracked dozens of key ratios in our industry. Most important of all, we’ve been able to compare and breakdown ratios of of the top firms vs. those at the bottom in terms of profitability. Suffice it to say that the “profit leaders” in our industry seem far better prepared to weather the “storm” than the “profit laggards.”

Below are just a few of the key ratios that we look at closely when analyzing the value of firms and their survivability score. Average sales for the firms in this extraction was $1,100,000. These ratios are extracted from the NPRC 2019-2020 financial Benchmarking Study. The 64-page study is a comprehensive analysis of Key financial benchmarks and ratios for the quick and small commercial printing industry. See page 48 for specific definitions and formulas used to report the following. (Click here to read more about this info-packed study.)

Key Ratios – All Firms by Profitability Quartiles

 

Key Financial Ratio* Bottom Profit Qrtl Top Profit Qrtl
2018 Average Gross Sales $1,448,004 $1,037,417
Cost of Goods % 30.6% 29.0%
Payroll Expense % 38.8% 25.8%
Overhead Expense % 25.2% 19.4%
Owner’s Compensation % 5.4% 25.7%
Excess Earnings $ -$7,135 $201,258
Profits Per Employee $ -$637 $32,461
Sales Per Employee $ $118,688 $144,085

Definitions as to specific ratios reported below can be found in 2019-2020 Financial Benchmarking Study

Sales Per Employee can often act as instant indicator of overall financial health. You don’t need a P&L or a Balance sheet and you don’t need the help of a CPA or bookkeeper to calculate it. SPE has nothing directly to do with payroll or wages so you don’t need that info either. Simply divide your annual sales (do not include postage income) by the total number of FT equivalent employees, including all working owners, partners, etc. used to produce those sales. SPE is generally calculated and expressed in annual terms, not monthly, although it can change somewhat from month to month.

By the way, a SPE in the $140-$150,000 range, even though that puts it in the “Profit Leader ” category, does not represent the top of what can be achieved. I know many firms, most of them heavily invested in digital printing, that report achieving SPEs of $160,000 to $180,000 and even more. So don’t be patting yourself on the back too quickly. You can always do better. On the other hand, if your SPE is $130,000 or below you are seriously under-performing in this industry compared to your peers.

Recent SPEs reported by NPRC – SPE varies modestly from report to report. Below are are recent SPEs as reported in various studies:

Study                                                               Average        Median
2019 Digital Color Pricing Study                    $139,830         $130,673
2020 Mailing Services Pricing Study             $156,179          $142,500
2019 Wage & Benefits Study                            $139,048         $134,444
2019 Financial Benchmarking Study              $139,595               NA

2019 Financial Benchmarking Study – Average SPE

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Huge Takeaways from Latest NPRC Financial Ratio Study

 Although the just-released 72-page, 2017-2018 Financial Benchmarking Study published by NPRC is filled with key printing industry financial ratios, there is one page that virtually screams out at the reader with the following warning…

“You cannot survive, let-alone prosper in this industry if you allow your business to report key performance ratios this low!”

As of June 5, 2017 this just-released study is
available 
in both PDF and hard-copy formats! 

Despite the fact that the new Financial Benchmarking Study offers up a variety of breakouts such as comparisons based upon annual sales, percentage of sales produced via offset printing versus digital printing, as well as breakouts based upon “sales per employee,” page 64, titled Key Ratios of All Firms by Profitability Quartiles, offers up some shocking comparisons.

If It Was Up to Me…

John Stewart Executive Director NPRC

The “Key Ratios” page is so important, so valuable, that if it was up to me, I would insist that every owner, especially those who are troubled by the fact that they are not making the kind of money they expect, make a copy of page 64 and tape it to a wall next to their desk. Of course, owners of the more successful companies in this industry have already been doing this for years, it is the troubled firms that I am most concerned with.

The “Key Ratio” section of the study offers up 29 key ratios or percentages used to identify or distinguish top performers in the printing industry against those at the very bottom. The ratios use to analyze firms in various quartiles aren’t inconsequential ratios found in accounting textbooks but rather key financial that impact exactly how much an owner and sometimes his or her spouse take out of the business every two weeks.

“Even more important, the ratios you will discover, when compared to your own ratios, will determine whether, after spending 15-20 years in this industry, you will have anything of substance to either sell or transfer over to a son or daughter!”

Depending upon how your ratios compare to those detailed in the study, these ratios ultimately will determine whether in fact you should return to your previous field of employment or stick it out and try to turn your business around in the next 12-18 months. Even more important, the ratios you will discover, when compared to your own ratios, will determine whether, after spending 15-20 years in this industry you will have anything of substance to either sell or transfer over to a son or daughter!

Comparative Ratios – Winners vs. Laggards

What types of ratios are we talking about? The ratios range from the simplest ones such as annual sales and rates of annual growth based upon four profitability quartiles, to percentage comparisons for fundamental expense categories such as cost of goods, payroll expenses and overhead expenses.

The Benchmarking Study delves far deeper than the basic ratios noted above, with comparisons of ratios such as owner’s compensation, excess earnings, and profits per employee. Other ratios examined include current and quick ratios (all ratios and terms are thoroughly explained in the study), as well as average Accounts Receivable collection days, to return on net assets.  

Below are are just a few of the shocking comparisons between firms at the very top as compared with those at the very bottom.  Remember, the results we are reporting are based upon real-world firms with employee teams, job and equipment mix, and types of sales very similar to your own. Whatever you do, don’t make the mistake of rationalizing and saying that, “Things in my market are really different from these companies… my business is really different and there is no way I could achieve these types of ratios. I just can’t worry about things I cannot change.”

 Average Cost of Goods

Although COG, as a percent of sales, has remained fairly steady for almost 30 years in this industry, it is still worth nothing that the “Profit Leaders” in this industry still end up spending 9% less than the “Profit Laggards” when it comes to cost of goods – A shocking indicator that some owners are simply running very poor, very inefficient operations combined most likely with terrible pricing discipline!

“If your COG, as a percent of sales, is 31% or higher you are most likely destined to mediocrity in terms of financial success in this industry.”

The bottom line? If your COG, as a percent of sales, is 31% or higher you are most likely destined to mediocrity in terms of financial success in this industry. Most likely, it is almost impossible for you to become a “profit leader” in this industry with a ratio of 31% or greater. 

Payroll and Overhead Expenses

Once again, according to the Key Ratio Extractions, poorly managed firms in this industry, despite the fact that many of them are averaging annual sales of $1.1 million or more, are doing a terrible job when it comes to controlling both payroll and overhead expenses. In many cases, some of the most troubled firms are paying 4-6 percent more for payroll and overhead than companies in the top quartile!

“How owners can possibly manage, let alone improve their operations, by relying on financial statements that lack even the most basic tools is beyond me!” 

Rest assured that the reasons these companies are paying so much than those at the top are rarely, if ever, related to geographic or demographic reasons. The most common cause is the failure of owners to carefully examine their monthly financial statements and then to take the necessary actions that are so clearly dictated.

To be perfectly blunt, how any owner could discover a total payroll cost ratio (excluding money paid to the owner) of 33-35% from his current financial statements and still be able to sleep well at night is beyond my comprehension. Note too that I am now 73 and really “cranky” sometimes but there are some owners out there who need to be grabbed firmly by the shoulders and given a good shake. 

A special footnote worth mentioning – it is shocking to discover how many owners receive monthly profit and loss statements lacking a vertical column of financial ratios – i.e. the percentage of total sales represented by each expense item. How owners can possibly manage, let alone improve their operations, by relying on financial statements that lack even the most basic tools is beyond me! 

Excess Earnings of Winners

Excess earnings is defined as those funds or profits generated by the business after paying a single owner a fair-market salary for his or her efforts. Excess earnings is often a key factor in determining the value of a business. It is typically subjected to an excess earnings multiplier and used to calculate the value or worth of a business.

“Sad to realize that companies can ignore this type of data for so long, only to realize after spending 15-20 or more years in this industry that their business has no value whatsoever!”

Suffice it to say, that companies in the top quartile in terms of profitability reported an average excess earnings figure of almost $200,000 while firms in the bottom 25% actually reported a negative amount. The latter meaning that these companies have very little if any net worth other than the “street market” value of their equipment.

Sad to realize that companies can ignore this type of data for so long, only to realize after spending 15-20 or more years in this industry that their business has no value whatsoever!

“However, before you start patting yourself on the back, realize that 25% of the entire industry is actually reporting an SPE of $180,000 or greater!”

Sales Per Employee

SPE has always been a reliable indicator of overall productivity, and once again those at the top, according to NPRC’s latest Financial Benchmarking Study, consistently report a considerably higher SPE than those at the bottom. Almost 13% of our participants reported an SPE of less than $100,000!

If your firm’s SPE is below $126,000 you will discover you are in the bottom 25% of the industry – Like it or not, you are clearly doing something wrong, at least compared to your peers, when it comes to either pricing, personnel management or equipment selection and you need to make some dramatic changes in the way you run your business.

If your SPE is in the $156,000 or above range then consider yourself fortunate because that would place you in the top 25% quartile. However, before you start patting yourself on the back, realize that 25% of the entire industry is actually reporting an SPE of $180,000 or greater!

Purchasing this Brand-New Report

The 2017-2018 Financial Benchmarking Study, published by the National Printing Research Council (NPRC), is available for purchase through the NPRC Bookstore. It is priced at $115 and sold on a 100% money-back guarantee. It is only available as a hard copy. Sorry, no PDFs available. 

 

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