The real problem with “profit laggards” in our industry is that they don’t know they are laggards. Most printers blame the economy, Covid19, vendors and the internet for most, if not all of their problems.
Many of these troubled companies simply ignore their own profit and loss statements. When they do examine them, they often are not even sure what to look for.
Profit laggards (those in the bottom 25% in terms of profitability) often have no idea whatsoever how poorly they are doing, especially when compared to printers in the top 25th percentile. They just figure everyone must be having the same problems they are facing.
When troubled firms look at key expense items such as “cost of goods,” “payroll costs” and “overhead expenses,” they have no idea whatsoever how those expenses compare to others – especially those firms falling into the top 25% in our industry in terms of profitability.
One of the big reasons for this is that they have so little information to work with when it comes to financial data. Our surveys show that most profit laggards lack properly prepared financial statements. Even when they do have decent statements, their statements fail to display key ratios adjacent to expenses (expenses expressed as a percent of sales).
Lacking ratios that they can use to compare their performance against others, it is no surprise that many of these troubled companies are so ill-prepared when a double whammy like Covid19 comes along.
Operating Ratio Studies
Fortunately for the industry, the National Printing Research Council (NPRC) has continued a 35+ year tradition in the printing industry of publishing key financial reports detailing profitability in the printing industry. Described as either “Operating Ratio Reports” or “Benchmarking Studies,” these popular reports provide an in-depth look at profitability in our industry.
These reports examine our industry in terms of annual sales, key expenses, and owner’s compensation. In addition, comparative breakouts include independents vs. franchises, single vs. multiple, association memberships, offset vs. digital, and firms with high reliance on brokering vs. those that broker very little.
As for sales, the latest study, the 2019-2020 Financial Benchmarking Study, provides breakout data for firms with sales as low as $400,000 to those reporting sales of $2.5 million and higher. Another valuable breakout includes an analysis of firms based upon their reported sales per employee.
As the study notes, firms with SPEs of $140,000 and higher are significantly more profitable than those with SPEs in the $80,000 to $115,000 range. The higher the SPE, the greater the odds that firms will indeed survive these turbulent times.
Profit Leader Quartiles
Of all the breakouts offered in the current and previous benchmarking studies, none is more revealing than when the study presents breakouts based upon “Profitability Quartiles.” In the most recent report, profitability quartiles are defined as:
The current Benchmarking Study not only analyzes profitability for the industry at large (all participants), but it also provides profitability quartiles breakouts for both independent and franchises.
Other breakouts offered include peer groups vs. non-peer groups, firms employing sales reps vs. those with no sales reps, and breakouts based upon geographic location.
Profit Leader vs. Profit Laggard Ratios
While the Benchmarking Study provides hundreds and hundreds of expenses and their corresponding ratios, there are a few that standout. Below are some key $$$ amounts and ratios that are discussed in this study.
Please not that the firms falling into the bottom quartile were in serious trouble pre-Covid19. One can only imagine the struggles the bottom 25% of our industry is facing in this new era of extended quarantines, wearing of masks and reductions in staffing.
Total Gross Sales
Cost of Goods
Payroll (Excl. Owner)
Doomed to Failure
If you fail to control your payroll costs you are most likely doomed to failure. You may not close your doors, but you are endangering the future survivability of your firm. When it comes time to sell, it will have little if any value and will command only pennies on the dollar.
If your firm fails to control overhead expenses and tends to report expense ratios that fall into the bottom quartile (as depicted above) you are probably doomed to failure. You cannot consistently achieve or report bottom quartile ratios as shown above and expect to remain in business! Things have to change and it begins at the top.
Purchase this Study
To purchase this study, visit the NPRC Bookstore here.
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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.
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.