Printing Industry News and Notes

Seller is deluding himself!

2010-02-10T13:41:00.003-05:00

I am dealing with a franchisee in the Northwest. There are some health problems in the family and he has decided to sell. The problem is that even when both he and his wife were healthy he had deluded himself into thinking it was Ok to invest in his business for the long term while forgetting short-term performance. The business is doing approximately $475,000 in sales.

The business was originally purchased with the hope of turning it over to a son-in-law. When that didn't turn out and the in-law moved to another state, the owner was forced to take a serious look at the business and try and make it grow.

Bottom line now is that he has four employees in addition to he and his wife. Three of the four employees are so highly paid that he is lucky if he can pay his wife $16,000 plus cover her healthcare costs of about $12,000 a year. What about his salary or compensation? I don't think he has ever paid himself a cent, choosing instead to "invest" in people and equipment - at least that is what he would have us believe.

His rent represents 14%, of his total sales; his payroll (excluding he and his wife) is approximately 40% of sales, and almost 45% of those sales are brokered. His sales per employee is hovering in the $80,000 range and he has no idea how bad this is, let alone the rest of the ratios.

Oh, I forgot to mention. He has a note payable to a local bank of $450,000! The current net worth of the business is approximately -$425,000! Net worth of the corporation is -$430,000!

He has been trying to sell the business (once again for health reasons), but when the franchisor has hinted that it isn't worth the $350,000+ that he thinks it is he just argues with them. They brought me in to do a valuation and my generous estimated value was $205,000, and that assumes that the seller will absorb all assets and liabilities (except for equipment), including that $450,000 note!

I just sent off a detailed valuation report to the franchisee, and I am awaiting his call where I am sure he will gloss over all these serious problems, and try to convince me about the great "potential" that this business has to offer for the right buyer!

If you think you can sell a business or value a business based primarily on "its great potential" I think you are deluding yourself, just like this owner is doing.

Rise and Fall of Mallard Press

2010-02-05T15:40:00.003-05:00

I normally don't find a lot of time to read a lot of industry publications, but I strongly want to urge readers a two-part article that appears to be making the rounds in the printing industry.

Titled "The Rise and Fall of Mallard Press," the interview appeared in a special interest newsletter titled Print CEO which in turn is published by Whattheythink.com. This article is well worth the 15-20 minutes it will take to read.

Payroll Costs - What's Included?

2010-02-03T11:18:00.002-05:00

Just had a printer call me with a question as to who or what should be included under payroll costs. Specifically, she was referring to a statement that I made in Quick Printing Magazine that suggested a payroll ratio of 26-28%. She asked what about salaries and commissions paid to outside sales reps.

My answer was pretty straight forward. All salaries, wages and commissions for all employees, excluding a single owner, should be included in this calculation. And that of course would include outside sales reps.

Remember, that employer's FICA, medicare, workman's comp., health insurance, and unemployment payments should be included in this calculation. If the expense wouldn't otherwise exist but for the fact that you have employees then it should be included in or under payroll. By the way, that would even include payments made to outside payroll services or money spent internally to generate pay checks.

Large Customer Impacts Business Value

2010-02-03T09:36:00.006-05:00

Within the past two months I have encountered two different firms, each of which had one specific customer that accounted for approximately 50% of all sales!

One case involved a $575,000 company with one customer accounting for $250,000 of those sales; In the second case, the firm had annual sales of $1.55 million, with a single customer accounting for approximately $700,000! Almost hard to believe.

Both firms are indeed profitable, with one qualifying in the top 25th Percentile in terms of profits. However, the vast majority of potential buyers out there will simply not consider a company like this, almost regardless of offering price, when a customer represents that large a percentage of sales.

In one of the situations there is 3-year printing contract up for renewal. If the contract is renewed it would make the purchase a bit easier to swallow, but most printing contracts that I have seen are not that rock solid. Even if we had a contract in place, a smart buyer would make the sale contingent upon retaining this customer and/or the length of the purchase contract would equal the length of printing contract. Also, if the buyer could not finance the purchase out of excess earnings during that same period of time then he probably should walk away.

In the other situation, there is a sibling who has been working for the business for more than 15 years and the parent's are ready to sell. However, there is a huge difference between what the father thinks the business is worth and the sibling who wants to buy the company. By the way, the sibling is the one responsible for attracting and maintaining the $700,000 account.

In a real sense, the sibling has the parent over the proverbial barrel and lately discussions as to the purchase of the business have gotten quite heated. What is really surprising is that neither the sibling or the parents have discussed the value of the business or its purchase in the past 15 years!

So now what happens. Stay tuned...

Good Feedback on Brokering

2010-01-14T10:01:00.002-05:00

I have received an unusually high number of comments on my January 2010 column titled, "Brokering - Hey It's All in the Numbers!"

The column clearly noted that the amount of gross sales that you broker is not the key factor in determining your profitability, but rather how you handle and disperse that gross profit among the remaining expense categories (fixed or variable) that must be covered.

In almost all cases involving brokering, the more you broker out, the lower the gross profit, and the lower gross profit the greater the necessity to reduce expenses in either one or both of the remaining company expense categories - payroll and/or overhead.

Can this be done? Absolutely, and a letter I received which is reproduced below illustrates that you can broker out and still be quite profitable.

"Dear John, I really enjoyed your article in this month’s issue of Quick Printer. I do have a question though, what is the average commission percentage that is paid to the sales reps on the gross profit? - i.e. If there is $1000 gross profit on the job, what percentage goes to the house vs the sales rep. Sales reps are commission only at my shop. I am the owner of XYZ Printing & Graphics. We are a small 6 person printing shop in Northern California (location has been fictionalized) and our sales are about 1.85 MM. We broker about 50% of our work. Thank you for your insight."

My response to his specific question is that I would need to have more info since a $1,000 gross profit might represent a 50% gross profit or a 10% gross profit, so in terms of dollars alone I could not say.

However, what caught my eye was the $1.85 million in sales being produced by six individuals. Assuming the owner is included in that number the firm's SPE would be $308,000; Even if the total number of employees increased to seven (including the owner), the SPE would still be $264,285! In either case outstanding SPE's, even though 50% of all sales are brokered.

Now, this owner did not mention his net profitability, but based upon the calculated SPE's I am assuming that his company is quite profitable, since there tends to be a pretty clear relationship between SPE and net profits. It may not be linear but it exists nonetheless.

Fraudulent Veteran's Organizations

2009-12-15T14:50:00.003-05:00

Nothing, nothing gets my blood boiling faster than to stumble upon an organization claiming to be non-profit and raising money for veterans when the facts prove otherwise.

I wrote an article a couple of years ago and today that article prompted a call from the Veteran's Administration in NY. They called and asked me what I knew about the The Veterans Alliance Service Center or the American Veteran's Alliance. Have they not heard of the Internet?

I told them I knew enough to call both of these organizations fraudulent to the core and anyone who has ever throughly checked out these organizations would know that to be true. When you don't list a mailing address, when you don't publish annual financial reports, and when you give less than 50% of what you raise to veterans then in my opinion as a veteran you are perpetrating a fraud - plain and simple!

What is really sad is that these organizations and others as well (most try and use the word veteran or soldier in the name) continue to operate and raise money all around the country. How do they do it? it is simple.

They approach the manager of a grocery store and say they are raising money for veterans. Most of these managers are encouraged by their corporate headquarters to become involved with the community so when the Boy Scouts, the Girl Scouts, the local softball league or even a local gymnastics team wants to set up a table outside the store they almost always get permission to do so. The same holds true when these managers are approached by someone claiming to represent veterans.

The mere fact of being allowed to collect money outside of the grocery store automatically acts as an endorsement of the organization. Unfortunately, some of these organizationa are not what they seem, certainly in the case of these veteran's groups.

What is really sad is to see people leaving the grocery store and dropping $5 or $10 into a jar believing it will go to help veterans... the only person that money is going to help is the guy working the table as well as the person he is working for... that's about it... in a few cases they may donate 4% or so to keep it legal...

So, if you are Ok with giving $10 to one of these groups knowing full well that only 40 cents or so may end up helping a veteran then be my guest, but you are both a fool and doing a disservice to veterans around the country.

Working for the "Family"

2009-12-15T09:55:00.003-05:00

A couple of recent consulting jobs reminded me of an on-going problem I have observed in this industry - family members, typically second generation, working and managing the businesses (for parents and/or parent-in-laws) with no written agreements as to how, if ever, ownership of the business will be transferred or sold to the next generation.

A classic case, repeated many times, is the best described as an example with fictitious names.

Steve married Karen 19 years ago. Karen's parents owned Quickie Print. About eight years ago, Steve was invited to join Quickie Print and soon became its manager. Under his direction and management, the company experienced healthy rates of growth and profits, with sales in 2009 projected to top $1.6 million. Steve has been well rewarded with an excellent salary package and benefits.

During the past five years or so Steve has discussed with his in-laws on numerous occasions the possibility of buying the business. The in-laws, especially his father-in-law, have always tended to be vague about what they thought the business might be worth, or even whether they were really interested in selling it.

About two years ago, Steve's in-laws decided to semi-retire to Colorado, drawing out healthy dividends from the business. In the meantime, Steve continued to manage the business full-time. Buying the business had slipped to the back burner.

Well things changed dramatically about six months ago. Steve and his wife got a divorce. The divorce was amicable, but it highlighted Steve's tenuous position in the business. He wants to buy the business, but his father-in-law, when pushed for an "asking price," has mentioned a totally unrealistic price.

Now, what does Steve do? In one sense, he has the in-laws over a basket. For all intents and purposes he is the business and if he left and took some accounts with him Quickie Print might not survive, short of the in-laws returning back home and taking over all management responsibilities. On the other hand, Steve has invested his heart and soul into this business for the past eight years but still has no stake in it whatsoever - he's just another employee and he has no equity in the business.

Comments - In eight years neither party really sat down and put in writing how the business might be valued and when and how the business might be sold. Sad! Steve is in full-charge of the business and makes a healthy salary but has absolutely no ownership stake in the business.

If you recognize your own situation in the above, whether you are a son, daughter, daughter-in-law or have any similar relationship and you are working in a business owned by parents, you need to clarify exactly where you stand, when you can purchase the business, and agree on a specific method for valuing the business. Of course, the same situation would also apply to a long-time manager who has been promised time after time, as an inducement to remain with the business, the opportunity to buy it "some day." Days turn into months, and months turn into years and still nothing is put in writing.

One good start, at least in terms of valuing a business, would be to purchase "Print Shop for Sale." Another idea might be to email me and discuss your specific situation. I will be glad to help if I can.

Employee Theft Leads to Company Closure

2009-12-04T16:18:00.002-05:00

EUGENE, OR—An ex-bookkeeper of a now-defunct printing company faces upwards of 100 felony counts for allegedly bilking the firm of more than $1.5 million, an act which may have contributed to its demise.

I just read the above in an email blast from Printing Impressions. I really have to wonder, despite the fact that I know this happens hundreds of times a year to printers around the country, why the owner didn't suspect or catch the thief a bit earlier.... you know, maybe started wondering about where $250,000 had gone, or maybe the first $500,000 or even $1 million.

One thing is for sure, I will bet (based on profiles of employee thefts of this magnitude) that she was a long-time employee, very dedicated and if true to form probably didn't want to take time off for vacations. Of course if you've working for a firm from which you can steal $1.5 million before getting caught you ought to be pretty loyal and dedicated!

You can read more about the story as it appeared in PI by going here:
http://www.piworld.com/article/former-employee-charged-15m-theft/1?sponsor=newsletter/pi-weekly

I too can see Russia from my back door!

2009-12-02T11:06:00.006-05:00

I just had cataract surgery performed on my right eye yesterday, and I mentioned this to a conservative friend of mine.

My friend emailed me back suggesting that if my surgery went well I would probably be able to see things much clearer now and would thus, by definition, probably become a Republican!

I wrote him back and said he was right. I can now see so clearly that when I go to the back of my house and look west across the Intercoatal Waterway I can see all the way to Russia just like Sarah Palin.

P.S. I know a lot of soccer moms and most of the ones I know are a heck of a lot smarter than Sarah Palin. In fact, she has given the term "soccer moms" a bad connotation. Just my thoughts.

P.P.S. By the way, cataract surgery and the medical advances it represents is nothing short of amazing. To be able to operate on such a small, complex organ and to be able to do so on an outpatient basis with little or no pain whatsoever is a testament to how far we have come in medicine in such a relatively short period of time.

Significant Statistical Changes Expected

2009-12-02T10:49:00.003-05:00

We are in the early stages of preparing the 2010 Operating Ratio Study for the Printing Industry. Although the availability of customized one-on-one reports (introduced for the first time in 2008) is still in question, the study itself will be published in full as it has always been.

What is both exciting and intriguing will be uncovering changes in levels of productivity and sales wrought by the changes in the economy during the past 24 months. Thanks in large part to the huge data base available to NAQP and Q.P. Consulting, we will be in a unique position to provide special insights as to how the economy has impacted printers and different ends of the spectrum. Specifically, we will be comparing printers of all sizes and types and examining how the economy has impacted their sales and profitability in the past two years.

I can only speculate at this point, but I would surprised if those previously in the top quartile will continue to report healthy owner's compensation in the 22-24% range. I won't be surprised, however, if these same firms report either minimal sales growth or even some decline. The smart firms, I suspect, will have concentrated on profitability. I also suspect that the lower profit firms at the other end of the spectrum will have concentrated their efforts sales at the expense of profits, and in many cases failing at both.

For those who participated in the 2008 survey and received a customized report, I would be interested in your input as to the overall value of those customized reports, as opposed to the more generalized ORS reports published previously.

Great Time For Setting Goals

2009-12-01T10:10:00.002-05:00

I love the holidays because I can always find some "quiet time" to sit down and reflect on the year just ending as well as to project what changes we might be able to bring about in the coming year - in this case 2010!

You shouldn't have to wait for an accountant to get a preliminary P&L and balance sheet for 2009. Even an 11th month statement will provide you with all the data and ratios needed to set some new goals for 2010.

You need to take a yellow highligher and circle key ratios such as cost of goods, cost of paper, total payroll expenses, overhead, etc. and then compare them to what the leaders in this industry (in your sales range) have reported.

Where do you get this information? Well, I hope you have a copy of NAQP's 2008-2009 Operating Ratio Study. There is no more important or useful document than this study and if you don't already have a copy you should order one today from NAQP. Call them at 1-800-234-0040.

Holidays and Competitor Surveys

2009-12-01T09:53:00.003-05:00

For many printers the holiday season brings with it a slowdown in sales. So how can you fill this time with a beneficial project that will help you in 2010? Conduct a survey of competitors that will reveal not only their pricing practices but the cleanliness of their facilities and the friendliness of their CSR staff.

As I write this blog I have a client who is undertaking just such a project. He has chosen 11 competitors in his market area. He has avoided choosing "garage" printers, and instead has selected printers with good reputations and longevity in his local community.

He has selected approximately five items, with two quantities for each, that he would like to survey. He has prepared an informal looking bid sheet and has hired a woman to conduct the project for him.

She is a local graphic artist and has been instructed to spend the next five days personally visiting each location under the guise of starting up her own graphic services business, and thus needs to get some printing done. She has also been instructed to tell each printer that she is not necessarily looking for the lowest price, but rather she wants to establish a long-term relationship with a local printer.

In addition to recording all prices and estimates she receives, she has been instructed to take notes on the overall appearance of the location and how she was treated by the CSRs who assisted her. She is also to record exactly how long it takes to receive quotes from these printers.

The goal of this market survey is to establish where this client fits in regards to pricing specific items and the measure how competitors rate when it comes to overall customer service and responsiveness to requests for quotes.

We expect that at least 2-3 printers on this list will fail to get back to our shopper in the 3-4 days allotted for this project.

I will report back on our findings. Happy holidays.

Nice Note From Client

2009-11-18T15:00:00.009-05:00

Just received the following from a recent client. It is a small portion of a lengthy email in which the client reports on the progress he has made in less than a week. Emails like this go a long way for making up for the long hours of on-site consulting, the lengthy air travel, and the 15+ hours spent writing the typical consulting report.

Good morning John,

We too really enjoyed our time with you last week. You're right, we covered a lot of ground. If I felt out of breath when I dropped you off at the airport, I can't imagine how tired you were. It was an incredibly awesome and inspiring experience for Katherine and me. Any doubts we may have had about the "cost" are a distant memory. I have more enthusiasm today and faith today than the day I entered this business 25 years ago.

Sales Dominated by One Customer

2009-11-16T15:15:00.003-05:00

One of my recent blogs discussed a printer who has one customer that accounts for approximately 52% of total sales. What makes this situation even worse (at least in my opinion) is that all the work that is done for this customer is brokered to an outside trade-printer.

Brokered or not, the most dangerous aspect about this situation is that very few if any buyers will buy a business that relies on one or two customers to produce a majority of its sales. You can rationalize all you want about how great the customer is and how you will never lose the customer, etc., etc. but the facts remain no one will buy a business so heavily dependent and reliant upon one or two accounts.

Therefore, while you may be making money in the short run, it is also quite likely you are losing money in the long-run, since most valuation formulas rely on a multiplier or "capitalization" rate to determine value and that multiplier will be much lower than normal due to the heavy reliance on one customer.

Tentative About Tweeting...

2009-11-12T21:51:00.005-05:00

Yes, a good friend of mine, Armand Girard, finally got me set up with a Twitter account and password about a week ago, but to be honest, I have yet to twitter.

I'm trying to build up my confidence and understanding how this all works. Suppose no one follows me, or suppose I decide not to follow someone else on Twitter? Will I hurt their feelings? Can I get folks to go to my blog and read the stories? Do I need to tell folks what I had for lunch? This is almost too much!

What have I done? Well, I will confess I have now hired a local consultant to help me with all this and I hope to post my first twitter very soon... I know the world (at least two or three people) is waiting to read my first twitter, and I consider it a huge responsibility!

Brokering Destroys Value of Business

2009-11-12T21:10:00.003-05:00

When brokered sales reach certain levels in a printing company, the value of that company tend to drop off dramatically, so much so that the company may have no value to formerly qualified buyers.

Case in point, a company stumbles on an outstanding opportunity to provide a large amount of flexography to a nearby growing company. The owner develops an excellent relationship with two individuals in the company. Neither of these individuals own the company but have extensive purchasing authority. Within a relatively short period of time, this account grows from $10,000 to $20,000, $50,000 and eventually to more than $180,000 annually!

When the jobs started coming in, the owner, who tends to be timid when it comes to pricing in-house jobs, decided to markup every job, large or small, by 100%, thus producing a 50% gross profit. The gross profit on this one account continues to be 50%! By now, the brokered work has grown to the point that it represents approximately 60% of total sales.

In the past 12 months, the company was approached by another printing firm who was looking to acquire another local printer. However, as soon as the prospective purchaser discovered that 60% of the sales of the entire company, and about 90% of all brokered work, came from one customer he backed off quickly, never to be heard from again. No one will touch this company, even though the owner would like to sell.

Easy to suggest that this company needs to refocus and concentrate on in-house sales, but the reality is (as it is in so many cases) that the tail is now wagging the dog, and the risk and fear of losing this HUGE customer dominates almost all of the day-to-day activities of this owner.

All it will take is for one of the two people in purchasing to have a heart attack, or the death of one of these two individuals, a change in ownership at the client's place of business, or even a casual sales call by another printer and everything that this owner has worked to build will collapse in a matter of weeks!

This is a true story with no happy ending. We are now in crisis management mode trying to turn this situation around as quickly as possible, but that is going to be very difficult.

Meanwhile, two or three times a week, the client calls the printer and gives him another $1,500 to $2,000 order that needs to be filled.

A consultant's Nightmare...

2009-11-05T14:27:00.002-05:00

Well, this is a first. Client wants me to prepare a valuation for his firm. He is buying out his partner. Nothing terribly complicated about it. He sends me, by mail, all requested information and we talk two or three times by phone. When I have the preliminary draft prepared I grab his business card which he had enclosed and send it off.

Twenty minutes later the client calls and sounds harried. He is on the road attending a conference but wants to let me know that the email address I sent the report to is a shop-wide address and that it is not a private email address! He is not mad per se, but I could detect some frustration in his tone.

He assumed full responsibility for the mix-up, and tells me when he was gathering the info together he couldn't find one of his special, private business cards so he sent me a business card with HIS name on it, but not with the email address for sending and receiving confidential information.

Oh well, I've had equally, if not more, embarrassing situations happen to me in the past. I guess the lesson to be learned is to double-check which address the client really wants you to use when sending confidential information.

Improve Your Financial Reporting Instantly!

2009-11-02T15:25:00.003-05:00

Nothing irks me more than to receive a set of financial statements, no matter how detailed or well organized, and yet discover they are lacking the most critical element of all - the key ratios or percent of sales column over on the right hand side.

If you are using Quickbooks, this is all you have to do to produce a much more informative set of financial statements with these ratios automatically calculated.

When producing a profit & loss report, but before printing, look up towards the upper left on the toolbar and click "Modify." This will bring you to a new screen that allows for all types of special formatting.

Look towards the bottom and click the "percent of sales" box, and then hit Ok. Voila! You now have a profit and loss statement with key ratios such as paper costs, payroll, overhead expenses, etc..... all the key ratios one needs to have readily at hand to analyze your business!

This same type of formatting is available in virtually every accounting package on the market. You just have to search for it. Once you've found it, make sure it is memorized and from that point on every time you produce your reports the ratios will be calculated.

Depreciation vs. Multipliers

2009-11-01T10:52:00.003-05:00

Although depreciation is not a direct cash expense, "Print Shop for Sale" nonetheless treats it as an expense when calculating owner's compensation and more importantly excess earnings.

Do not assume, however, that because we include or treat depreciation as an expense that it automatically results in a lower valuation method. Our valuation method is just as likely to poduce a higher valuation than a lower one - in either case it is a "fair market" value that is both practical and realistic from both the buyer's and the seller's perspective.

How is this accomplished? "Print Shop for Sale" uses a very detailed questionnaire for calculating its earnings' multiplier. This multiplier, because it relies on weighted answers to 14 different, industry specific questions, often results in a much more accurate multiplier than those used by many business brokers.

See "Print Shop for Sale" for further details. (www.printshopsforsale.net).

Valuations and depreciation

2009-10-31T16:08:00.002-04:00

Ask a business broker to place a value on your business and 99% of them will exclude depreciation and interest expenses from net operating expenses, and as a consequence they will often arrive at a significantly higher valuation than what Larry Hunt and I would arrive at using our business valuation methods.

Why? Because we view depreciation as a real expense to be considered, not a purely hypothetical $$$ amount that can be casually added back to net profits and translated into an increased valuation of the business. Why do brokers do this? First, it often leads to a higher valuation and a higher valuation always pleases the seller and brokers almost always represent the seller.

If you purchase a $100,000 piece of equipment and depreciate it over five years (straight line) then your Profit and Loss statement will report a depreciation expense of $20,000 each year. Most brokers will add that $20,000 back to cash flow when attempting a valuation. We, on the other hand, will treat it as a legitimate expense, even though a check was never written in that year.

On the other hand, suppose at the end of the year you decide the purchase was a terrible idea and you call the dealer or run an ad in a trade magazine. What do you think that piece of equipment will sell for at the end of the year? Do you think you can recover 80% or $80,000? Chances are good that you will be very lucky to recover even $80,000. Most likely you will be offered less. Whatever the offer, I think we most of us can agree that we will get significantly less than we paid for it and it is the difference between selling price and current value that depreciation is supposed to represent. When you sell an asset for less than you paid for it that is depreciation and that is exactly what you end up doing when you sell the business... you end up selling earnings potential and the assets used to produce those earnings.

What happens if you depreciate that piece of equipment over a five-year period of time. What do your financial statements look like in the sixth year? Well, assuming that piece of equipment was the only purchase in the past five years, your financial statements are no longer reporting a depreiation expense and your balance sheet shows an asset value of $0! In "Print Shop for Sale" we would assign a real-world, market value to that asset since it no doubt has some residual value while at the same time continuing to produce earnings for the company.

More on this topic later.

High Payroll Costs Killing Three Firms!

2009-10-29T19:56:00.004-04:00

In less than six weeks I have consulted for three firms, ranging in sales from $400,000 to $1.6 million and in all three cases the numbers were nothing short of shocking.

One company had allowed its payroll to skyrocket to more than 41%. With typical COG running at an average 26-30% and general overhead expenses running in the mid 30's, this company was bleeding "red" ink.

Shockingly, the owner had never really isolated his direct and indirect labor costs. He simply didn't know what to look for and needed prodding just to take the first step.

What was the first step? Terminate at least 3 employees in the next 48 hours. He did that. Another employee gave the owner her notice about a week later. Her notice had nothing to do with the turmoil at the company. What are the prospects that this company will survive another six months? Probably less than 50-50.

Another company in the midwest had labor costs at 37.6%. Once again, when you see a number like that you ought to react immediately, and not sit back and wonder how much more sales need to increase to bring that number back in line. It really can't be done. Don't delude yourself.

NOTE that is cases where Payroll Expenses are cited, they should not include wages, salaries and benefits paid on behalf of the owner.

My third company is doing a bit better, and has a bit more breathing room, but even this company is in serious troubles with payroll costs above 32%.

By the way, two out of the three companies mentioned above have clearly been violating FLSA (Fair Labor Standards Act) regulations by placing one or more employees on salary and expecting the employees to work "whatever hours are necessary" to get the job done. In one of these cases, the owner has already been fined and is looking at an audit that will cost him $1,000's of dollars in time reviewing payroll records for hundreds of employees going back more than four years.

Anyone who thinks you can simply place someone on an annual salary and thus be exempt from paying overtime is most likely a fool. I couldn't say stuff like that on list servs I formerly belonged to, but I sure as hell can say it here. You are playing with fire when you place anyone on a salary and assume that they are exempt from overtime regulations.

I spent more than 30 minutes today with an owner who was trying to find some loophole that would justify keeping one employee on salary.

By the way, the audit mentioned above - how was it initiated? By one former employee who decided to make a formal complaint with the local wage and hour board. That's all it took to get the ball rolling, and once it started rolling it just got bigger and bigger!

Wage Freeze & Reduction in Benefits

2009-10-20T10:51:00.006-04:00

A reader just commented on my previous post, by asking, "John, what about a wage freeze or benefit cuts? We are seeing again this year a double digit increase in health and pay 75% of that cost. I am looking at not keeping during our slow time, one employee and cutting back to 35 hours the rest of my staff or giving raises to spring or summer."

I believe that either one or both of the first two alternatives (a pay freeze or cut in benefits) are preferable to a reduction in salary. I see nothing wrong whatsoever with freezing wages until some time in 2010. As for cutting benefits, such as selecting a new health insurance program with higher deductibles, I have no major problem with that approach either.

However, I disagree with the "cutting back to 35 hours" because once again you are asking everyone to suffer by instituting a 12% cut in their salaries. Sure, cutting hours back to 35 is better than a reduction in hourly pay, but the net result is the same, a reduction in take-home pay.

Sure, the employees are working fewer hours, but just as important, if not more so, is the fact that their real-world take-home pay is being reduced as well. Most employees live from week to week and paycheck to paycheck and in this scenario everyone will feel the pain.

A better solution (in my opinion) is to terminate one employee as opposed to reducing the take-home pay of all employees. Granted these decisions are not easy to make. Terminating an employee is much more painful for both the employer and the employee who is terminated.

Then again, no one ever said running a small business is supposed to be easy.

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Reducing Wages vs. Terminating Employees

2009-10-19T09:14:00.004-04:00

The subject of whether you should reduce wages (i.e. lower the hourly rate for all employees by a specific percent) as opposed to terminating an employee has come up on two or three occasions in the past couple of months.

In one case specifically, a former client told me how much she was sacrificing to save her business and she had instituted an across-the-board pay reduction of 15%. In another case an owner asked me in advance what I thought he should do, reduce payroll or terminate employees.

I am emphatic that you should never penalize an employee team by exacting from them something they previously earned. If business slows down dramatically, it is your responsibility to lead the company by making hard decisions, and in my opinion reducing hourly rates in order to assure that everyone keeps their job is not the way to do it!

Most owners are exposed to the idea of reducing hourly rates across-the-board from listening to the evening news and hearing stories about trade unions agreeing to accept a cut in pay. Think about it, from the employee's standpoint and even more so from the union's standpoint, that is a smart move. The employees love the union for saving their jobs and they hate the employer for reducing their wages. The union finds itself in a win-win situation. The bottom line is what works for larger corporations and unions does not work for small businesses.

If you have a team of seven employees and their total annual payroll is $237,120 and you decide to reduce their payroll by 15%, that will lead to an annual savings of approximately $35,568.

Every single employee will be affected by this pay cut and every single employee will suffer. Worse, the pay cut will probably be accompanied by a speech by you that says something to the effect, "Folks, we are going to have to work harder than ever before as a team and I expect everyone to pitch in during these challenging times."

No matter how hard you try and no matter how sincerely you make your case, they will not believe you, even if you tell them you too are taking a paycut, or haven't received a paycheck in three months.

What will happen is that seven employees will be disgruntled by the suggestion that they should continue to work just as hard but work for 15% less pay than they received before. Every single employee will feel this way, no matter what you say or do.

My strong suggestion is that you thoroughly examine you list of employees, calculate your SPE which is probably lower than it should be, and then terminate the least productive of the team. In a real-world scenario involving seven employees with hourly wages ranging from $20 per hour down to $12 per hour, the reduction of virtually any single employee (but for the lowest paid) will accomplish the same $$$ savings that you would have accomplished from a 15% pay cut across-the-board.

Told of the options you faced after you have made the decision, the remaining employees are far more likely to respond to a pep talk than a speech announcing a 15% pay cut across the board.

A pay-cut embitters all employees, while a termination impacts only one.

A pay-cut will most definitely negatively impact the morale of the entire company, forcing many of the better employees to start looking for other jobs. A termination of one employee, on the other hand, will clearly convey to the remaining employees how serious you are and the steps you are prepared to take in order keep the company going.

By the way, don't be surprised, especially if you terminate the "right" employee, that one or more employees come up to you later and gently chide you that you should have made that move much earlier.

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Things You Absolutely Cannot Do...

2009-10-12T21:31:00.004-04:00

A recent consulting assignment was one of the most challenging I have ever tackled... $1.2 million in annual sales and was/is bleeding to death... The full story will have to wait for a week or two, but some lessons learned can be shared now.

Never, never loan your company money without a specific, documented plan for repayment. The only worse thing you can do is make another loan to supplement the first. If your company owes you money (check your balance sheet) and your cash flow is low or non-existent, make installment payments to yourself in lieu of taking a salary. You will save on payroll taxes and improve your balance sheet.

Never, never fool yourself that you can survive with an SPE below $100,000. The chances are good that unless you take immediate steps to improve productivity (and your SPE), that your SPE will drop rather than improve.

Never, never allow your total payroll to rise above 30%! There is no way a company with payroll costs at or above 30% will survive in the long-run. Don't lie to yourself and your spouse that things will get better. They won't so long as you ignore this number.

Never, never ignore your financial statements - The most troubled companies I have encountered these past three years are those that either don't receive financial statements on a regular basis, or if they do they never read them and compare them to the readily available ratios that can point the way towards survival and turn-around. If you want more information about some of these key ratios check out my recent blog that discusses "the six pack" of flying instruments.... (or something like that. )

It's late at night and I wish I could share more of my thoughts, but I spent 18 hours visiting with this firm and at least another 18 hours trying to pull my thoughts together and recommend step-by-step measures that might, just might save this company.

There's one very special problem I encountered with this consulting visit, but I could not bring myself to tell the client and I am still trying to determine whether it should be mentioned. I may share this in a future blog.

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Break-Even Analysis Spreadsheet

2009-10-09T10:37:00.006-04:00

You can now download an easy-to-use Excel Spreadsheet that allows you to play various "what-if" Break-Even scenarios.

All you need is a current set of financial statements, from which you will be able to extract your total fixed overhead expenses, your cost of goods as a percent of sales, and your payroll figures, extracted either as a fixed dollar amount or as a ratio.

To download, click the link in the navigation bar above or go to: www:quickconsultant.com and follow the "download" link to find the Break-Even spreadsheet.

P.S. You can subscribe to this blog and read new entries as they are posted by using I Power Blogger, or clicking on this link: http://www.quickconsultant.com/blog/atom.xml