Keeping Your Ratios in the Green

A couple of blogs ago, I discussed the "Six Pack" of instruments used by pilots. Monitor and scan those instruments frequently, and a pilot is likely to have a safe flight. The same is true for our "Six Pack" of key ratios in the small format printing and digital copying arena.

Pilots often are told to make sure their instruments are reading in the green, and the same should be true for the instruments we use to run our printing and copying businesses. Below are are the specific numbers you will need to look for to keep your instruments in the green. How do your numbers compare?

1. Profit & Loss Statements - To remain in the green, you must receive financial statements on a monthly basis. Nothing else will do. Even more important is that you must take 15-20 minutes studying these statements and comparing them to previous statements, taking note as to what trends (good or bad) are developing.

2. Payroll Costs as a Percent of Sales - You must keep total payroll costs at or below 29% to remain in the green. As soon as you see this ratio rise to 30% or above you need to carefully examine possible trends that may be developing in your company. You are clearly entering the yellow or orange zone (if not the red zone) if your payroll costs rise to 31-34% or higher.

3. Paper Costs - Paper Costs as a percent of sales should rarely if ever exceed 11-12% if you want to remain in the green zone. Let this ratio climb by even one percent and it is an early sign of trouble ahead. Companies reporting a signficant percent of their sales coming from digital copying often report total paper costs in the 9-10% range.

4. Sales Per Employee - In order to remain in the green, I believe you must maintain or acheive an SPE of at least $125,000. That isn't a great number and certainly doesn't represent the best that can be achieved, but it should be enough to keep you out of trouble.

5. The Current Ratio - Too many printers ignore their Balance Sheet because it sometimes doesn't make a lot of sense. The current ratio rarely appears on you balance sheet but it can be calculated quickly by dividing your total "Current Assets" by total "Current Liabilities." Make sure the entries for both these categories are properly recorded. To remain in the green, nothing less than 1.7:1 should be permitted. Even that is a bit weak, but it would still be in the green. Below that number, and you are drifting into the yellow, orange or red zones - zones you definitely want to avoid.

6. Owner's Compensation - An owner's compensation of 13% will barely keep you in the green, but you won't have the safety margin you need to move forward and grow your business. Ideally, you need to be striving for an owner's comp of 17-20%, which is a level that 25-35% of our industry achieves each year.

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Your Payroll Ratios - Worth a Second Look

Twenty-six years ago the quick printing industry was much different than it is today. Average sales (according to an Operating Ratio Study published at the time) were $336,000. High-speed B&W copiers were in their infancy, and digital copiers (B&W or color) didn't even exist. We relied on photo-direct platemakers and small presses for more than 75% of our total income.

Three interesting ratios also appeared in that early study as well. Averge "Cost of Goods" was 29.7%, "Overhead Expenses" were 28.1% and "Payroll" was 24.3%. Total costs of operation thus totaled 82.1%, producing an average owner's compensation 17.9% of sales.

Move ahead 26 years and we find some interesting changes in our landscape. Despite the dramatic changes brought about as a result of computerization and digital copying technology, two key ratios have remained virtually unchanged. Today, average "cost of goods" remains virtually unchanged at 29%; "Overhead Expenses" have actually dropped slightly and now average 27% of sales.

Unfortunately, "owner's compensation," which was 17.9% in 1983 now averages 12.6% -industry, a drop of 5.3%! This represents a decline in profitability of almost 30%, and surely deserves the attention of every owner.

How did that happen? How did those profits drop by 5.3%? Well, if you haven't guessed by now, the entire drop in owner's compensation can be traced to a dramatic increase in average "payroll costs."

Today, "payroll" now averages a whopping 31.4% of sales and that is more than enough to account for the drop in profitability in our industry. Had it not been for slight improvements in "cost of goods" and "overhead expenses" the drop in profitability would have been worse.

What is even more amazing, is that payroll costs have increased dramatically despite the vast increases in productivity promised (and even achieved) via automated presses, CTP, digital copiers, computerized estimating systems and modern DTP systems.

The only good news to be found in all of the above is that not all companies have marched to the same drumbeat.

At least 25% of those companies survey in 2008 reported an average owner's compensation of 23%! How did they achieve or exceed the profits reported in 1983? By closely monitoring and controlling their "payroll" costs! These companies report an average "payroll" costs of 26.9%, proving that payroll costs can be controlled.

One critical piece of advice. Your monthly financial statements need to separate total "payroll" costs under a distinct and separate heading. Beneath this heading should be gathered all expenses directly and indirectly related to payroll. Don't allow your accountant or bookkeeper to place payroll items such as workman's comp., Federal and State unemployment benefits, health insurance and a myriad of other payroll expenses unde "overhead." Despite the fact that this is a popular place to locate these expenses, they don't belong there! Enough said for now.

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