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.

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

Throw Out Your Three Year Plan

I recently exchanged emails with a former client. Included with the emails were copies of the most recent financial statements. The company has shown improvement since its 2008 year-end financial statements, but the improvements are coming far too slow and far too late in the game to save this company.

Always timid to make dramatic changes with a "sense of urgency," this owner recently set out to turn his company around with a "three-year plan." Unfortunately, the numbers indicate he will be out of business long before he reaches the three-year mark.

In 2008 the company lost ($140,000) or -24% on sales approximately $570,000. For the first nine months of 2009, the company has lost an additional ($46,500) or -14.5% of sales. How an owner can even sleep at night with financial statements like this is beyond me.

The company's payroll costs, excluding the modest amount taken out by the owner, has ranged from 48% in 2008 to 40% in 2009! Paper costs have ranged around 15% of sales. Rent is running 12% of sales. Any one of these ratios should have caused a "warning siren" to go off, but if it did this owner simply wasn't listening.

Folks, when you start seeing ratios like these, it's time to take immediate steps to stop the hemorrhaging! You don't decide to wait another few months to see if by chance a miracle happens, you must take steps immediately!

This company has known for more than three years that its payroll costs have consistently been running 30-50% higher than what they should be, and yet the owner has used one excuse after another to avoid making severe reductions in staffing.

While the rest of the industry is is using a total of 3.5 to 4 employees to produce $420,000 in sales (that's what is projected for this year), this company seems to require 5 FT employees, including the owner to produce those sales. Something is wrong with this picture, but the owner has simply turned a blind eye to this and many other issues, month after month and year after year.

Even worse, this company has known for more than six months that it was occupying a space twice as large as it needed and thus paying twice the industry norm for rent. While landlords and tenants across the country have been coming to terms and making adjustments on leases, this owner has done nothing more than make one mild appeal to the landlord. The landlord responded that he was in trouble himself and was in no position to help!

During my conversations with the owner, I was shocked to hear that this print shop owner seems to empathize more with the landlord's predicament than he does with his own business. Suffice it to say, unless all of your other ratios are lower than industry benchmarks, you simply can't pay 12% of sales for rent and expect to keep your doors open.

Not all stories have good endings. This is one of them. On multiple occasions I have stressed that what this business needs is not a three-year plan, but a three-week plan but I know it isn't going to happen. Sometimes you would like to reach out and shake these owners but you can't. You can put the fear of God in them, but you can't force them to do what needs to be done.

P.S. You can subscribe to this blog and read new entries as they are posted by using the button near the upper right hand corner of this blog, just beneath the "archives."