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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New SPE Analysis is Revealing

Recently, we conducted a special analysis of financial data taken from the 2008 Operating Ratio Study and the results were quite revealing. First, we extracted all companies with sales between $700,000 and $3 million. Next, we sorted the data (representing approximately 209 companies)and then sorted the companies by their reported SPE. We then broke our sample data into four evenly divided quartiles and then calculated the corresponding owner's compensation for each of these quartiles.

Below is what we found:



The first line in each breakout represents averages while the second line shows medians. Note that the companies in the top quartile in terms of Sales per Employee(SPE) are achieving an SPE almost 70% greater than those in the bottom quartile. Even more relevant, however, is that the average owner's compensation of those at the top is almost twice that of those in the bottom quartile - 16% vs. 8.6%!

Causes of low SPEs are numerous, but essentially it comes down to the ability of one company to produce $1.5 million in sales with approximately 9 employees while a company with similar sales (and similar breakout of sales) could find itself employing 15-16 employees in order to produce the same $$$ volume and mix of work!

Some questions you might want to ask yourself are as follows:

Is your current equipment mix the best that it can be in terms of overall productivity, or have you been rationalizing that the "older stuff is still good and we still produce a lot of work with it."

Do you really need a full-time book-keeper, or that second DTP specialist?

Are you creating jobs for family or relatives that otherwise would not exist?

Are you making any attempt to track sales produced in key departments such as DTP or your pressroom? Without some formal tracking method for measuring output in these departments, the appearance of folks just looking busy or even harried can be very deceptive.

Of course, a company can have a very productive team of employees in place, but if the company fails to properly charge for this productivity it will definitely show up in lower SPEs as well as lower owner comp numbers!

Call me if you have any questions.

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