This past August reminds me of the opening line from “A Tale of Two Cities,” by Charles Dickens – “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity…”
As for the “best of times,” I was able to help an owner salvage a business with $3.2 million in sales and $3.9 in expenses. The owner had already loaned his company $90,000 and by the time he contacted me he had just sunk another $75,000 into the business—the latter coming from the education funds for his two daughters. In this case, my advice was free, and I was able to point out some immediate problems that could resolve the crisis and hopefully turn the business around. More on this later.
What about “the worst of times?” Well, I spent the entire month of August with a high level of anxiety, anger, and frustration. Somehow, somewhere I contracted a serious staph infection called MRSA. MRSA is resistant to most antibiotics, and those that can be used to treat the disease have many strong side affects. Left untreated or misdiagnosed you can die from an MRSA infection. As the month of August progressed, and as I sought out help from general practitioners and orthopedic surgeons, it became clear that I had reached, as Dickens said, “the epoch of incredulity.”
A Comedy of Errors
During the month of August I discovered that my family physician is only good for writing prescriptions, and wouldn’t know how to incise a small infection if he tried. I encountered an orthopedic surgeon who declined to treat the infection and suggested instead that I visit the emergency room at the local hospital. He then had the nerve to invoice the insurance company for $375 for this worthless piece of advice.
When I told my doctor I wanted a second opinion he recommended another surgeon upstairs. When I called that office to make sure my appointment had been made the nurse told me they don’t treat MRSA patients and that I should visit an infectious disease specialist instead. By the time I saw the latter, it had become a comedy of errors and the infection had gotten worse! The infectious disease specialist basically told me that the drugs I had been prescribed at the dosages given had been totally inadequate for treating MRSA. Instead of getting better it was getting worse. Consequently, I now needed five days of infusion with an antibiotic 100 times stronger than what I was taking orally.
As I sit here today typing this column, my anxiety and frustration levels are still at an all time high. I completed the infusion a few days ago, but I am now back to double doses of another antibiotic. At high dosage levels, antibiotics can cause numerous side effects, including high levels of anxiety.
By the way, don’t ever let anyone ever tell you that you can’t detect if you have high blood pressure. Hogwash! I can. And despite taking blood pressure medication, I can tell you my blood pressure is probably 160/90 as I write this column—all of this as a result of the drugs and frustration of trying to fight a serious infection and find competent doctors.
Anyway, the primary lesson I learned from this episode also applies to the “best of times” portion of this column that follows. While undergoing treatment for MRSA, I was told time and again by both other patients and nurses that patients need to become their own healthcare advocates. You need to be very knowledgeable regarding all medication and treatments that are prescribed, and don’t hesitate to ask questions.
Ironically, that’s the same advice I ended up giving to my $3.2 million printer who called me for help. I told him he needed to be a much better advocate for his own company or he would surely fail. He was relying far too much on second hand information from his managers, and was allowing others to dictate how his financial statements should look.
It Was the Best of Times
Anytime I can help a fellow printer, whether I am paid or not, it gives me a real high. A couple of months ago, I wrote a column offering some free consulting if you were really having problems and needed some explanations of comments I had made in the column.
Some what surprisingly, the owner of a company located in the northeast and doing $3.2 million contacted me and asked if the offer was still good. I said yes and he told me that he was in the process of loaning $75,000 to his company. This loan is on top of a prior loan to the business of $90,000 that continues to be listed on the balance sheet. I pleaded with him not to loan the company more money before we talked, but he couldn’t wait.
I told the owner I wasn’t sure I could help, but told him to fax me his financial data. He forwarded detailed P&Ls for the past two years along with a current balance sheet and list of employees. That was more than enough to work with.
I absolutely refuse to work with financial statements prepared by accountants, CPAs, or in-house bookkeepers. Why? Because most of them do a lousy job in presenting the information you need. In almost all cases they refuse to use the printing industry’s standard chart of accounts. Instead, they insist on using something out of a textbook or something suggested by Quickbooks. These CPAs, accountants, and bookkeepers think they know best, and tend to throw up roadblocks when clients suggest they want to see their P&Ls formatted in a different way.
If you don’t use a standard chart of accounts, there is no practical way to compare the ratios of specific costs centers to others in the industry. Of course, no one cares when you are making a huge profit; it is only when you start losing money and loaning money that this type of information becomes critical.
As an owner, you need to be the primary advocate for your company, and you need to demand that the information on your P&Ls be presented in a format that you want—not what others suggest. This owner’s P&L was three pages in length and it had wage and salary data scattered throughout the three pages under a variety of headings. I asked him why he would take the single biggest expense in his business and then chop it up and spread it all over the place to the point where there was no way, other than with a calculator, to bring all the numbers together.
The owner admitted that he hadn’t taken charge of the layout and he acknowledged that he had allowed the bookkeeper to do it her way. As a result, he couldn’t see the forest for all the trees. There was so much individual detail that he couldn’t see things that jumped out at me in less than two hours.
By the way, this company is an all-digital company. It has grown at a steady 32-41% rate for the past eight years. Suddenly, for the first time, its sales have dropped. It had reached $3.9 million in 2008-09, but those sales have dropped to $3.2 million for 2009-10.
The owner’s concern was the drop of $700,000. My concern is that he apparently couldn’t live and make a decent profit on $3.2 million. I told him most of the printers in this country that I know would kill to be doing $3.2 million, and they would be making at least $300,000 in salary alone from that size business, not the $165,000 he was taking out currently.
A drop in sales of $700,000 is certainly disappointing, but it isn’t the end of the world. However, you need to be prepared to act early on to keep your ratios in line, and if that means cuts in payroll, then so be it! Once again, you need to act with a sense of urgency and take charge of your own company. I surely wouldn’t count on most of the managers I meet out there for advice. One thing you don’t do is ignore what your financial statements have been telling you month after month for the past 12 months, and then call someone like me for help.
Everyone Is Busy
One ratio I discovered early on was that his total labor costs, excluding what he received, was 41% in 2008-09. That same year, they reported a loss of $132,000. The next year, their sales dropped 18%, down to $3.2 million, but their salary ratio, although improved, was 38%, once again excluding that paid to the owner. “We really cut our staff to the bone early last year, and cut everyone’s salary by 10%. My managers (note the plural) tell me we are as lean as we can be and still produce our products,” the owner told me.
I asked him what kind of training or background in our industry do these managers have that would qualify them to make such a statement. “Everyone is busy?” Hell, everyone is always busy, especially when being watched, but that doesn’t tell the tale. Once again, the owner was not being very astute, nor was he a very good advocate on behalf of the health of his own company.
He was relying on others to frame the problems. The problem (I am yelling now) is not the loss of sales, but the continuation of very high labor rates, which make it almost impossible at any level of sales to produce a profit. It is not the loss of sales, but the lack of guts to make hard decisions when required. Here is a comment that appeared on the spreadsheet that I prepared: “It is virtually impossible to produce any kind of profit, let alone reduce your debt, with labor ratios as high as they are. Industry-wide, the top 50% of companies in the $2-5 million range report average payroll ratios of 26-32%! Although sales dropped by 18% from 2008 to 2009, company’s payroll has only dropped 2.3%.”
What we have here is a fire that is still smoldering and it will not be put out (and probably will get worse) unless far more drastic steps are taken. I told the owner that he needs to trim his payroll costs down from its current 38% to 32%. That 6% reduction amounts to a savings of $215,950. Even with that amount of savings, the company would still be losing money if it continues on its current path.
The Losses Continue Unabated
Despite the loss of $132,000 in 2008-09, it got worse this past year with a reported loss of $246,047 (-6.8%). It is important to note that this owner is withdrawing about half of what he should, according to industry standards. As a result of his willingness to take less out of the business, he is, in fact, lowering the value of his business because it is providing additional dollars to employ workers who are simply not needed. Once again, this owner has not been a good advocate for his best interests. He has relied on managers to do what only he can do.
Not only is the company losing sales, it is unable to meet its monthly expenses (thus the losses) and the primary culprit is payroll. And yet, every time he talks to his managers they tell him they are working as hard as possible. I calculated their sales per employee and it came out to $133,302, which if this was typical of the industry, would be a good SPE, but this company is 100% digital and has a huge investment in “state of the art” digital equipment. Their SPE ought to a minimum of $165,000-180,000. That translates into an employee reduction from 27 employees to 20-21 employees.
Other Solutions & Options
A modest increase in prices across the board of 3% would translate into an additional increase in sales of $108,000. After preparing my initial brief report, I discovered something that made most of my expense ratios even worse. Under income, I noticed $122,000 for “Postage Income.” Postage income received from clients should never be listed under the income portion of the P&L. Neither should “Postage Expenses.” Both of these items need to be treated as “below the line” as additional income and expenses.
So what’s the big deal? Well it means that the expense ratios I initially calculated all increased because the real sales they produced had dropped $122,000. Well, what the heck, this was a “freebie.” Next time I will have to charge.
Senior contributing columnist John Stewart is president of Q.P. Consulting Inc. Contact him at 2110 S. Dairy Road, West Melbourne, FL 32904, call 321/727-2444, email email@example.com. Be sure to check out John’s blog on his website at www.quickconsultant.com.