Quick Consultant: Don't Blame the Recession!

As someone who talks to printers on a daily basis, I have to argue that most of the problems faced by printers today are self-induced and would have occurred regardless of the recession. Yes, there has been a decline in average sales in the printing industry. On average, sales have declined about 15% since 2007. That’s really not that bad, and a decently run business ought to be able to absorb that decline in sales.

My gut feel says that average sales for quick printers in 2010 will either match their 2009 performance or exceed it slightly. I believe the industry has indeed turned the corner, and many companies, but certainly not all, are stronger coming out of the recession than they were going in.

Yet, despite my modest optimism that 2010 will turn out okay, there are printers out who are looking for excuses for their own failures. They are quick to blame their problems on all those folks in Washington DC. Not only is that a cop out, it is a misinformed excuse for failure.

After 27 years in this industry, I have never encountered a printing company that could legitimately blame the political party in power or the state of the economy for its problems. For every failure in every market, large or small, rich or poor, I can find you a success story as well. I’m not saying the economy doesn’t play a role, but I have never found it to be the primary reason for failure.

 

Trouble Shooting Printing Firms

As is often the case, it is the simple things that can prevent a company from getting into a financial quagmire. I’m going to list four of the more common problems I find in this industry and suggest solutions to each. A forewarning: I have probably mentioned each of them numerous times in previous columns. The funny thing is that when things are rosy, folks don’t pay too much attention to these things. It’s only when things start to head south, and owners find themselves loaning money to their companies just to make payroll that they start to look around for answers. It’s only when owners discover they have maxed out their credit line that they start looking for solutions. They lose a large customer and they panic. By that time, it is often too late to turn things around.

Below are four tips to help you avoid that “knot in the stomach” feeling you get when you wake up one morning and realize that the business you have built for the past 15-20 years is no longer able to pay its bills and is, in fact, in dire straights. I’m going to keep each tip short and to the point. If I fail to explain it adequately just drop me an email.

 

1. Monthly Statements with Ratios. You must receive monthly financial statements on a timely basis. That means getting a P&L and balance sheet within 15-20 days following the end of the month. These statements also must include a “ratio” column expressing each expense as a percent of sales. This is mandatory.

I don’t really care too much if your total overhead expenses dropped from $311,849 in 2007 to $279,072 in 2009. What I am concerned about is that the percent of sales ratio for overhead expenses actually increased from 25.9% to 27.4%—that’s the danger signal.

Examine your overhead expenses and find out which ones have increased in the past 12-18 months. Use a highlighter to track these expenses month by month. There are very few overhead expenses that can’t be trimmed, especially if the alternative is going out of business.

 

2. Understanding the Balance Sheet. You can almost ignore the balance sheet when it comes to day-to-day operation. But you better be familiar with it when taking a longer view of the business, especially its value and whether that value is going up or down.

There are two things to check on your balance sheet: The current ratio and owner’s equity, or net worth. You will almost always have to calculate these manually. The “current ratio” is simply current assets divided by current liabilities. From a practical standpoint, it should be at least 2:1. Companies with a current ratio of less than 1:1 are no longer able to meet current obligations with what is coming in the door. That’s how otherwise profitable companies actually end up declaring bankruptcy.

Companies with current ratios of 3:1 or 4:1 have excellent ratios. These companies have acquired a great deal of cash to help them weather even the worst of financial times. A similar ratio is the “quick ratio.” This excludes inventory from current assets. A good quick ratio should still be 2:1 or greater.

While a P&L statement reflects the profit or loss of a business during a specific time frame, the balance sheet represents the total worth of a business from the day it opened. After all is said and done, the value of a business, at least its “book value,” is determined by subtracting total liabilities from total assets. This is often referred to as total owner’s equity or net worth. They are all the same.

Balance sheet items that always raise red flags are items such as loans to and from stockholders, loans to officers, or notes payable to private individuals. All of these deserve close scrutiny. Can you explain every entry?

 

3. Monitoring Payroll Ratios. I’ve yelled about payroll expenses for the past 15-20 years. Yet, hardly a week goes by that I don’t receive a set of financials that show payroll expenses as a percent of sales are setting some new record and are the cause of 95% of the problems being faced by the company. If your payroll ratio has increased since 2007, then you have a problem. If anything, the best run companies in this country have been able to lower their payroll ratios, not increase them. If payroll suddenly jumps and remains unacceptably high for more than 90 days, then you need to be prepared to act immediately.

Once again, I am looking at key ratios. I don’t care if payroll costs dropped from $383,165 in 2007 to $336,925 in 2009. What concerns me the most is that payroll costs actually increased from 31.8% to 33.1%. By the way, those statistics come directly from the most recent Financial Benchmarking Study published by NAPL/NAQP. You need to know precisely what the ideal payroll ratios are for your size and type firm, and the only place you can find that type of data is in that study. Call NAPL/NAQP today if you don’t have a copy. It could save your business.

 

4. The Loss of a Big Customer. You absolutely must be prepared to lose a big customer. The greater your dependence upon one, two, or three customers for the bulk of your sales, the more dangerous the situation is. By the way, the greater the dependence upon a small number of customers, the lower the value of your firm.

Looking back on 27 years of consulting, I have never encountered a situation where a printing customer was locked in for life. I knew one printer who relied on 50% of his income from one large foundation, for which his father was the executive director. It was lucrative work, and his father held the position for 26 years. Guess what? His father was terminated by the board and the printer lost 50% of his business overnight.

I’ve seen a purchasing agent with 20 years of a close personal relationship with a printer suddenly have his job terminated as the result of downsizing. I’ve seen big companies quietly sold overnight, and before the printer could even react, his key customer was moved the next week to another state. I knew the owner of a multi-million dollar religious publishing firm who stated that he would never sell and he would always rely on this printer. Guess what? About eight months later the business was sold, and there went the locked-in customer. You name it and I’ve seen it.

All I am saying is you absolutely must be psychologically and financially prepared to lose large customers—especially your largest—and you should be working every week to lessen that blow if it ever happens. Don’t delude yourself into thinking that it can’t happen.

 

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 qkconsult@aol.com. Check out John’s blog at www.quickconsultant.com.

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