A printer in the Midwest started to experience a slide on its profit and loss statement. After calculating these ratios, he was able to communicate clearly where cost adjustments needed to be made and why. As he explained on our recent teleconference(*), “If you don't measure the right things, or you don't let your staff know their importance, nothing will improve.”
By combining these two ratios, you can right size your printing company's labor cost. To reiterate, the first ratio wants you to run your company at 80 percent or more Utilization of the direct labor. The second factor tells you to spend $1.10 on average for every dollar of the now efficient direct labor. By monitoring and striving to achieve or excel beyond these ratios, you are right sizing your company.
A final ratio to consider for measurement is as simple Cash Flow coverage ratio:
EBITDA Coverage of Debt Service Ratio = EBITDA (Earnings before Interest, Taxes and Depreciation and Amortization) divided by Debt Service
Banks use this ratio. So do creditors. This simple calculation tells you whether you have the cash flow to pay your debt service. Without the cash flow from operations, much more creative means has to occur to pay off the banks. Obviously, it's easier to earn it from operation, so rightsizing your operations, payroll and non-payroll cost is the challenge. Cash Flow Coverage should be 1.25 to 1. Remember, even if you don't have a bank covenant, it is very important to have this ratio covered. If you cannot cover debt, it becomes a steep and painful slide out of business.
Beyond all this is another hurdle for all employers: How do you adjust appropriately yet maximize productivity? First, use the measures described here. For additional guidance, make historic references. Look back five, or even 10 years, at your company's past performance ratios. Were your ratios in line then? If so, what did a healthy cost structure look like at that time? If you're at a loss for comparisons, use the Printing Industries of America Ratios Reports. The Ratios Reports are segmented in various ways including by company size. A company that was accustomed to sales levels around $10 million/year, but now needs to scale back to a $7 million level, can use these industrywide reports as a guide.
When the dust settles, will there be an upside in all of this? Industry experts say yes, so rightsizing now allows you to become smaller but mightier—and well positioned for that recovery when it comes. Indeed, scaling back to profitability has been needed for years.
Many printers report that the recession has caused them to take a fresh look at work coverage, shifts and job efficiencies. Creative ideas like having two-shift turnovers in a 24-hour period instead of three, or running 13-hour crews instead of eight-hour crews have proven effective for some. Others are creatively utilizing part timers to fill in gaps, managing labor costs like a variable cost. We all know that rightsizing in times of growth is easier than during a down economy. No one likes to make the tough decisions. In this economy, though, look at rightsizing for what it really is—a sound, business-based opportunity to become more profitable. After you calculate the pertinent ratios and do the comparisons to past years and industry averages, you will be in a prime position of strength to reboot and clean things up that you should have addressed years ago.
(*) A Cup O' Joe is a complimentary teleconference series for printers offered by MargolisBecker on timely topics for the graphic communications industry. Details and registration forms for upcoming sessions are available at www.margolisbecker.com under the “Events” tab. MargolisBecker LLC is the nationally known business and management advisory specialist in the graphic communications industry. We offer services including strategic planning, business valuations, mergers and acquisitions, turnaround management, accounting, auditing and tax compliance; and are the preparers of the PIA financial Ratios Studies. If you have any questions, contact Stuart Margolis or Joe Becker at (610) 667-4310 or e-mail to firstname.lastname@example.org or email@example.com.