BASIC RATIOS TELL THE TALE – In 2007 we reported average Owner’s Compensation was 12.6% for ALL participants. In 2009, Owner’s Compensation, for the first time, actually dropped below 11% and now stands at 10.9%. Please note that many of the key ratios reported above do change based upon the extraction criteria being used. The 2010 Financial Benchmarking Study provides numerous breakouts based upon annual sales categories, population densities, companies with and without sales reps, and profitability quartiles, just to name a few.
PARTICIPANTS WEATHER THE STORM - With the exception of Cost of Goods, which has remained amazingly steady in the 28.5-29.5% range for more than 25+ years, expenses such as payroll (excluding owner) and general overhead rose enough in the past two years to produce a dramatic decline in owner’s compensation, at least for the 124 companies who participated in both the 2007 Operating Ratio Study and the 2009 Financial Benchmarking Study.
What an exciting time to be in business! I must admit that I’ve been in this industry for more than 35 years and I can’t recall a single day when I actually dreaded going to work. I look forward to coming into the office every single day. Some days I’ve got a report to write, while other days I have to analyze some figures for a special article I am working on. It really doesn’t matter. There’s always something new and challenging on which to work.
This past weekend I found myself more energized than normal as I began examining some of the early data coming in from this spring’s special survey conducted by NAQP, its 2010 NAQP Financial Benchmarking Survey, formerly called the Operating Ratio Study.
To some readers, words such as “excited” or “extra energy” sound a bit over the top when it comes to analyzing financial ratios for an industry, but believe me when I say they are not. Having been a newspaper reporter before I got into the printing arena, there’s just something special about being among the first to uncover exactly what is happening in an industry, especially one with which you’ve you have been so closely involved with for so long.
So it comes as no surprise that I spent all day April 2-3 pulling together all the data submitted for this year’s biennial benchmarking survey so I could write about it in this column. Even though the deadline for the survey was March 22, we had to allow another few days for the surveys submitted by mail to work their way through the postal system and back to our offices.
As a practical matter, we simply cannot conduct any serious analyses whatsoever until all the data is available. Once we reach our assigned cut-off date, we then use a series of tests and examine virtually every cell for outliers and mathematical errors. With more than 300 printing firms submitting surveys this year, it meant that we had to deal with more than 40,000 data cells on our Excel spreadsheet. When we begin to do specific extractions or sorts it gets even worse, with the spreadsheet actually doubling in size to almost 80,000 cells as we use special sorting criteria and advanced filtering to explore some of the keys to success in our industry.
Customized Study to Participants
Fortunately, for as long as I can remember, I’ve always had help producing this study. My good friend and industry guru Larry Hunt has always been at my side helping me to produce this major industry project. While I use Excel to produce hundreds of special extractions, sorts, and comparisons, Larry has this truly unique talent for just being able to cut through the chaff and spot a major trend or an erroneous data entry in seconds, all without the benefit of Excel or a calculator. Larry, as he has done for years, will also author the Executive Summary that will accompany this year’s final study.
Every company that submitted a survey by the published deadline will receive a customized Financial Benchmarking Study before the end of May. The report will include a number of profit and loss, balance sheets, and key ratio sheets comparing various aspects of their performance against their peers in the industry. Accompanying each customized report will be a special Executive Summary written by Larry Hunt.
Hunt will also author a longer, more detailed Executive Summary that will appear in the complete, 86+ page 2010 Financial Benchmarking Study. Readers who did not participate in this year’s survey, can purchase the complete study directly from NAQP by going to its website at www.naqp.com. The new study is available to NAQP and NAPL members for only $155, and to non-members for $225.
From my perspective as both a consultant and industry analyst for more than 30 years, I consider this document to be in its own distinctive class. I have taken absolute novices in this industry and made them experts about its financial inner workings within one weekend, using nothing more than the Financial Benchmarking Study as a primary tool.
I’ve even told people, especially newbies, that if you purchase this report and spend two or three hours analyzing its contents, you will end up knowing far more about what really makes this industry tick and what it really takes to be a profit leader than 90% of your peers.
Sales & Profits Clearly Down
Although we still have a couple of weeks before the Benchmarking Study is finalized and released, we are confident enough in our preliminary findings to provide the following information. We’ve already started producing a variety of test breakouts based upon specific criteria. Below are just two of the dozens of breakouts that will eventually make their way into the final study.
Our first data is from an “ALL” extraction of all participants, excluding those with annual sales below $150,000 and/or greater than $5 million. Note, those companies excluded from the data analysis will still receive their own customized reports.
All Participating Firms (This year’s survey)
- Average Sales: $1,016,939
- Average Cost of Sales: 29.3%
- Average Payroll: 32.9%
- Average Overhead: 26.9%
- Owner’s Compensation: 10.9%
- 2009 Sales vs. 2007 Sales: -12.9%
- Sales Per Employee: $118,010
Comparing the above ratios to what was reported in the Operating Ratio Study conducted two years ago, we find that average annual sales dropped $164,976, or almost 14%, between calendar year 2007 and 2009.
The data below represents ratios extracted from companies with 2009 sales between $800,000 and $1.4 million—one of the largest, most representative sales extractions in the benchmarking data:
Firms Between $800,000 - $1.4 Million in Sales (63 companies)
- Average Sales: $1,026,973
- Average Cost of Sales: 28.7%
- Average Payroll: 32.8%
- Average Overhead: 27.1%
- Owner’s Compensation: 11.4%
- 2009 sales vs. 2007 sales: -15.6%
- Sales Per Employee: $118,391
Comparing 2007 vs. 2009
So, how do some of these overall performance ratios really compare to those we reported in 2007, since we are dealing with two different groups of respondents? Remember, those who participated in this year’s Benchmarking Survey are not necessarily the same as those who participated in the 2007 Operating Ratio Survey.
Well, thanks to the efforts of Larry Hunt, and the fact we must be able to identify individual participants in order to meet our fulfillment obligations, we now have the tools that allow us to identify companies that have participated in multiple/consecutive surveys. This, in turn, allows us to get an even more accurate read on the industry since we can look at what the same companies reported for the year 2007 compared to what they reported for 2009. We found 124 companies that participated in both biennial surveys. Among those selected companies, we discovered the following:
|Cost of Goods:||28.7%||28.4%||-0.3%|
The data, although somewhat disappointing, should certainly not come as a great surprise considering what the printing industry has endured during the past two to three years. With a decline in sales across a two year period, one would expect that overhead expenses, since they are generally fixed, would tend to increase as a percent of sales.
It is also not surprising to find that payroll expenses increased even while annual sales started to decrease. We believe this is quite simply to be blamed on the reluctance of owners to layoff employees when a drop in sales first became apparent.
Assuming that most owners recognize the long term danger of allowing payroll as a percent of sales to slowly creep upwards, there is still a lag between the time the problem is recognized and the time a solution is finally implemented. In either case, this hesitancy to terminate clearly shows up in lower owner’s compensation and a decrease in sales per employee (SPE).
Next month we hope to highlight at least a few of the key characteristics of the profit leaders in this industry that distinguish them from the profit laggards, and how you can move your company into the former group as opposed to the latter.