Quick Consultant: Checklists and Flying on Instruments

It’s no secret that I love flying. And there are some clear parallels between flying and running a small business and I thought I would share a few of those with you in this column.

From the very first introductory flight, students are taught to use checklists. Checklists are designed to help you catch minor problems and discrepancies that, if left unchecked, can ruin a perfectly good day.

About 20 years ago I authored my first book, titled “Checklist for Survival in the 1990’s.” When selecting the title for the book, I never gave a thought to the parallel between my “printing checklist” that I discussed in the book and the checklists used to assist pilots.

Well, there is a parallel between the two checklists. The FAA is pretty strict about how checklists are constructed. Virtually every eventuality is planned for, and there are specific steps to be taken in every situation. If you follow the rules, odds are you will fly safely for many years.

The same is true for the printing industry. If you follow the rules and use some basic checklists, you can keep your business from spinning out of control and crashing to the ground in flames. In the past six months I have found myself conducting more and more valuations. In virtually each case, I applied a formal checklist to measure the overall health of the business.

In some of these valuations, I was appalled that owners had waited so long to make changes in their business—changes that seemed to cry out for action. Your financial statements contain all the information you need to either salvage a failing business or take a mediocre business and make it a profit leader.

Sense of Urgency

In some situations, the calls for help have come too late. Some owners, realizing their businesses have little or no value, have simply locked the doors and walked away. A few others struggle every month to pay their bills, make payroll, and pay themselves a modest salary. The problem with many owners is that they lack a sense of urgency.

You must be willing to act immediately. You cannot put off taking necessary actions with the hope that things will turn around next month or in a couple of months. Chances are good they won’t and things will just keep getting worse.

Flying on Instruments

Virtually every pilot is familiar with term “six pack.” No, we’re not talking about Budweiser, but a standardized arrangement of six key instruments that pilots rely upon, especially when flying in bad weather. The instruments indicate airspeed, the horizon, altitude, turning and banking, compass heading, and rate of climb or descent. A good pilot can still keep the plane flying straight and level, even if he loses one or two instruments. Lose more than two, and even the best of pilots can find themselves in deep trouble, although this rarely happens.

The same can be said when it comes to running a printing business. If just one gauge is off or in the red zone, you can probably get by. But if two or three of the other instruments are in the yellow or red zone, you may be setting yourself up for an accident. The more gauges with needles in the yellow or red range, the more questionable it is whether the business will survive.

So here’s my six pack of instruments (ratios) and what they represent:

P&L Frequency: The frequency at which companies receive financial statements is often directly related to profitability. The weakest companies in our industry rarely receive monthly financial statements, while the best run companies wouldn’t be satisfied with anything less.

Payroll Costs: Every owner in this industry ought to be able to look at their financial statements and within seconds determine total payroll costs, excluding payments made on behalf of a single owner. This category needs to include not only gross wages, but health insurance premiums, unemployment, worker’s comp, employer FICA, bonuses, and anything else remotely related to benefits paid on behalf of employees. Well run, profitable companies in this industry consistently report total payroll costs in the 22-28% range, while their counterparts report ratios in the 33-40% range. Sometimes it runs even higher.

Paper Costs: Paper costs as a percent of sales typically run in the 9-16% range. Companies with heavy emphasis in digital printing tend to report at the lower end of the spectrum. Nonetheless, if your paper costs are in the 14-16% range it is an indication that something is wrong with either pricing, high error and re-run rates, or inefficient equipment. As a general rule, profit leaders typically report paper costs in the 10-11% range. Troubled companies can find themselves with paper costs in the 13-16% range. This is a small instrument or ratio that can reveal a lot about a printing business.

Sales Per Employee: SPE is a critical instrument that too many owners ignore. They make excuses, all the time failing to recognize its overall impact on profitability. SPE of $150,000 is easily attainable in this industry, but there are many companies reporting SPE of less than $100,000. A company with SPE of less than $100,000 and/or payroll costs above 35% is in trouble. Owners have few choices if they want to survive. You don’t put off decisions regarding termination of employees for six weeks or six months, hoping things will turn around. You act upon this information as soon as it is received.

Current Ratio: Here’s another instrument many owners seem to ignore. No one seems to pay attention to the balance sheet, and yet the balance sheet can tell you more about the overall health of a company than any single P&L. Check your net worth (or owner’s equity) and compare it to what was reported 12 or 24 months ago. Has it increased or decreased during this period? The current ratio (total current assets divided by current liabilities) varies dramatically in this industry. A good ratio, or one that should be targeted, is 2:1 or higher. A poor ratio, and one that can indicate a pending crisis, is 1.2:1 or lower. What is your current ratio, and have you discussed this with your accountant or CPA?

Owner’s Comp: This instrument is really an indicator—or the product of—the prior five ratios. But even this ratio can be distorted. When calculating owner’s comp, you cannot and should not include the wages paid to your spouse or business partner. Their compensation, or most of it, needs to be included under payroll costs. What about including perks in this calculation? That is permissible, so long as the owner can prove they are true perks and not necessary expenses. Claiming all payments for a company car as a company perk is generally not going to pass the “smell” test, especially in a company that requires at least one vehicle for deliveries and sales calls.

Check your own six pack regularly and keep your company flying straight and level. Happy flying!

Senior contributing columnist John Stewart is president of Q.P. Consulting, Inc. He is the co-author of the industry best seller “Print Shop For Sale.” Visit his website at www.quickconsultant.com or a website dedicated to the book at www.printshopsforsale.net. Contact him at 2110 S. Dairy Road, West Melbourne, FL 32904, call 321/727-2444, or email qkconsult@aol.com.