It's All in the Numbers A Tale of Six Firms

As I prepare this column, I am also in the process of working on a PowerPoint presentation for printers in California. I am supposed to talk about pricing and running your business by the numbers. Half the effort in these types of presentations is trying to make sure the audience can relate to the numbers and ratios you present, rather than simply looking at them in the abstract.

So I pulled up the master Excel spreadsheet used to produce the NAQP 2008-2009 Operating Ratio Study and started doing some extractions. Although the spreadsheet contains detailed financial data for more than 340 companies, a typical query—even though we are dealing with almost 40,000 cells—takes me less than a second.

Since the presentation was for a California group of printers, I decided to do a search for companies in California that fell between $800,000 and $1.2 million in annual sales. Why that sales range? Because I knew, from past research, that about 40% of our segment of the printing industry falls within that sales range. My search turned up six companies. A national sort within the same sales range turned up 80 companies in California.

Remember the TV show named The A Team? The main character in the popular series was famous for saying, “I love it when a plan comes together.” Well, that’s exactly how I feel when I do financial sorts like these and the numbers just seem to come together (as well they should) to reconfirm some of most of my fundamental beliefs about what works and what doesn’t work in this industry in terms of profitability.

One of the most interesting of all, although it does not surprise me, is that the ratios, even among a very small selection of firms taken from one specific section of the country (one state, in this case), will often come very close to mirroring the national ratios and vice versa.

No One Pays Attention!

One cannot look too long at the bar charts on this page without noticing the great similarities between our small selection of firms from California as compared to the 80 companies that came from our national selection. Remember, these are companies whose 2007 sales fell between $800,000 and $1.2 million.

Look at Cost of Goods (COG) for a minute. Notice how relatively close the numbers are between the Top Third, Bottom Third, and the All selections. Historically, the average Cost of Goods in our industry hasn’t really changed in more than 29 years. If your COG is close to these percentages, it indicates that, from a profitability standpoint, your pricing is probably okay and you ought to look elsewhere if you’re facing problems.

Jump over to Overhead Expenses. Notice here the huge gap between what the top third and the bottom third in our industry report, whether in our California Six or our national sampling. When you delve deeper into Overhead, there are noticeable differences between the best and worst in this industry, but you will have to order NAQP’s Operating Ratio Study to get to that type of detail. (By the way, if you don’t have a copy of this study, you ought to order one today. Call NAQP at 800/234-0040 or visit their website at www.naqp.com

Payroll Is Always the Culprit

The biggest culprit affecting profitability, as I’ve preached many times before, is your payroll ratio. That ratio includes gross pay, employer and employee FICA, Medicare, unemployment, worker’s comp, health insurance, bonuses, etc.—all the payroll expenses paid on behalf of employees, excluding those paid on behalf of the working owner.

Look at the two graphs and examine closely the bars above Payroll. Notice the gap in percentage points between the red bar and the green bar. That gap may not explain all the reasons between the top and bottom firms in our industry, but it sure goes a long way! Ignore this ratio or fail to control it properly, and you could be doomed to mediocrity and having a business worth little or nothing when it comes time for you to retire and try to sell your company.