The past several years have been particularly difficult for printers’ profitability. The 2008/09 recession has significantly reduced sales as printers’ customers have reduced their marketing budgets. Furthermore, printers’ customers have moved some of their shrinking budgets to the Web. To add insult to injury, energy costs and medical benefit costs have increased many times the rate of inflation. The good news is that most printers experienced a stabilization of revenue in the third quarter of 2009. During the first quarter of 2010, printers will see if their customers have restored marketing budgets or just maintained 2009 funding. In either case, there is no guarantee that 2007 revenue level will ever return, and it is time for printers to manage their firms based on the realities of today.
What To Do?
There is a proven three-step approach to returning a printer to profitability after a downturn in sales:
Step 1: Bring cost in line with current sales levels;
Step 2: Review your pricing strategies and insure that your best customers are supported and defended from competition and that your least profitable customers are identified and corrected, and
Step 3: Focus and manage your sales force so it is achieving profitable growth.
The first step is most important to complete as a successful cost management program and will provide the cash and time to complete Steps 2 and 3, which may cost money and will certainly take time.
Return To Profitability
- Match costs to current sales;
- Modify pricing strategies based on customer profitability;
- Manage sales force to achieve profitable growth.
This article will address Step 1: Match Costs to Current Sales Levels. Over the years, many tools for matching cost to current sales levels have been proposed. Gifted leaders are absolutely qualified to walk around and identify most actions needed to resize. Such talent is a requirement in today’s environment but because of the dramatic downturn in sales, usually not adequate to identify all actions needed. The metric discussed here can help any printer match cost with sales and more importantly assist the entire workforce in maintaining the proper relationship between costs and sales.
The metric is Value Added per Payroll Dollar (VA/Payroll Dollar) and is calculated by dividing Value Added by Payroll Dollar when each is computed as follows:
- Net Sales, less
- All Material Cost and Supplies, less
- All Outside Services
- All Payroll including Commissions, plus
- All Employee Benefits, plus
- All Employer Payroll Taxes, plus
- All Temporary Labor
VA/Payroll Dollar has several unique characteristics that make it a superior metric for assisting printers. First, it is highly predictive of profits. It accounts for 90 percent of what drives profits when profit is measured as EBITDA as a percent of sales. Accordingly, concentrating on this metric is likely to drive improved results. Second, it predicts profits over multiple periods of time for the same printing firm. Third, it predicts profits across all segments of the industry. Fourth, it is easily understood by all employees.
How To Use VA/Payroll Dollar
- Begin the process with a mindset that all labor costs are variable, including executive salaries. Remember there is no study in support of the premise that you need to be big to be profitable. Family owned business must also identify any salary that is attributable to ownership and only include in the following analyzes market salaries for actual work performed.
- Compute VA/Payroll Dollar for each of the last several years including the most recent years when your firm’s profit was acceptable.
- Compute VA/Payroll Dollar by department (or in whatever manner you analyze labor costs) for each of the last several years including the upcoming budget year.
- By examining VA/Payroll Dollar in those years when your firm’s profit was acceptable, develop VA/Payroll Dollar objectives for the upcoming year by department (or in whatever manner you analyze labor costs).
- Compare VA/Payroll Dollar objectives (step 3) to upcoming budget (step 2) and identify areas in need of improvement.
Now the difficult work begins. If your current VA/Payroll Dollar is below 1.5 it is unlikely that you are making any money. Obviously exceeding this level is mandatory. Examine staffing levels, pay rates, machine speeds for the periods above on an absolute basis and on a per VA Dollar basis.
Make the difficult decisions. For instance if sales have dropped by 20 percent, five customer service reps now needs to be four. If sales reps are not covering their draw—reduce the draw or fire the rep and transfer the fired rep’s customers to the house or performing reps. Today most employees are happy to have a job. Although unthinkable two to three years ago, many firms have successfully reduced salaries across the board without a significant reduction in employee morale. You may need to rethink how you staff shifts and rethink your attitude about sending people home when you don’t have work.
The bottom line: Profits can only be achieved when your labor costs are in line with your Value Added. Matching your costs, particularly labor costs, to your lower sales is the first step to returning your printing firm to profitability. This is difficult work and must begin with the attitude that many firms make good profits. Your current sales levels and you can do the same.
Think smaller, match cost and look forward to great profits when sales return to higher levels. For example, if you were a $20 million printer and now can reasonably expect sales to be at the $15 million level—match your cost to a $13 million sales level and enjoy great profits as you achieve $15 million in sales.
Stuart Margolis is a CPA and partner of MargolisBecker LLC. He provides information that helps firms operate profitably. For more information, visit www.margolisbecker.com.