Money Talk: Effective Management Using the PIA Ratios (Part 1)

It is time to buckle down and align goals with sound benchmarks. This year’s PIA Ratios show growth in profits for the industry on average and among industry profit leaders. What is the secret to making money in the printing industry these days? What are the profit leaders doing differently than the rest of the industry?

Detailed answers to both of these questions are provided to you as a critical management resource in the annual Printing Industries of America (PIA) Ratio Studies. Industry leaders understand it, absorb it, and live it. These important benchmarks allow you to learn from the mistakes of others and uncover secrets to success. Successful managers understand that numbers talk. They listen, digest, and respond.

To most effectively use the PIA Ratio Studies, we recommend you adhere to these important guidelines:

1) Use industry standard formatting for your financial statements to facilitate comparison to and interpretation of the Ratio data. The standard format has Sales or Value of Product Produced as the top level revenue item with expenses grouped in sections below it. Those costs; Materials, Factory Labor, Factory Expenses, Administrative Expenses, and Selling Expense, follow each other.

2) List your Value Added (VA) calculation on the face of your internal financial statements. VA = Sales – Material Costs. It reveals the actual value you added to the paper, the ink, the finishing, etc. It is often called your inside sales. By excluding pass through expenses such as expensive paper or outside bindery costs, you will be able to focus on variations of your firm’s manageable expenses such as factory expenses, factory payroll, and administrative/selling expenses that need to be tightly managed every financial reporting period and on every job.

3) Calculate most of your Ratios as a % of VA, not as a % of Sales. Using VA as the basis of ratio calculation has historically provided a better benchmark for monitoring costs and profit. For example, most industry studies have shown that factory labor costs as a % of VA need to be at 40% or less if the company is going to be profitable. Only material costs and outside services should be calculated as a % of sales. Here is an example statement you can follow:

4) Compare your actual numbers to your budget as a benchmark using monthly financial statements and rolling income statements. To monitor expenses and control costs, compare your monthly financial statements to your budget. Monthly financial statements provide clear and concise pictures that can be readily compared to budget and to industry standards. There are limitations to the monthly statement, however; so we also recommend using a three- to six-month rolling income statement to monitor general corporate management costs and make timely decisions, particularly in today’s more volatile economy.