Quick Consultant: Surveys Often Provide Excuses for Low Profits

In the past 25-plus years I have consulted with more than 450 firms, and I have published more than 30 statistical studies involving the printing, mailing, and reprographics industries. In the past five years, I have also prepared approximately 120 individual company valuations based upon “Print Shop for Sale,” a book I co-authored with fellow consultant Larry Hunt.

All the consulting visits, industry research, and valuation assignments involve a lot of one-on-one face time (or at least phone time) with clients. I get to know them pretty well and they in turn get to know me. I suspect that my list of industry leaders, laggards, and those in between—the individuals to whom I turn for advice and input—is probably one of the largest in the industry.

I am purposely citing the above as a preface for a real shocker of a statement: In the all this time, but especially in the past five years or so, I have never once had a single owner look me straight in the face and suggest that rising healthcare costs, foreign competition, illegal immigration, increasing government regulations, and/or rising paper costs were the core obstacles preventing them from improving their profitability.

And yet, based upon the results of one or more recent surveys I have seen in the past few months, you would think that the low or non-existent profits that are found in this industry are the direct result of these obstacles.

I don’t know if those creating the surveys have an agenda of their own, or if those who participate in the surveys are overly suggestible to the specific choices being offered, but in either case, someone needs to stand up and say “Whoa!”

 

I’m Saying “Whoa!”

Everyone who reads this column knows that I tend to be pretty blunt, maybe even offensive at times, but I just don’t take well to folks spouting off at the mouth before they have engaged their brains.

I’m still waiting for someone to call me and discuss how health insurance is killing their bottom line. The same thing can be said about government regulations. Sure, there are a lot of regulations, but don’t blame your poor financial performance on them. Maybe you need to take a lesson from the best in this industry, and that is to strive to change the things that you can control and, for the most part, forget the rest.

To be blunt, I think there are many printers out there who are clueless as to the real causes of their problems, and it makes them feel good when they lash out and blame rising healthcare costs, government regulations, and other such stuff that talk show hosts are offering up!

Without going off on a tangent, I just turned down a valuation assignment for an independent. It would have been a simple $975 for me. But I turned it down once I uncovered the fact that, other than the rental income he realizes from an LLC he owns, he has been unable to take out any salary for the past five years. Being a bit sarcastic, my guess is he’s probably a member of the Tea Party and has been yelling and screaming for months that the government needs to get off his back and repeal Obamacare! Of course, the fact that he carries no health insurance whatsoever doesn’t seem to dampen his fervor one bit.

 

Excuses Lack Substance

Every time I decide to take a new look at the industry, either from a short-term or long-term perspective, I become more convinced that most of the excuses for lower profitability being cited these days just don’t hold up under closer scrutiny. I think there are way too many naysayers out there, and it’s time to look at some hard cold facts instead of accepting the results of eye-catching surveys that seem to suggest that we are no longer responsible for our lack of profits. We can all blame it on the government. That sure makes an analysis easy.

My suggestion is that instead of listening to others (including me), that you begin to question everything that you read about this industry, and then ask yourself, “Does this pass the smell test?” “Is that really true as it applies to my business?”

I would urge every reader to go back and pull out at least three years’ worth of year-end financial statements and examine some of the key ratios such as payroll costs, cost of goods, and overhead expenses.

• What ratios have changed and what brought about those changes?

• Could some of these changes have been averted or limited in their impact or scope?

• Can anything be done now to reverse or improve some of these trends?

One last thing—be very, very cautious of accepting advice from folks who, for the most part, have never owned their own small business. As we know, it is a different world down here in the trenches. It ticks me off to no end to read comments by folks who have never had to make a payroll themselves or wonder where the money was going to come from to pay the business property taxes that are due next month. People who work for others shouldn’t be giving advice to people who work for themselves.

 

Bigger Problems than Healthcare

OK, let’s return to the initial allegation that rising healthcare costs are responsible for so much of our current misery. Yes, healthcare costs represent a significant cost of doing business and these costs have been going up dramatically the past decade or more. But to suggest that healthcare costs are a primary cause of the decline in profitability in our industry is playing to our emotions, not to the facts at hand.

I just finished running some basic numbers and even a 15-20% increase in healthcare premiums between 2010 and 2011 (10 times the average rate of inflation) for a 40-year-old employee being paid $20 per hour translates to a total increase in payroll costs of approximately 1%.

Do I like that increase? Of course not, but if you look at the bigger picture and closely examine both of the charts within this article, it is quite apparent that we have a much bigger problem on our hands than just increasing healthcare costs. Like it or not, rising healthcare costs were not the primary cause of the dramatic increases in payroll costs or the declines in profitability between 1983 and 2009. Rising payroll costs have been a major problem in this industry from its earliest days; long before “Obamacare” existed.

While other expenses such as cost of goods and general overhead expenses (see Chart #1) have remained almost the same or even declined in the past 25 years, payroll costs have continued to soar as a percent of sales. Some companies have dealt with these increases far better than others.

Leaders vs. Laggards

The profit leaders in this industry, those in the top 25%, have consistently been able to control and maintain their payroll costs in the 25.5% range, while the worst run companies struggle to survive with payroll percentages in the 39-40% range. Surely, the differences in total payroll costs as a percent of sales between the best and the worst in this industry have little to do with healthcare premiums. The differences stem from poor management and poor decisions on the part of the owners. Yes, it is that simple.

Make no mistake about this—neither the government nor the current state of the economy can be blamed for the horrendous, totally unacceptable payroll ratios reported by the bottom two quartiles as shown in Chart #2. The blame falls, instead, squarely on the shoulders of the owners.

The dramatic decline in profitability in this industry can be traced almost directly to the steady increase in average payroll costs of 24.8% in 1983 to almost 33% at the end of 2009 (See Chart #1). There is no serious data to support the claim that increases in healthcare costs have been to blame for this dramatic rise in payroll costs

It is important to note that the relationship between payroll costs and profitability in this industry has rarely, if ever, been a question of paying employees too much or offering them too many benefits. The real culprit, as I have demonstrated time after time, has always been employing more people than are required to produce the work, as well as the failure to reduce staffing as companies acquire more productive equipment.

 

Can’t Raise Prices?

By the way, don’t let anyone suggest to you that increases in your cost of goods (COG) is somehow an inevitable consequence of the current recession and there isn’t much that can be done, or that it just has to be accepted as another reason for declining profits. Hogwash! The fact is that COG has remained almost constant in this industry for more than 25 years, staying in the 29-30% range during this entire period. If yours has suddenly gotten out of a very tight range, then do something about it.

Once again, the leaders do a better job than the laggards when it comes to managing their businesses. The top companies in this industry have been able to maintain a COG ratio of 27.5% for more than 25 years, while the COG for those in the bottom quartile has hovered in the 30.6% range for that same period of time.

For printers to suggest, as they seem so inclined to do so these days, that many of their costs are rising (paper, energy, ink, other materials) and they are powerless to do anything about it is simply ludicrous. Other than shopping for the best prices and reducing spoilage, the best way to bring COG under control is to raise prices in your computerized pricing systems. It can be done; it must be done. It is as simple as that.

Everything said above about COG applies to overhead expenses as well. Overhead costs as a percent of sales have actually declined slightly in the past 25 years. There is also a very noticeable difference in overhead expenses reported by those at the top (21.9%) as opposed to those at the bottom (30.8%).

The root cause of most financial problems facing this industry is the same as it has always been—the inability of owners to make difficult choices when difficult choices need to be made.

Instead of making the truly difficult choices involving the termination of long-term employees or raising prices in a price sensitive economy, even when financial and productivity ratios dictate that this must be done, too many owners choose instead to close their eyes, hoping against hope that things will somehow turn around next month or next quarter.

 

For the Next Industry Survey

Just once, the next time someone decides to conduct a survey and lists things such as healthcare costs, government rules, rising costs, and the inability to raise prices as potential obstacles to profits, I would like to see the addition of one more choice that could be checked: “Most of my financial problems are of my own making, and I accept full responsibility for my own stupidity for not having dealt with the situations when they were small and still manageable.”

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