Money Talk: Setting Target Ratio Metrics That Matter

Benchmarking studies, such as the Ratios Study done by Printing Industries of America (PIA) or other industry-specific studies, are valuable management tools in assessing how your company is doing compared to printers of similar size, geographic location, product line, or other comparative factors. Such metrics can help you assess your market position and identify industry trends so you can respond appropriately.  

  • But how do you use such information in the best and most effective way as you make day-to-day management decisions for your business?
  • How do you know what the appropriate Target Ratios are for your unique business needs, capabilities, and goals?

What is a Target Ratio?

In general, a Target Ratio is a way to quantify the relationship between two measurable results. It is used to track performance for sound financial management. Target ratios are “current” numbers, reflecting what you should be able to achieve within your company’s particular set of circumstances at this moment in time. As circumstances change, so will your ratios and so should your Target -- demonstrating the need to constantly track and compare your numbers to goals.  As shown on the sample ratios calculation chart below, your target numbers may not match goals or industry benchmarks.  It is important to understand not only that a difference may exist, but why that difference exists; and whether, as a practical matter, it should be an achievable benchmark or not for your company.

So what should my company’s target ratios be?

Let’s look now at our example of important indicators for a $10 million company. Take special note of the bolded indicators as these are the ratios that should regularly be assessed from your financial statements. 

Example:  Target Ratio for a $10 Million Company

 

 

 

ACTUAL RATIO

TARGET RATIO

PROFIT LEADERS INDUSTRY BENCHMARK

CASH FLOW COVERAGE:

 

 

 

 

 

Pre-tax Income

$100,000

 

 

 

 

Depreciation

$250,000

 

 

 

 

Interest Exp.

  $75,000

 

 

 

 

Earnings Before Interest, Taxes,     Depreciation & Amortization (EBITDA, or Cash Flow)

 

$425,000

 

 

 

Principle payment on Long-term Debt

$300,000

 

 

 

 

Interest Exp.

  $75,000

 

 

 

 

 

 

$375,000

 

 

 

RATIO:

 

 

1.13 to 1

1.25 to 1

2 to 1

 

 

 

 

 

 

SALES PER EMPLOYEE:

 

 

$115,000

$125,000

$158,000

VALUE ADDED PER EMPLOYEE:

 

 

  $74,700

  $84,500

  $103,000

EBITDA AS A % OF SALES:

 

 

4.25%

7.5%

15.0%

SPOILAGE AS A % OF SALES:

 

 

1.0%

.0675%

.005%

DEBT TO EQUITY:

 

 

3.75 to1

2.75 to 1

1.4 to 1

RECEIVABLE DAYS OUTSTANDING:

 

 

52 Days

45 Days

44 Days

As we have previously noted, the use of target ratios will determine what changes need to be implemented now to put the company in an acceptable financial position. Often, it is too much of a stretch to reach all goal ratios at once. But that does not mean you can’t be successful for your own needs at this time.  As is evident in the chart above, Target Ratios that were set are below those achieved by “Industry Profit Leaders.” That is perfectly expected.  In reality, setting Target Ratios “on paper” in the finance office translates to change and modifications in operations, purchasing, collections, sales and other areas.  Change takes time, effort and careful managerial oversight.

Moving your current ratios to logical targets will not only be rewarding for you, but also for financial improvement, especially cash flow.

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