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What to Look For If Your Profits Are Low

Posted Wednesday, September 27, 2017 by Tai McNaughton - Economist, Printing Industries of America.

alt textFrequently we are asked for our top reasons for low profits at printing firms. Just as is true of your physical health, some vital signs in the health of your business can be too high or too low. The following is a list of indicators that may need to be examined in order to see greater profitability:

Your Prices Are Too Low

Over the years, we have repeatedly pointed out how price increases trump both cost decreases and sales increases in boosting profits. Too many printing companies focus on costs and continue pricing as they have in the past. PIA studies show that raising prices by just one percent raises profits by a higher percentage than decreasing materials cost by one percent, reducing payroll cost by one percent, reducing administrative and selling costs by one percent, or increasing sales by one percent.

Your Plant Utilization Is Too Low

Low plant utilization means that plant overhead is spread over fewer jobs, leading to low or no productivity.

Your Value Added Is Too Low

A basic maxim of the printing industry is that profit is derived from sales of a company’s internal manu-facturing process; so, printers need to minimize their outside purchases. Printers make a profit from the work done inside their plants, not outside.

Your Sales Per Employee Are Too Low

The gap in sales per employee for a profit leader compared to a profit challenger is over $35,300 for printers with less than $3 million in annual sales. On average, each additional $3,600 in sales per employee increases profit on sales by one percent.

Your Sales Per Production Employee Are Too Low

The gap between profit leaders and profit challeng-ers for this metric is over $20,700 for small printers. On average, each additional $2,100 in sales per production employee adds one percent in profit as a percentage of sales.

Your People Costs Are Too High

For all printers participating in this year’s Dynamic Ratios, profit challengers paid an average of 40.2 percent of sales for people costs (wages, salaries, benefits and payroll taxes). In contrast, profit leaders expended an average of just 35 percent, for a difference of 5.2 percent. For smaller printers (less than $3 million in annual sales) the gap is even greater — 5.6 percent of sales.

Your Paper and Consumable Costs Are Too High

Paper cost as a percentage of sales is a benchmark that can indicate both efficiency and inefficiency. However, in most cases, relatively high paper cost indicates inefficiency or high waste and spoilage.

Your Production Costs Are Too HighFor a typical print job, variable costs comprise around 60 percent. Total factory cost of product as a percentage of sales is inversely related to value added but not in a one-to-one relationship.

Your Sales Costs Are Too HighA typical printer spends around eight percent of sales on selling expenses such as salesperson salaries, benefits, payroll taxes and commissions. Profit leaders usually beat this rate by one percent or so. Typically, a leading cause of high selling expenses is the sales commission structure itself; so, if this metric is high take a look at this first.

Your Administrative Costs Are Too High

For a typical printer this metric is usually around eight percent or so of sales. Usually, a profit leader can shave a half percent or so off of this amount.

Now that you have diagnosed where your problems lie, understanding how to implement change procedures in your firm is a whole different story. PIA’s Center for Print Economics and Management offers a Financial Performance Assessment that gives you a detailed action plan to follow based upon the health of your financials.