Thursday, September 17, 2009

Your Payroll Ratios - Worth a Second Look

Twenty-six years ago the quick printing industry was much different than it is today. Average sales (according to an Operating Ratio Study published at the time) were $336,000. High-speed B&W copiers were in their infancy, and digital copiers (B&W or color) didn't even exist. We relied on photo-direct platemakers and small presses for more than 75% of our total income.

Three interesting ratios also appeared in that early study as well. Averge "Cost of Goods" was 29.7%, "Overhead Expenses" were 28.1% and "Payroll" was 24.3%. Total costs of operation thus totaled 82.1%, producing an average owner's compensation 17.9% of sales.

Move ahead 26 years and we find some interesting changes in our landscape. Despite the dramatic changes brought about as a result of computerization and digital copying technology, two key ratios have remained virtually unchanged. Today, average "cost of goods" remains virtually unchanged at 29%; "Overhead Expenses" have actually dropped slightly and now average 27% of sales.

Unfortunately, "owner's compensation," which was 17.9% in 1983 now averages 12.6% -industry, a drop of 5.3%! This represents a decline in profitability of almost 30%, and surely deserves the attention of every owner.

How did that happen? How did those profits drop by 5.3%? Well, if you haven't guessed by now, the entire drop in owner's compensation can be traced to a dramatic increase in average "payroll costs."

Today, "payroll" now averages a whopping 31.4% of sales and that is more than enough to account for the drop in profitability in our industry. Had it not been for slight improvements in "cost of goods" and "overhead expenses" the drop in profitability would have been worse.

What is even more amazing, is that payroll costs have increased dramatically despite the vast increases in productivity promised (and even achieved) via automated presses, CTP, digital copiers, computerized estimating systems and modern DTP systems.

The only good news to be found in all of the above is that not all companies have marched to the same drumbeat.

At least 25% of those companies survey in 2008 reported an average owner's compensation of 23%! How did they achieve or exceed the profits reported in 1983? By closely monitoring and controlling their "payroll" costs! These companies report an average "payroll" costs of 26.9%, proving that payroll costs can be controlled.

One critical piece of advice. Your monthly financial statements need to separate total "payroll" costs under a distinct and separate heading. Beneath this heading should be gathered all expenses directly and indirectly related to payroll. Don't allow your accountant or bookkeeper to place payroll items such as workman's comp., Federal and State unemployment benefits, health insurance and a myriad of other payroll expenses unde "overhead." Despite the fact that this is a popular place to locate these expenses, they don't belong there! Enough said for now.

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Anonymous Maria Payroll said...

Interesting post. Thank you for sharing your insight and for giving a great advice. Things have really changed. Prices of basic necessities and commodities have gone way up and will continue to do so.

January 9, 2011 at 1:40 PM  

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