Breaking Down The PIA Ratios --DickesonMay 2002
Thirdly, with a universe of 45,000 printers, we're talking small businesses here—family businesses. The last thing we want to do is pay taxes on income or otherwise. We're providing a living for dad, mom, kids and relatives (some of whom actually work in the shop and some who kinda work—now and again.) Net Profits means taxes. Net Profits and taxes are to be avoided—not evaded. Does this happen? Tell me something I don't know.
If you're a printing company with publicly held stock being traded on the open market you love Net Profits. They get converted to EBITDA and then multiplied by a P/E ratio to give you that lovely on-paper-millionaire feeling as you drive around in your leased Jaguar.
Now where are we in our annual rites of spring? Do we toss our PIA Ratios Studies in the trash? I wouldn't. They're all we've got. Some time ago, PIA and Margolis shifted to an emphasis on VA—Value Added. Very smart move. Value Added is sales less material, including buy-outs. It was a smart move, but PIA and Margolis apparently overlook just how canny they were by reporting both sales and materials to arrive at Value Added. Deduct materials from sales and all of the rest of the costs are the expenses of conversion—converting raw materials to printed products.
The relationship between price and raw materials is quite revealing. There's but trivial difference between "Profit Leaders" and "Profit Challengers" in almost any grouping. Value Added to raw materials, as perceived by print customers of the 900 reporting firms, is roughly the same for print leaders as print challengers in every grouping!
For example, for reporting firms with more than $15 million in sales, materials were 39.95 percent for leaders and 39.40 percent for all firms in the 2000 Studies. Reinterpreted, pricing by leaders and all firms was 2.5 times the cost of raw materials—the MM for Materials Multiplier—for companies at that sales level. Check it out.
Look at those PIA Ratios Studies as a Target Selling Price Guide. Select the Materials Multiplier shown for your classification. Figure the cost of materials for a prospective job. Multiply by your MM. That's your Target Selling Price. Move up or down in quoting from there, depending on the Customer's Value Perception and the likely competition.
No Magic Solution
Forget this Net Profit nonsense in the Ratios Studies and whether you're a public or private company, and that your lazy brother-in-law is on the payroll. At the Value Added level what difference does it make, anyway? Is this a magic solution? No way. It's a benchmark. Only a benchmark. We need decision support. That's what we're looking for in numbers. Just a bit of cold comfort for pricing. The PIA Ratios Studies provide an unexpected, unintended, benefit. Good stuff.
Years ago Peter Drucker said the three tasks of management are liquidity, productivity and tomorrow. We've learned the deceptions of job cost accounting and the irrelevancy of general ledger accounting. What's left? Cash. Do we have more than we started with? EBITDA measures earnings before interest and taxes, but those two are paid from cash. So let's name it just EBDA for earnings before depreciation and amortization.
We hear you, Peter.
We'll call our system KA-CHING for the sound of cash drawer liquidity. No, we'll name it ZOOM-O for the sound of printed throughput whistling out the door faster and faster.
Okay. It's EBDA-ZOOM-O-KA-CHING Graphic Arts Systems Inc. Now, how's that for your Website URL?
—Roger V. Dickeson
About the Author
Roger Dickeson is a printing productivity consultant based in Tucson, AZ. He can be reached by e-mail at firstname.lastname@example.org, by fax at (520) 903-2295, or on the Web at http://www.prem-associates.com.