How you can Take the Reins on Your Financial Ratios
When you boil it down, a financial ratio is a simple mathematical formula that compares two or more sets of numbers. However, as our market still struggles to find solid ground post-Recession, this formula is critical to maintain control of your firm’s operations.
Financial benchmarking is the number-one way to take the reins and control operational costs.
Few people understand financial ratios—and how printers can apply them—better than Stuart Margolis, CPA, MT, of Margolis Partners, LLC. If you’ve participated in the Ratios, you probably recognize his name. He’s a long-time partner of Printing Industries of America who helps industry members increase profits with Ratios financial benchmarking.
Why is financial benchmarking so vital to success? If you’re a business owner or manager, you know you need to keep your costs in line with sales. The Ratios let you 1) track operation costs, 2) compare them to those of industry profit leaders, and 3) pinpoint areas for improvement.
As an active consultant for Printing Industries of America, Stu has seen the good, the bad, and the ugly when it comes to how some companies control their operations. We sat down with Stu to find out how top firms are taking back control of their operations and developing a strategic plan for the future using Ratios.
Through Margolis Partners you’ve published many guidelines for effective management strategies using Printing Industries of America Ratios. What are the top three best practices you’ve seen your clients implement to benchmark their company against industry profit leaders?
SM: Well my number one best practice IS always to benchmark your company, so if you do that, you’re already ahead of the game! But the top three best strategies I urge all my clients to employ are:
1) Structure your financial information in the standard format for the printing industry. Although it may seem obvious to some, it’s an important, often overlooked step that allows you to organize your statements and make direct comparisons to other financial reports. Since the Ratios survey is formatted to this structure, participants can do this easily allowing a side-by-side comparison of your numbers to those of industry profit leaders.
2) Set up a “Profit Plan” for the next year that describes how you will operate in the future. With consistent benchmarking, you can begin to compare your current performance to previous years. This strategy reveals specific areas for improvement and challenges you to perform as a profit leader.
3) Benchmark, plan, repeat. Although that’s a rather simplified statement, essentially the companies that continuously repeat this process of benchmarking and then setting up the following year’s Profit Plan are the ones that I see succeed most often. These are the firms that build and maintain their competitive edge.
What do you feel are the most significant benefits of a Custom Financial Analysis (CFA)?
SM: Since the CFA really goes beyond comparing your financials against industry profit leaders—letting you see your actual financials next to the profit leaders and the average performers—you get a much clearer understanding of where your company stands against competitors. And you can perform a more in-depth cost analysis. After filling out the Ratios survey, we can customize this confidential report based on the data you select—compare by size of firm, products produced, etc. This would all take a long time for most companies to do themselves, but we can calculate the CFA for you automatically because you filled out the Ratios and gave us your numbers in that standardized format. My clients can then take that data and apply it immediately.
What key performance indicators (KPIs) do you recommend your clients track?
SM: One of the top recommendations I make is to measure your factory labor as a percent of value added. This is because factory labor makes up a large portion of your costs. Plus, it’s also a variable cost and can be difficult to control. The principle matter is that you want to get the most out of your factory labor dollars.
Another important KPI is the debt to equity ratio. Even six years after the Recession, this is still an important ratio because not all printing companies have completely recovered. With this ratio you’re comparing the total amount of debt or liabilities to the amount of equity in your company. The debt-to-equity ratio is also a key indication of the amount of leverage your firm has, and less leverage equals greater stability.
Can you share an example of how a client has used the Ratios and a CFA to improve their financial position?
SM: I want to share two different client experiences to demonstrate how important it is to retain control over your ratios. My first client is from a small, family-owned business. They have a slow to moderate growth rate. We started applying annual benchmarking with the CFA, and, although they’re not growing quickly, year after year they’ve been profit leaders. Why? Because we continuously use Ratios to make sure that their costs are in line with sales. This allows them to know if they need to right-size their company to meet current sales levels.
On the other hand, another client’s company was experiencing rapid growth. As a result, business decisions were being made on the fly. As they struggled to keep up, they did not consistently apply benchmarking and eventually started losing control of their costs. As fast as they had grown, they fell out of line, and their business suffered. To get them back in control of their company, we applied benchmarking as proof to all future decisions.
Many companies will relate to either one of these examples, but the point is that growth without control of costs can lead to disaster. We all aim for revenue growth, but without consistently using ratios and CFA to control costs, it’s easy to fall out of line—and we want to help our clients avoid that problem.