Value-Added Revenue: Knowing Your Numbers

Understanding the importance of value-added revenue is one of the key success factors for any print company. While many leadership teams already subscribe to this thinking, there are many that do not.

So what is value-added revenue anyway? Simply defined, it’s the revenue you get for a project, minus the direct materials, outside purchases, and click charges. The remaining balance is value-added revenue, and that’s the revenue that you have available to operate the business. Why is this important? Until you surpass your value-added breakeven costs for the month, you will not have a profitable month. Conversely, once you surpass your value-added breakeven, you will be profitable for that period. Seems obvious, but the value added number is more important than the actual sales number.

We lost money on this job, so there’s no value added, right? No, just because the cost sheet shows a loss, there is still value added that contributes to the overall goal for the period. Here are a few examples. A traditional print project that you sell for $1.00 may have .35 cents of paper, materials, and outside purchases, leaving you with .65 cents of value added. In another example, a project that is totally outsourced may sell for $1. You pay .50 cents to the supplier leaving you with .50 cents of value added. Both are good, but both are different. One more example to consider. Your target sell price is $1, but due to market conditions you have to sell it for .90 cents. You still have .35 cents of paper, materials, and outside purchases, leaving you with .55 cents of value added. It’s less than the .65 cents you’d get at full price but it’s still .55 cents that goes toward operating the business — value added.

Most businesses have a portfolio of customers and projects, all with different pricing and value added levels. The key to remember is that they all count and the goal is to surpass your company’s unique value-added breakeven level. One more story of two CEO’s reporting their monthly results to the bank.

The first says “the market is tough and our competitors don’t know their costs. We held firm to our pricing levels and we were profitable on all of our work. Unfortunately though, we didn’t quite have enough work, didn’t surpass our value-added breakeven number and lost money this month.”

The second CEO starts off in a similar way, “the market is tough and our competitors don’t know their costs. We were flexible with our pricing levels so that we filled our capacity, but there were jobs that we were not profitable on. Fortunately though, we had enough work, and surpassed our value-added breakeven number and made money this month.”

Which story do you want to report on?

Selling only on price is no way to go, unless of course you are the low-cost producer. Filling your capacity and making money using these tactics merely buys you time to up your game. The goal is always to differentiate your business so that you can tip the scales and earn the right to charge a premium for your work with customers and markets you engage in. It’s easy to overlook these areas when you’re busy running the operation, putting out fires, and trying to achieve the goals you’ve set for you and the business. One challenge for you and your team is to begin keeping track of the day of the month that you achieve value-added breakeven? While you may need to reconsider the metrics and reporting that you currently use, it’s a worthwhile venture. The sooner you do that, the sooner you begin to flow money to the bottom line. How are you managing the value-added threshold for your business?

Share your thoughts below or to discuss further or perhaps gain more clarity — send me a note.

Mike Philie can help validate what’s working and what may need to change in your business. Changing the trajectory of a business is difficult to do while simultaneously operating the core competencies. Mike provides strategy and insight to owners and CEOs in the Graphic Communications Industry by providing direct and realistic assessments, not being afraid to voice the unpopular opinion and helping leaders navigate change through a common sense and practical approach. Learn more at www.philiegroup.com, LinkedIn or email at mphilie@philiegroup.com.