Off the Cuff: How to Measure Key Barometers of Business Health

BUSINESS

Off the Cuff: How to Measure Key Barometers of Business Health — Part 2

June 22, 2009
By Mark L. Venit, MBA, Contributing Writer

In Part One, I focused on the seven key barometers of business health and marketing performance — cost of garments, production payroll, advertising, rent, telephone, utilities and professional development — and what each ratio tells me about a company’s financial performance and its management and marketing cultures.

As I noted, looking at more traditional ratios — such as debt-to-equity, price-to-earnings and accounts payable (A/P) vs. accounts receivable (A/R) — gives a quick financial snapshot. The picture I get from studying these standard ratios shows a company in black and white, while studying my seven key barometers shows it to me in full color.

Let’s look at each of the seven areas and review specific goals and remedies for reducing the percentage each contributes to a company’s profit and loss (P&L) statement. Almost every ounce of reduction goes right to the bottom line — and into your bank account (well, subject, of course, to the taxman’s cut).

The cost of garment is the single largest expense in virtually every custom decorating company. How do you lower garment costs? Some answers are obvious; some are less so.

Buy smarter, which doesn’t necessarily always mean cheaper. If you compare every wholesaler’s price and buy from several wholesalers each week on price alone, you’re making it difficult for you to become designated as a key account of a major wholesaler. In the long run, putting most of your eggs in one basket — and a few in a back-up source on standard goods — will earn you leverage to receive price concessions, free freight and rebates. And when you need a “friend in the business” working on a major quote, you’ll find your prime source will go as low as possible for both of you to score a deal on a big purchase.

As they say, “If you don’t ask, you won’t get.” When your top source checks your purchasing activity and sees it has risen steadily — and, of course, that you pay your bills — you’ll be amazed at the deals and the service you’ll receive in return for your loyalty and conscientiousness.

Your goal should be to reduce garment costs by 2% to 3%, and the most common way to do so is to qualify for free freight.

Production payroll is the second largest cost for most companies. Production payroll means your technical staff, including managers, doing and/or overseeing the actual garment decoration. (This category does NOT include owners, clerical staff or salespeople). The average shop labor in the industry for custom decorators (excluding preprints), including taxes and benefits the owner pays, runs between 12% and 16%. The most efficient companies show at under 9%. When this figure rises above 16%, a company is headed for serious trouble if it cannot improve production efficiencies.

A case in point is Show Me Studios (not its real name). On a consulting assignment to the Midwest a few years back, I saw on the firm’s profit-and-loss statement the highest production labor figure I’d ever seen for a million-dollar-plus company -- a whopping 30.3%. I also noted electric and gas costs were 3.2% — more than twice what's normal.

While embroidery production was relatively efficient, when I observed screen printing production employees at work, I saw the dumbest arrangement of labor ever in a screen printing department. The new owner, from another industry, hadn’t formally designated a production manager, although one employee assumed some responsibilities in scheduling orders and assigning people to various workstations. But he was still one of the boys and related to two other pressroom employees.

In the main pressroom I observed four screen printers working — individually — on four manual presses, each with its own dryer running. (The explanation for the doubled-plus energy costs was instantaneous). At the far end of the building was a mint-condition automatic press, covered with dust. When I asked the printers why they didn‘t use the automatic press, the answer was “We don‘t have enough work to keep it busy. Or us!” So they spread all the work around in such a way as to keep everyone working full-time at full pay, often with overtime. The production crew, well paid to the point of being overpaid and with a respectable benefits package, was consuming the highest production wages I’d ever seen for screen printing personnel and in effect performing their labors at the highest possible cost. Though each man was quite productive on his own, their lack of production synergies, poor organization of labor, and counterproductive production management was killing the company, already on financial life-support when I arrived on the scene. One look at the production ratios told me there was a virulent cancer that needed to be treated and fast, lest the company fail within 30 days.

Drastic situations called for drastic measures. Two printers were let go the next day, the automatic became busy every day, and unnecessary overtime was virtually eliminated overnight. Overpaid production support personnel were terminated and replaced as needed with lower-cost entry-level personnel. Production payroll was cut almost in half, buying the company a little breather on cash flow, while other economies were engineered to reduce overhead and slightly reduce garment costs. Screen printing and embroidery staff were cross-trained wherever possible. The marketing faucet, languishing for two years, was fired up again. A year later, with sales up 31%, the company was back in the black. Big time.

The remedies to cutting your production labor ratio includes a variety of options:

Investigate purchasing better, faster, more productive equipment. Yeah, it costs money, but if used effectively, the new horsepower will generate savings in shop labor and marketing advantages, both of which more than justify your investments by boosting output per hour of operation and per employee.

Upgrade your workers’ skills, connecting wages to performance. Workers with better developed skills put out more and better work, catch mistakes before a crisis ensues, and value their jobs more. Yeah, you might even have to pay your better-trained staff better wages, but the expense is mitigated by higher output and better quality along with faster set-ups.

Cross-train your staff wherever feasible in basic skills and support processes. The flexibility to assign work gives management a valuable resource for keeping your crew working while the meter’s running.

Make sure overtime is approved by a senior staff member, in writing (on a time card or special form).

Schedule jobs at least 72 hours before they’ll run. Last-minute questions, unordered/undelivered stock and last-minute customer approval means your employees are waiting around for answers, moving in slow motion, or completely idle because of management screw-ups. And your bottom line inevitably suffers.

Advertising: My experience and my recommendation for advertising are that it needs to be in the range of 3% of gross sales of custom apparel, give or take a half point, to satisfy the objectives of lead generation, account retention and gaining market share. If you’re way below that figure, you’re losing business that should be yours. But “It’s an expense!,” you say? Advertising is an investment; it’s an expense only when it doesn’t work. Be certain to ask new customers how they heard about you and keep score; more effective tracking (and planning) can be better accomplished by segregating advertising by the markets each medium or portion of it addresses (custom, preprint, events, athletic, etc.).

Rent/Mortgage: If your credit is good, there’s an outside chance you might be able to renegotiate your mortgage, though it’s far from a sure thing. Rent, on the other hand, is something where, depending on the economic situation in your area, you might find your landlord would rather have a paying tenant than a vacancy. If you’ve been paying your rent on time, what’s there to lose in asking for some help from the landlord? And if a move is in order and the advantages are justified, you’ll likely end up with more for the same money or the same space for less.

Communications: Review you telephone and Internet deals. Competition is fierce right now and even your current vendor would rather see you taking advantage of a promotion than losing you to a competitor. There’s no harm is asking for a better deal.

Utilities: You know where to look for savings. Review wasting energy on idle dryers, lights and appliances being on when they don’t have to be, and other common sense solutions. But you can only cut so much without being penny-wise and pound foolish. Focus on the big stuff. If you own your own facility, a more involved but potentially smart undertaking is getting an HVAC professional to see if you’re a good candidate for improved insulation or upgraded equipment. Consider adding skylights and other ventilation improvements where possible in the warm weather to let heat escape oppressive screen printing pressrooms. The goal here is to cut energy usage to no more than 1.5% of gross revenue.

Professional development companies that invest in their employees are statistically more profitable than firms that don’t. If it’s been a while since you’ve been to an ISS show and attended seminars and workshops, or it’s been too long since engaging one of your technical sales reps to run an on-site clinic (usually at no charge), the sooner your crew gets up to speed with changing technology — or using the old stuff more effectively, the faster your productivity will show improvement.

Have at it. Any effort will return some savings. A serious effort should return some serious savings.

Mark L. Venit, MBA, president of Apparel Graphics Institute, Ltd., provides management and marketing consulting and proprietary research to apparel graphics companies throughout the Americas and Europe. Author of several books and nearly 400 articles on management and marketing, he also serves as chairman of the board of ShopWorks Software.

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