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MAGIC NUMBERS

Sep 1, 1998 12:00 AM


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With all the competitive forces driving our industry, it's never been more crucial to have a solid handle on what's going on inside your business. And managing from your monthly financial statements is like driving forward while looking in your rearview mirror. The view may be interesting, but it's a little late to change it.

Most printing companies are finding that their monthly sales volume is becoming increasingly unpredictable. We all know that relatively small decreases in sales volume usually cause a large reduction in profits. For an "average" printer making three percent pretax, a five percent sales shortfall wipes out any profits, and a larger sales shortfall can cause a substantial loss. Many printers work the entire year to fill in the profit holes left by two or three problem sales months.

All printing managers need more timely information with which to manage--so they can know what's going on and do something before they're run over by the results. We insist that our clients pick a few key items to look at and watch very carefully. By doing this, they can react fast enough to make a difference.

We've outlined below 10 "magic numbers" that can be assembled into short "hot lists" for quick and easy review. The items are easy to understand, and the information is easy to gather. In fact, most companies are generating most of the numbers already, but they're lost in a mass of information piled on desks and credenzas. It's information that is never reviewed--at least not until it's too late.

Of course, different companies will want to focus on specific items that are closely suited to their particular situation. However, in working with almost 400 graphic arts companies, we've found that most of these numbers are crucial to almost everyone. Some people might look at each of the numbers daily; others might only look at some numbers weekly. But they all keep on top of the numbers relentlessly.

Daily Items: These tell you how you should feel about yesterday's results. Obviously, the trend over a week or more is much more crucial, but these numbers should be glanced at daily.

1. Dollar value of quotes. If most of your work is quoted, the dollar value of quotes is your single best early warning signal for shifting sales volume. We know it can be difficult to choose a single value of each quote because of the multiple quantities and design variations in each quote. But don't let this be an excuse. Have your estimators select a single value for each quote--no matter how many variations--since that quote can't turn into more than one job.

Using this quote log, you'll quickly begin picking up trends in quoting activity. If there's a drop-off over a few days, it may not mean anything. However, if the quoting slowdown goes on for a week or more, it's almost certain to result in a sales decline. Now is the time to begin thinking about stimulating sales.

2. Dollar value of orders entered. As turnaround times get shorter, plants can quickly run out of work. Therefore, keeping close track of the value of orders entered can be crucial. It's too late to rely on this as an early warning signal, but it can confirm your suspicions about likely sales over the next few weeks.

3. Dollar value of labor input to work-in-process. This is the single most important indicator of plant "busy-ness" because it converts all the hours worked into an expected dollar value. Most packaged software routinely computes this already by multiplying each cost center's chargeable hours by the hourly rate for the cost center. This number has limitations, but if we had to pick a single number to tell us how to feel about yesterday, this would be it.

4. Net availability under line of credit--plus aged receivables. For fully leveraged companies, cash is generated through formula-driven lines of credit and through collections of receivables. If you're a fully financed company, you can't let too many days go by without keeping close tabs on these numbers--along with projected shipments.

5. Dollar value of shipments and billing. Obviously, jobs have to be shipped and billed to turn into sales. It's surprising how slowly most companies prepare their billing, which impairs their ability to get an early handle on the month's sales. It also hurts loan availability and collections in a major way.

Weekly Items: These items may take a little more time to become significant, but they need to be evaluated carefully when they show a change. 6. Percent chargeable time in major cost centers. If you want a quick look at how much of plant labor is spent carrying out chargeable tasks, this is just what you need. But the percentages can be misleading if there's not enough work. This is because crews will often find ways to make a day's work fill the available time.

Our experience has shown that most companies can generate at least 20 percent more work in the same number of hours just by having enough work on a consistent basis. That's why we recommend tracking efficiency as well, since taking two hours for a makeready that's planned for one hour won't yield any more income. (See item number 8.)

7. Predicted sales volume for the current month. Most printers get to the final week of the month before they come to grips with what their sales really will be. Why? Because they don't have solid sales projections and don't do timely updates of projections. Most likely, they don't have much confidence in sales projections to begin with.

You'll be surprised at how helpful sales projections can be if they're revised in a timely and realistic manner. But unless you require timely sales projections (and updates), salespeople will avoid sharing news of cancelled or delayed jobs. This makes for nasty surprises at month-end.

We've found it takes about three months to get salespeople comfortable with the idea of projections, but once they get used to it they can quickly improve their accuracy. In turn, you'll have a much more solid handle on what's really going on in your business.

Monthly Items: Here are three monthly items that are crucial for understanding results and evaluating the near future.

8. Actual vs. estimated costs in major cost centers. This is the starting point in understanding whether the plant is producing according to standards. It also will highlight areas in which your quoting and production standards might need to be adjusted. It's the acid test for finding whether there might be some hidden capacity lurking behind slow running speeds, and it gives you a solid sense of how effectively your manufacturing is being supervised.

9. Total value-added for the month. This is the only end-of-month item we've included in this action list because it's simply the best way of predicting monthly profits after the month's billing is complete. It's a much better predictor than sales volume because pricing shifts, large buyouts or changes in product mix can skew sales and overstate the amount of money available to pay your highly fixed operating costs. If you want to understand your company's financial results, compare monthly profits with monthly value-added. That will provide 90 percent of the answer.

10. Sales projections for next month and beyond. By mid-month, you should have revised projections for the following month. The numbers will shift as jobs are delayed or lost, but focusing on future work is a proven way to have useful conversations with key accounts and prospects. You'll be surprised at how helpful the process of projecting sales can be in building a more effective sales management process. It will take a few months to build projecting skills and experience, but it'll pay big dividends for you and for your salespeople.

If you want to be a more effective manager, making your own hot list of magic numbers is a terrific starting point. These numbers will provide a better sense of what's going on in sales, the plant and key financial areas. In a fast-moving competitive environment, you can't have your operating results be a surprise. Having better information may not cause better results, but it will make it easier for you to quickly identify where action needs to be taken.

You'll be giving yourself a valuable gift when you have the information you need to understand and predict what's going on in your business. However, it will put some pressure on you--now that you have the information, you'll have to begin doing something with it. But isn't that why you became a manager in the first place?

Samples of hot lists and reporting forms developed by R.H. Rosen Associates, Inc. are available by contacting Bob Rosen (RRosenNY@aol.com) or Jim Kohnke (JCKohnke@ Compuserve.com) via E-mail.

With printers involved in a daily struggle to meet customer demands, it's hard for managers to get a handle on what's going on in their businesses. To assist with this endeavor, Rosen Associates has developed the Virtual CFO--a method to give clients a quick monthly overview of their financial statements and key operating numbers that drive results.

The low-impact approach is tailored to each company. It starts with a proprietary financial analysis and hot lists of "magic numbers," but the heart of the service is a monthly conference call to ensure that key company managers understand what's behind the results and start improving the situation.

The discussion starts with the financials, but moves on to examining sales and operational issues, which are the causes of financial results. Graphic arts users of the service have uncovered some startling profit opportunities--not just the cost reductions that most financial people recommend. Selling opportunities also can be uncovered.

"We created Virtual CFO to meet the industry's need for high-quality advice in a low-cost, easy-to-use format," says Bob Rosen, president of Rosen Associates. "We are delighted at printers' responses to the service and they are delighted at the results generated from taking just one hour a month to understand what's going on in their business."

For more information, contact Bob Rosen in New York City at (212) 719-5700 or E-mail: RRosenNY@aol.com.