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Dynamic Ratios A User Guide

By Tai McNaughton, Economist, Printing Industries of America

Imagine what could be accomplished if your compa- ny’s yearly profit rates were 10% of your annual sales. The harsh reality is that the average printing firm struggles to turn a profit of 3% of annual sales. That means leading printing establishments are averaging profits three times greater. But why?

The Magazine 12 4.2017

Enter the Dynamic Ratios, the premier financial bench- marking tool of the printing industry. Financial bench- marking allows for evaluation of company operations and compares them to industry standards. Analysis of a firm’s bottom line is vital for pinpointing strengths and weaknesses.

Business Application Comparing a firm with similar companies enables informed decisions about which operations should be maintained at their current level and which should be improved upon to reach profit objectives. New this year in the Dynamic Ratios, section three of each vol- ume provides a quartile graph showing markers for the median, lower quartile point, and upper quartile point. If a standard quartile graph is applied to tests scored out of 100%, the median represents a 50% score. A score of 75% means that one is doing quite well and better than 75% of peers. Anything over 75% corresponds with performing at the top of the class.

Now, let’s say we want to look at income before taxes as a percent of sales. Additionally, we are going to hypo- thetically assume that the lower quartile point is –1%, the median is 3%, and the upper quartile point is 5%.

Our data shows that 25% of respondents stated that their income before taxes was less than –1%. That means that a large number of firms are operating at a loss. On the other hand, the average printer had income before taxes at 3%. Even better, 25% of respondents stated that their income before taxes was greater than 5%. In terms of application, the following shows a breakdown for what the results mean.

• Greater than 5%—Keep up the great work!

• Between 3% and 5%—You’re doing OK, but look into how you can improve.

• Between –1% and 3%—You have a lot of room for improvement.

• Less than –1%—You need to improve or you risk losing your business.

In addition to this new section, the Dynamic Ratios still contains information on all firms as well as profit leaders. The industry’s profit leaders are those print- ers performing in the top 25% of profitability. Since a firm’s objective is high profits, we suggest comparing your firm’s financial data with profit leaders.

Dynamic Ratios Application The next step is to calculate comparable numbers. It is absolutely critical to know the correct terminology for what went into a particular ratio. For example, when calculating people costs, it is important to know where a customer service rep is classified (FYI: They would be included in General Production Wages).

Printing Industries of America offers a user’s guide that gives full definitions of the questions asked. The guide is incredibly helpful when determining what goes into particular people costs and material costs.

Now that information is comparable for a variable, take your own number for that variable and divide

SOLUTIONS

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