Benchmark shows printers are battling to make a quid

This is the glaring statistic that leaps from the executive summary of the industry’s seminal Performance Benchmarking Study, and it should sound alarm bells in printing companies around Australia.

The study, launched at PrintEx 03 is the next major initiative growing out of the Print21 Action Agenda. An ambitious federally-funded study conducted for Printing Industries it consists of an initial benchmarking report, detailing the key performance indicators (KPIs) that distinguish the best and the worst performers in the industry.

It also comprises an interactive online benchmarking web facility where companies can measure their own performance against the industry to find out where they stand.


But if most printing companies are not getting a working return on total assets (ROTA), the top 10 percent performers in the industry are doing quite nicely, thank you. Not setting the world on fire – this is the printing industry after all – but they are managing to wring a decent 15 to 20 percent ROTA from their activities. These are the winners in the industry and the whole aim of the benchmarking study is to provide statistics on how the best are tracking, in what areas, what their ratios are and how can everyone else copy their success?

There are winners and losers in the industry and the gulf dividing them is wide. The lowest performing 25 percent of companies are actually losing money and cannot be long for this life without the injection of even more capital – good money after bad without concomitant changes to business practices.

These uncomfortable facts come from the data collected from 170 printing firms by Benchmarking Plus and Negotiaction, the two consultancies hired by Printing Industries to conduct this second-ever benchmarking study of the Australian printing industry. The inaugural sample data was from printing firms of all shapes and sizes who submitted their own results confidentially, with by far the greatest number coming from small sheetfed enterprises.

These founding member companies are the only ones, at this stage, to be able to access the online data at www.printnet.com.au

Other printing companies are now being encouraged to join in and submit their figures to help grow the national benchmarking database.

Operating on the basis that there is little to be learned that is useful from the inferior performers, the benchmarking study seeks to identify the best practices of the top 10 percent. In looking at what factors or characteristics seem to drive their superior financial returns the authors examined several key areas. (What follows is an edited extract from the study.)


Return on total assets (ROTA)

This is the single most telling financial indicator of the ability of a print industry enterprise to survive and prosper in the medium to long-term. ROTA must be sufficient for an enterprise to be able to invest in new assets as the need arises. In simple terms, this measure needs to be considerably higher than the ‘risk free’ return that is often equated with the 10-year Commonwealth Bond rate, which in January 2003 was around 5.3 percent.


Against this benchmark the results show that most enterprises that provided data do not make sufficient return to provide a reward for risk and to repay capital in the long-term. The lowest 25 percent of enterprises do not even make a (positive) return.

ROTA is the product of profit margin (profit as a percentage of sales) and total asset turns. Profit margin is a measure of the surplus after all costs are subtracted from the sales revenue. As such it is a summary measure of two aspects:

• the effectiveness of an enterprise in pricing its product to reflect the inherent value
• the effectiveness of managing the costs incurred in producing the product.

Total asset turns (sales revenue divided by the book value of total assets employed in an enterprise) is a measure of how effectively the assets employed in an enterprise are put to work earning revenue. As such it is a measure of effectiveness in acquiring assets wisely and utilising them at a high level of activity.

Really successful enterprises will have higher profit margins and asset turns than their competitors on a fairly consistent basis from year to year.

Possible implications for individual printers

If your ROTA as defined above is less than approximately 15 percent (the better performance level) you should be actively looking for ways in which you can get it to that level. Otherwise you are not getting sufficient reward for your hard work and risk associated with being in business.

If your ROTA as defined above is less than approximately 5.1 percent (the mid-level performance) you should urgently be looking for ways in which you can get beyond that level. Otherwise it will be difficult for you to continue to fund your business without eroding or possibly destroying your capital base.
If you wish to improve your return on total assets look to both of the following key aspects of your business:

• profit margins (which in turn means your pricing practices and your control of wastage and other costs)
• 
  asset turns (which in turn means the level of utilisation of machinery and of working capital items such as debtors).

Total asset turns

Total asset turns (a ratio derived by dividing the annual sales revenue by the total assets employed) are a measure of how hard your machinery and other assets, such as inventory and debtors, are being put to work to earn revenue for the company. A company with high asset turns is earning a higher level of revenue for every dollar invested. If all other things are equal, such a company will earn better profits and better returns on capital than a company with low asset turns.

As with other KPIs, there is a significant disparity between the best and worst performers. The best enterprises are earning 3.3 times more in sales revenue per dollar of assets employed than the worst. The effect of this is that for a given profit margin, those at the best performance level on this measure will make 3.3 times the return on total assets than at the worst performance level.


Implications for individual printers
If your total asset turns are at or below the mid-level, ask yourself – Is it because my fixed assets (machinery) are working well below capacity?
If so, can I either increase the throughput or divest some under-utilised capacity and reduce associated costs?

Is it because my other assets (inventory, debtors) and the timing of my payments to my creditors could be better managed? If so, can I reduce my working capital needs through tighter cost control and, hence, make better returns on my investment?


Sales growth and selling efficiency and effectiveness

The results of the survey show that at the mid-level performance, the sales trend is virtually flat. However, as is the case with other results shown so far, the best and worst performers, as represented by the best and worst figures, show widely varying results.

The best performers show very good results. For some enterprises this appears to be because they are coming from a low base in year 2000, perhaps as a result of having just started in business or having a particularly bad ‘one-off’ year. But given that 10 percent of enterprises in the sample exceed the best figure, this is unlikely to be the case for all. It is also possible that some of the results of the best performers could be due to mergers or acquisitions.

On the other hand the worst performers are shrinking in terms of sales revenue. This may be the result of a deliberate attempt to forego unprofitable business to improve margins or to divest an under-performing unit of the enterprise. But if not, the future of the worst performers could well be bleak.
It is worth noting that the gap between the best and worst performers widened in 2002 relative to 2001.


Implications for individual printers

Your sales trends should not be looked at in isolation. They should be considered in conjunction with profit margin as a percentage of sales, and also in relation to profit.
It is a particularly good sign if sales are increasing and profit margin as a percentage of sales is also increasing.
At the other extreme, it is a particularly bad sign if sales are decreasing and profit margin as a percentage of sales is also decreasing.


It’s not dark yet

Despite the reinforcement provided by the study of an industry in crisis, the prognosis is not all bleak. The authors conclude that superior performance is possible for any type of printing industry enterprise:

“The gaps in financial returns (return on total assets, profit margins, growth in sales and profit) between the superior performers and the group as a whole are large, so the rewards for being a superior performer are considerable. Superior performers universally show evidence that they manage their people with care and effectively (as evidenced by training days per person per year, staff turnover, cost and value added per employee).

“Superior performers also manage their productive capacity very effectively (as evidenced by the level of utilisation, costs per sales dollar, maintenance per sales dollar, level of attention to overs and spoilage, equipment write-off and retirement practices). The chance of being a superior performer is higher if the enterprise has a speciality of some type (such as product category or process technology). This may extend to type of customer served but this is impossible to tell from the data gathered.

“The chance of being a superior performer is also higher for a larger enterprise. However our conclusion here is that larger enterprises are represented more prominently because they are more likely to have professional management and hence display some of the characteristics of superior performers.

Also, being a larger enterprise can be a natural outcome of being a successful smaller enterprise in earlier years. Hence being small is not a barrier as such to being a superior performer.”

The Benchmarking Study is available from Printing Industries. Contact your local office in capital cities.