A Three-Pronged Route (CONT’D FROM PAGE 22)
A Waste, Where Not Needed No one enjoys terminating or furloughing employees. But, business leadership requires making tough decisions in tough times in order to keep the organization viable. Remember that right now, federally supplemented unem- ployment benefits are generous. When holders of non-es- sential positions can replace – and sometimes even ex- ceed – their salaries with unemployment compensation, using PPP funding to artificially subsidize those jobs doesn’t make sense for anyone. If there is anything good to be said about having to run a printing or a packaging company during a viral epidem- ic, it is that the slowdown affords more time for reflection and planning than owners usually get under normal oper- ating conditions. We recommend using the time to think deliberately about staffing and what it will mean for doing business profitably in the new normal now taking shape around us. Paul V Reilly is a Partner at New Direction Partners, an investment banking and financial advisory firm formed in 2008 to serve the printing, packaging and related in- dustries. Services include merger advisory through the representation of selling shareholders as well as buy side representation, valuation services, capital formation, turnaround and restructuring services and temporary/in- terim management consulting. To learn more about New Direction Partners, visit New Direction Partners’ website at www.newdirectionpartners.com or call (610) 230-0635.
now, forecast expenses and loan eligibility on that basis, and rehire those positions later – a tactic that leaves the door open to resuming full staffing when business condi- tions are better. Simple, But Revealing All of this is done with an eye toward maximizing value added per dollar of payroll, the metric recognized as the best predictor of how profitable a business is going to be. To calculate it, divide sales (less materials, supplies, and outside services) by payroll expense (including commis- sions, temp labor charges, payroll taxes, and benefits). It’s simple measurement that everyone can under- stand, and it provides clear benchmarks for profitable performance. In the printing and packaging industries, the baseline for profitability is having about $1.50 worth of val- ue added for every $1 of payroll expense. Profit leaders do even better, often achieving ratios on the order of $1.85: $1. This formula makes it easy to see the interrelationship of staff size, payroll expense, and value added in determin- ing profitability. If a company’s ratio was favorable in 2019, that should remain the target to hit this year. Our advice to recipients of PPP funding is to continue to manage labor costs as if the funding had never been available – up to, and including, making workforce reductions where they can be justified for the long-term good of the company.
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July 20, 2020
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