Profitability Analysis of Companies
That Broker More Than 25% of Sales

Although the size of the extraction is smaller than we would have liked, we were recently asked to prepare a special extraction comparing the profitability and key ratios of firms that tend to broker substantially more than the industry average of 16-17% of total sales. 

Using an initial search criteria of firms that brokered 25% or more of their sales to others, we uncovered 30 companies that met that criteria. Working with those companies, we then sorted them by profitability and extracted the top-third and the bottom third for purposes of comparing key ratios. As you can see from the report below (You can go here to download a PDF of this extraction), these companies actually reported brokering between 35-39% of their total sales.

Previous Research - Historically, financial surveys conducted in the printing have shown that companies can produce high levels of profitability, regardless of their "job mix," but in order to do so, owners must pay close attention to key ratios unique to the job-mix in question. Profitable companies pursuing offset printing report specific operating ratios. Companies specializing in digital printing report different ratios. The same is true for those companies gravitating to brokered work. Each segment of the production mix requires specific ratios in order to maintain profitability. Some owners do very well at this, while others do poorly.

As an example, companies that tend to produce most of their sales in-house typically report higher payroll expenses than companies that send out much of their work to others. The reverse is also true. Companies that broker out much of their work to others correspondingly tend to report lower payroll costs and yet higher cost of goods.

Companies that Broker 25% or More of Sales to Others
Top 1/3rd vs. Bottom 1/3rd in Terms of Profitability 

Companies Brokering

Mark-up practices aside for the moment, cost of goods in the printing industry averages approximately 30% of sales. Interestingly enough, that ratio has remained at the 29-30% level of sales for more than thirty years. However, as companies begin to broker-out more and more of their work to other companies, cost of goods as a percent of total sales tends to increase, sometimes significantly.

That being true, it is clear that in order to maintain previous or desired levels of profitability, companies must look elsewhere to reduce other expense categories. Some companies take measured steps to reduce payroll under the logic that if their company is sending more and more of its work to others to produce, then there should be a corresponding reduction in overall payroll costs. Unfortunately, as you can see from the break-out above (or the PDF download), this doesn't always happen. The result is that some companies that broker out more and more work often find themselves struggling to achieve adequate levels of profitability.

Another cause of concern for companies that broker significant amounts of their sales is their total cost of sales. Owners must pay very close attention to their cost of goods or cost of sales ratio. This ratio of course tends to be impacted by three factors: pricing practices, markup rates applied to costs and waste/spoilage. As you can see from the break-out provided above, the average cost of goods (34-41%) among companies that broker a great deal is already significantly higher than the industry average of 30%. And yet, even among these companies, the difference in cost of goods between those at the top and those at the bottom is quite significant.

Firms that broker a great deal typically tend to report somewhat lower overhead expenses than reported by the rest of the industry. Because they tend to broker out a great deal, many of these companies, at least the more successful ones, do not find the need to maintain or lease significant amounts of equipment - i.e. why should they when they are using the equipment of others! These companies tend to show lower depreciation rates, lower lease costs, and often times lower facility rental costs as well.

We encourage all NPOA members, especially if they broker a great deal, to download the FREE Executive Summary of the 2014-2015 Financial Benchmarking Study, or better yet, visit the NPOA Bookstore where members can purchase the complete 103-page study for only $135, a 40% savings over the retail price of $225.