"So, if you are willing to consider the current value of net owner's compensation, adjusted for inflation, I would conclude that our industry has managed to provide an income to owners that has outpaced inflation." [Brian Ebbers] concludes, "This would, however, contradict the report's assertion that there has been a reduction in profitability (as measured by net owner's compensation)."
by John Stewart quick consultant Payroll Costs Vs. Profitability I recently received a private email from a friend and easily. Brian is correct in stating that in terms of real dollars, reader who took me to task for what he claims were adjusted for inﬂation, the average owner today is doing two failures in my September column dealing with better than the average owner in 1983. In fact, if you look at key industry ratios. Guess what? At least from his the numbers above, it appears the average owner is ahead by perspective, he was right and he will be surprised when he about 16.4% in terms of owner’s compensation. I will offer a reads this acknowledgement. couple of caveats. As you may recall, that column, titled “More Key First, it remains more than a minor concern to me that if Ratios from NAQP’s Latest Study,” lamented the fact that cost of goods and overhead expenses continue to remain proﬁtability in our industry has declined almost 30% during about the same, which they have for more than 25 years, the past 25 years; dropping from an average of 17.9% in and yet payroll continues to inch up year after year, we have 1983 to 12.6% in 2007. an even more serious problem than I pointed out in my I noted in that column that while two of the three key column, and than Larry Hunt noted in the Operating Ratio’s expense ratios, cost of goods and overhead expenses, have Executive Summary. remained almost identical during this 25 year period, payroll My second caveat deals with a known problem. We are not expenses have increased dramatically from 24.3% of sales to necessarily looking at or examining the same companies year 31.4% of sales. after year. As an example, companies that averaged sales of My friend, Brian Ebbers, owner of Cascade Printing and $336,100 in 1983 may only be doing $600,000 or $750,000 Graphics, Grand Rapids, MI, noted that while there was no in 2007, or they may be out of business. On the other hand, disputing the fact that payroll as a percent of sales has increased companies that reported average sales of $1,200,000 in 2007 over the years, he wanted to vigorously disagree with my may have been doing $500,000 or $600,000 in 1983, or may assessment that proﬁtability has declined almost 30%. not have started until the late 1990’s. While it is true that some companies have participated for many years in our Simplistic Analysis? Ouch! surveys, others participated for the ﬁrst time in 2007. “Your assertion is correct if you retain a simplistic analysis Consequently, while we feel quite conﬁdent in the statistical of the data and ratios, but if you are willing to take a more accuracy of the key ratios that we report, the same cannot comprehensive look at the numbers you will ﬁnd the true be said for how representative our sales and expenses are in proﬁtability, which I deﬁne as the earning power of the terms of raw dollars. business in real dollars, has actually improved,” he writes. Brian clariﬁes his statement by noting that in terms of One Last Thought owner’s compensation adjusted for inﬂation, ow
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