Payroll Costs Vs. Profitability by ProQuest

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									                                                                                                                  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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