Securing Your Screen Printing Financial Future

FinanceFrequently in the newspaper an article appears about employee theft. Small businesses are the most vulnerable. A larger risk is loss from well-intended, innocent error.

How important is this subject? Prepare to be shocked. Start by asking your employees, delivery personnel, friends and family how much out of each $1 of revenue at America’s most successful companies is profit. Out of each dollar of revenue how much is profit at UPS, Wal-Mart, Macy’s, Citibank, GM and others?

A few facts
People will typically answer 50 cents out of every dollar is profit. They think that is what you the owner take home. Our UPS driver said UPS makes 70 cents profit from each dollar of revenue. The truth is UPS earns 4/10 of one cent. Wal-Mart and Macy’s earn 3 cents per dollar. Citibank and GM are losing 12 and 36 cents per dollar of revenue the last time I checked.

If your business is making so much money, then who cares about a misprinted shirt, lights left on in the bathroom, a conveyor belt that is running too fast, and many other ways potential profit is escaping your grasp?

The most profitable businesses on the New York Stock Exchange with few exceptions consistently have net income of 5% of net sales. Most businesses make less. 5 cents goes into 100 cents 20 times. If we waste a $1 shirt, then we have to produce 20 times the $1 above budget to meet our profit objective. $19 of the $20 sale above budget is the cost of that sale so we make $1 to pay for the spoiled shirt.

Cost of waist
If a company makes 1% profit, then the multiplier effect is 100. So the cost of a wasted shirt or lights left on that are not being used is the work required to pay for the waste. Your employees will not believe this. We posted the income statement of big name companies for all to see the cents profit per dollar. Everyone was amazed. Now no one leaves unneeded lights on. Everyone is pulling together to cut costs every way possible. Even the UPS driver now handles our packages more carefully.

Systematic review
You can avoid being a victim of fraud and innocent error by a systematic review of your business. This is a simple process that gets everyone focused on making the maximum amount of money. Each time someone finds yet another way to cut costs or increase profit, everyone feels the victory.

A systems review can be, first, accounting and, second, managerial. CPA firms audit by documenting the revenue and disbursement sequences of actions. The CPA wants to know who records the sale or purchase order, the physical handling of the product or service, and payment. Ideally, the three functions should be executed by different people. The CPA will review a series of these transactions to see if these procedures are being followed on a consistent basis.

Match the paper work
A purchase order is evidence of something being purchased. The receiving report is an independent report of what was received. Never use the packing list for receiving. Accounts payable matches the P.O. to the receiving report to the vendor’s record of what transpired, and if all three participants in the process agree, the invoice is processed for payment. The chance of the three making the same innocent error is remote.
check

The check should be signed by an independent 4th person who verifies compliance with this procedure. If that 4th person is not an owner, then the employee should be bonded by your insurance agent. Cancelled bank checks should never go to the bookkeeper. The checks should be mailed to the owner’s residence for bank reconciliation and to verify vendors and signatures. That guards against phantom vendors.

separation of duties
The same separation of duties applies on the revenue side of the business. Sales orders are written using prices approved by the owner or management. A CPA would check for compliance again by drawing a sample of transactions. The person who ships independently records what was shipped. A different person in accounting creates the invoice, and of course the customer checks the invoice against what was received. The CPA then traces the payment to bank deposits. Keeping copies of customer checks and credit card slips is a good idea.

When duties are separated innocent errors will be caught. I might write a sales order, but forget to give the customer a discount, or I used the wrong price. Accounting will very likely see that error so that a correction can be made. Anyone contemplating fraud will be discouraged and discovered when duties are separated. Fraud reported in the newspaper usually results from situations where these checks and balances do not exist. The incidence of innocent error that could damage customer relations or your financial condition will be much more common than fraud.

Rotate people in jobs
Banks and many companies rotate people in jobs. The old rule in banks was each employee must take a two week vacation on the theory that errors, innocent or otherwise, are more likely to be discovered when the person is not present. This practice might not be practical in a small business, but an independent review of transactions certainly is practical and a wise step to take.

The managerial approach
The managerial approach is to question whether the right sales price is being used and whether multiple vendors were considered. The smart buyer does not buy low price. The smart buyer identifies the best value. Will the business be looking to the vendor for help? What is that help worth? If I can buy a quart of ink cheaper from one vendor than another, how many shirts per quart can I print, and what is that extra dollar I am paying costing me per shirt compared to the value of help from the vendor?

Of course, there are many other managerial considerations like the quality of ink, how reliable the vendor is about shipping promptly, and more. In our company, for example, we buy only shirts that have been vacuumed by the manufacturer. We don’t want to spend time picking threads and bits of fabric off of shirts or find lint on the bottom of our screens. Issues like these can be more important than a price difference. That is why a managerial review is so important when reviewing purchasing and revenue procedures.

CPA firms at larger clients review the reliability of company procedures. If the procedures include appropriate separations of duties and reviews which are found to be followed on a consistent basis, then the CPA has a reasonable confidence that the financial records fairly represent the financial condition of the company. In a smaller company, the CPA would vouch the balance sheet. You can adopt both practices.

vouch the balance
To vouch the balance sheet as a way of determining profitability and having confidence in the financial condition of the company each asset or liability is independently verified. Cash records in the general ledger are reconciled to the bank statements. Accounts receivable are confirmed by subsequent payments from customers and by sending confirmation letters to customers. Inventory is counted and valued using purchasing records. Invoices for fixed assets are inspected and depreciation methods checked against standard methods for accounting and tax purposes. Liabilities are verified in a similar fashion.

A managerial review extends beyond accounting documents. Each and every aspect of the business is potential. Going back to the conveyor belt that is running too fast, the temperature of the dryer would have to be on a higher setting than when the belt runs more slowly. If the heat can be turned down, the electric or gas bill will be lower. Then what is the limit on how low can the temperature be set?

Slow it down
The belt should run as slow as possible without slowing production. If printing 120 one color shirts per hour in a manual press shop, the belt will have to run faster then when printing 50 four color shirts per hour. Once the speed is determined, then the heat level is selected so that when a shirt comes out of the conveyor and the ink cools to room temperature the ink cannot be picked off the shirt or be cracked by stretching.

The manager looks at every decision that is being made each day on a routine basis, and then compares to options that might be available. Slowing the conveyor belt, adding doors to the conveyor, even if they are cardboard, and drying damp shirts with a heater fan before printing might be changes that can be adopted on a routine basis. Increasing the voltage on a dryer to cut cost might not be practical. Adding temperature controls to flash and conveyor dryers always saves money.

Shared Opinions
When people working together share their ideas about options and opportunities, you will be amazed by what you hear. Some people will be reluctant to make suggestions for fear of rejection. No matter how unreasonable an idea may initially seem, all ideas should be received with respect and value. Often that initial idea that ultimately is not adopted triggers thinking in another person who comes up with a better idea. If the business even got only one good idea out of every 20 offered, that is one the business did not have previously.

lay out of the shop
So let’s look at the lay out of the shop, how materials are handled, lighting, ventilation, work heights of presses and tables, amount of cleaning we do, and so many more subjects. Get everyone involved so they have the feeling of ownership. Then look at what you know other companies have decided. What do they know that we do not?

120 shirts per hour
People printing one color shirts should comfortably print 120 shirts per hour on a sustained basis. If you are not, then there is a potential for improvement, and you would want to know more about those shops printing 120 per hour. Some shops with automatic presses load a shirt every 3 seconds. What can we learn from them? If we use wooden screens, why have other shops switched to the more expensive retensionable aluminum screens? Why do shops use the more expensive capillary film rather than liquid emulsion?

The questions are endless, and so is your profit potential. As you increase the profit of the business you are also in a better position to pay employees better, offer benefits, and improved job security. The benefits could be ice cream sundaes for everyone every now and then, or free soda anytime, or maybe even a cash bonus just before Christmas.

I also like to ask employees how can a company respond when losing money. The utilities will not cut their rates. We still have to pay sales, use and many other taxes. Our vendors will not cut their prices out of sympathy for us. When we go through all the options employees understand why companies lay off people. Payroll and all the fringe costs can be eliminated quickly, and that reduces costs faster than anything else a business can do. Keeping the company profitable is important first to the employee, because the employees in most companies are the first to suffer from financial losses at the company.

We may read about fraud at local companies, but in truth that is just a symptom of the many opportunities that exist to improve the profitability of all companies. Finally, I offer this challenge. If your net income is not 30% or more of net sales, you have not looked at all the opportunities.