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Getting Back to Basics – Part Two

By Mitch Klingher

May 17, 2024

As discussed in part one (“Getting Back to Basics,” BoxScore, November/December 2023), material margin and time as expressed in machine hours are the keys to predicting profitability for most converters (throughput and velocity). But there is so much more to it than that, and each operation is slightly different. So there is no real cookie-cutter approach to reporting.

A large corrugator operation that is converting in excess of 100,000 msf, or 1,000 square feet, per month is going to look at things a lot differently than a small specialty sheet plant that is trying to sell value-added and niche products. There is, however, a tremendous amount of commonality even between these two diverse operations such as:

  • A large investment in equipment.
  • A plant workforce consisting of direct labor, indirect labor, and shipping labor.
  • An inventory of raw materials, work in progress, finished goods, spare parts, and shop supplies.
  • A maintenance department.
  • A customer service department.
  • A design department.
  • An accounting department.
  • A cost-estimating system and employees who utilize it.
  • A salesforce.
  • Various other administrative and management personnel.

In some of the larger operations, there is also a purchasing department, a marketing department, an estimating department, and probably a few others. Some converters who are doing high graphics and point-of-purchase or point-of-sale packaging will have a large number of project coordinators and much larger design departments. The point of all of this is that most financial statements I see are simply listings of expenses broken up into two or three large categories such as factory overhead, shipping and delivery, selling, and general and administrative expenses. The lead page of your statements needs to be neat, concise, and on the expense side categorized by functional cost centers. Broad categorizations such as selling expenses or general and administrative expenses don’t tell you much about your operation.

Having categories like design department expenses, customer service department expenses, or maintenance department expenses gives you the ability to look at real departmental costs of your business and to give each manager the ability to budget and track their departmental costs, without showing them the entire financial statement.

In the first article in the November/December 2023 issue of BoxScore, I talked about the need to separate manufactured from nonmanufactured sales, and that is a great first step at improving your reporting. The key question is whether there are definable profit centers within these two broad categories. For instance, your nonmanufactured activities may include assembly and fulfillment, sales of packaging supplies, sales of brokered corrugated, wood products, foam products, brokered folding cartons or setup boxes, etc. You need to have a system of tracking the profitability of each of these items. Lumping them into the “nonmanufactured” bucket is expedient but not particularly informative. Similarly, you manufacture different kinds of boxes and price them very differently. Your sales of boxes coming off your flexos may be priced differently from boxes coming off your die cutters. Boxes that go through two or three machine centers are likely priced differently than boxes that go through one machine center. Boxes that include high-graphic content, whether it be direct print flexography, laminated lithography, digital, or some kind of preprint, are also going to be priced differently. You need to have a system of tracking this as well.

Many of you tell me the reason you cannot do much of this profit center reporting has to do with software limitations, and I agree that the prevalent software companies don’t provide a lot of room for sales analysis. However, all of the systems allow for a flag called product codes, and these product codes can and should be customized to help you create profit centers. If you set up your profit codes to track profit centers, the system will give you a pretty good idea of the gross sales side of the
equation. Most systems I see in my travels have the product codes setup to be box styles. I advocate setting them up as profit centers. A combination of machine routings along with various graphic codes and various categories of nonmanufactured sales will give you a lot more information on the sales side of your business.

The cost side of this equation can be mostly handled within your general ledger. For each profit center, there must be a corresponding general ledger account that records the materials purchased specifically for that category of sales. Simply having one account for purchased products is not conducive to this type of reporting, but it does make life easy for your accounts payable department. The same can be said for the purchase of sheets, labels, and preprint. Multiple accounts for these types of purchases must be set up and maintained. Digital sheets, white top sheets, triple wall, and other nontraditional sheet purchases must be segregated into separate accounts.

If you go back to the first article in this series, material margin is the king of the converter’s financial statements, and if you can get the material margin correct for each profit center, then you can get a pretty good sense of where you are and aren’t making money. Most software systems are geared to track contribution rather than material margin, which is likely to include direct labor, freight, and variable
factory overhead. Although these expenses are real, it is quite difficult to allocate them back to the order with any precision, which is why I recommend using material margin alone. If you can then marry the machine hours and the labor hours for assembly and fulfillment to material margin, you can really focus in on the various categories of profitability. I have seen that this kind of analysis, while not always pristine, can help you effectuate meaningful change in your business.

Orders you thought were extremely profitable may not look as good through this lens, and conversely, orders you thought were extremely unprofitable may start to look a lot better to you. The bottom line is this:

  1. Do not let limitations in your software packages deter you from taking a closer look at the components of profitability in your business.
  2. A focus on material margins and time will help lead you in the right direction.
  3. Creating and maintaining cost centers based upon the significant functional departments in your business will give you a lot more information about your cost of operations and will facilitate better budgeting and management decisions.

Mitch Klingher is owner of Klingher Nadler LLP. He can be reached at 201-731-3025 or
mitch@klinghernadler.com
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