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Dead Printer Working

Copyright February 8, 1996

Transmitted from New Orleans, Louisiana

Dear Friends. . .

Dead Man Walking is the name of a current movie whose name is based on what prison guards yell to indicate a death row inmate is being escorted outside of their cell. Dead Printer Working Syndrome is what the sergeant-at-arms at the printing association should yell every time an owner passes who has less than a 2 to 1 current ratio. It is my opinion that many owners stay dead printers working because of their mistaken perception of equipment purchases. Let me explain.

I started a conversation regarding equipment buying via Crouser OnLine. It hit, to say the least, a responsive cord. Allow me to bring you up to date. We begin by defining working capital.

A balance sheet shows a company s assets which equal (balance) against liabilities and owner s equity. The concept of current comes from the accounting cycle which is one year. Therefore we can separate (classify) assets and liabilities as current or non-current. Current liabilities are those which are either cash or are expected to turn into cash within twelve months (cash, accost receivable, inventory. Similarly, we can classify liabilities into current and non-current. Current would include accounts payable, taxes payable and the current portion of notes payable (12 months of payments from the date of the statement for instance). Current assets minus current liabilities equals your working capital. Current assets divided by current liabilities equals your current ratio which should be 2 to 1 or $2 of current assets for each $1 of current liabilities.

Now, a 2 to 1 or greater current ratio is hassle free management. Conversely, businesses die when they run out of working capital. Reasons for running out of working capital are varied, but the result is the same: death. Now, in between comes the dead printer working syndrome: building the current ratio to the point where there is money in the bank, but not enough. So, before enough is achieved, it is spent and the dead printer continues to work.

It is my advice that the prudent print shop owner increase their working capital beyond a 2 to 1 ratio and then spend the excess on equipment, a new house, retirement or whatever they choose without doing damage to the family s biggest asset: the business.

One reader, while not objecting to this view, did object to my final statement that the most prudent way to invest in equipment is to buy that which will allow you to do it cheaper, better and faster when you plug it in. Let us hear from him. Tom, While I agree with your sound asset management principles, I must emphatically disagree with your statement that the secret to buying equipment is buying that which allows you to do it cheaper, better and faster as soon as you plug it in.

That view doesn t recognize the value of innovation in profitable (albeit also unprofitable) business growth. Many of us who stuck our necks out with color and color RIP devices have prospered handsomely as a result, as I m sure you know. Our color volume continues to enjoy excellent profitable growth -- not because we can do it faster, better and cheaper -- but because we can do it, period. We ve taken advantage of a still rapidly growing opportunity, though the commitment to the technology certainly involved financial risk several times along the way.

It was certainly our sound balance sheet that allowed us to take those risks without the fear of being buried by them, but doing it more efficiently had nothing whatever to do with the investment decision. It was purely a matter of expanding our capabilities and our capacity to benefit from these new revenue streams.

Well, let me attack this very common mis-perception of financial good judgment before printers buy again.
I begin by granting my writer one point: print shops are never started with enough working capital. I sure didn t when I started my shop and very few I have ever visited did. As a result, dangerous gambles must be taken with a limited amount of capital in order to get a print shop off the ground. You do not hear from those who do not make it. You only hear from those who do and frequently they are stuck in the equipment gambling mode. My point isn t the fact this is required, and even desirable, in start up businesses. My point is that most outgrow this invincibility complex resulting from previously successful gambles and begin managing their increasing assets prudently as opposed to gambling the survival of the business on the every equipment purchase.

Let me explain. We can develop a matrix of equipment investment via technology and markets and rate the risks involved in the gamble. The least risky investment is to deal with existing technology and existing customers. The most risky is to invest in new technology requiring new customers.

.............................................Old Technology.................. New Technology
.................Old Customers.........Least Risk............................ More Risk
.................New Customers.......More Risk............................ Highest Risk

Proven technology with current customers is the lowest risk gamble. A three headed drill to allow workers to do the work they have to do today faster, better and cheaper is a better gamble than adding a color copier because you think you have a market.

Well, then, as my reader would say, how does anyone ever invest in truly new technology? Here s how. Begin with a capital budget. This is where you spend the cash generated from operations (sales - expenses + depreciation - payments = +/-cash). Second, (narrowing the discussion to equipment purchases only), identify all potential equipment investments: cutter, press, paper drill, color RIP devices, and delivery truck.

Then, invest in the equipment which allows you to do it cheaper, better and faster, (existing customers and existing technology). Once you have eliminated this category of equipment (existing technology and existing customers) then move on to expansion equipment (new technology and new equipment). But, always deal first with the lowest risk investment among the alternatives you have. So, spend the excess of working capital first on what will allow you to do it cheaper, better and faster. Then, make riskier equipment investments as you choose to risk the funds. But this is theory. Here s how it really works in real life.

Practical Example:
Real life is printers who continue to spend working capital on equipment. Here s a recent message. Tom, you know that I don t have the wisdom or patience to wait for current ratio analysis, and that our equipment purchases have come more as a function of needing the capacity of a newer, bigger, faster whizbang. I don t think I m in trouble yet, But I need to discuss the new additions of equipment (I ve already bought) and the next needed purchase (a folder) and some options that I see for its financing? This purchase, unlike most of those in the past, has the potential to be an increase in capabilities, but at the minimum is needed to replace one that is just worn out. (Currently using an air fed Pro-fold that was about 3 years old in 1988 when we bought it. No right angle for it, and the $1000 that we spent to rebuild a year ago was apparently a waste. Our repair guy asked us to buy a new one... and he doesn t even sell them.)

Tom: Before I start reviewing this message, I pulled up your balance sheet as of our last visit and the budget portion of our spread sheets. It shows you first need $60,000 in working capital before you achieve a 2:1 current ratio. Therefore, you currently have no excess funds to spend on equipment. That money was withdrawn from the business earlier this year (for personal expenses). Additionally, you need $10,680 a year to finance your retirement. This means you essentially want to spend money you do not have. Your capital budget projects an increase of $71,000 this year. This would have funded your retirement and cured your working capital problem in twelve months. However, you are now choosing to divert this money to buy equipment.

Printer: My question is: Should we get a nice shiny new one (about $18-22,000) and lease it or try and strike a deal w/ someone for a used one at about half that price, but no financing options... or, at best, an equipment dealer who is going to give me a 30-60-90 payment deal?

Tom: Should you pay $22,000 or $11,000 for a folder? $11,000 would be better assuming comparable equipment. $11,000 with a 30-60-90 day payment plan and no interest would be better still. However, understand, at a minimum you are planning to spend $11,000 of working capital you have not yet earned.

Printer: What you aren t aware of is the following changes that we made (without consulting you-we were afraid you would say no ): 1) We replaced a Kodak copier w/ a newer version of itself. No new capabilities, but far superior quality. This was needed so that both of our copiers would have similar quality output. We were only 8-9 months away from paying off the older one, but the new one s payment is slightly less than this one and it should lower our maintenance. costs due to an improved click rate.

Tom: Assuming a $1,000 payment and the fact you were 8 months away from paying it off, you have spent $4,000 of your working capital on this deal. That s because you increased your current obligations from (approximately) 8 payments of $1,000 to 12 payments of $1,000 (or whatever the actual payments were). Okay, that s a $4,000 expenditure of working capital.

Printer: 2) We just agreed to and took delivery on a $14,400 purchase (of a Mac 8500 64mg ram, 120 MHz, 2 gig hard drive, and an upgrade of an older system to Power Mac status) that was needed for a good bit of the work that we ve been doing lately. It is a one year lease with an $1196/mo. payment. I chose the short term financing because the other lease factors looked like worse robbery than this one year, it required 2 payments up front and is a true fair market purchase at the end. I haven t signed off on this yet, but do you think that in light of the fact that now I am going to have to buy a folder, that I ought to back off on the term of the lease and extend it to 2 or 3 years?

Tom: Now, this has you spending your working capital at a rate of $1,200 a month for 12 months plus 2 months up front or $1,200 x 14 = $16,800.

Tom: In Summary: As of our last visit you were projecting an increase of $71,000 in 12 months which you allocated to cure your working capital deficit and fund your retirement. That took care of your earnings for the next 12 months. Now, instead, your Kodak deal spent $4,000 of that money. Your Mac deal spends another $16,800. And your proposed folder deal spends $11,000. So, you will only have, at best, $39,200 of the $71,000 projected increase in working capital if you work hard all year and meet your sales budget of $770,000 and don t spend any more than you have planned.

So, what was the question? Should you pay $22,000 for a folder or $11,000? Neither. You have already spent the money you have to spend on equipment plus some of next year s. But that s your choice. I advise curing your working capital deficit and funding your retirement. You, however, need to decide what your priorities are and then accomplish them.

TRAVELOG: I will present Power Pricing March 23rd to the Gulf Coast Association of Quick Printers in New Orleans. In February, we will be doing client work in New York, Pennsylvania and Texas as well as presenting a February 3rd seminar in Dallas and attending the NAQP Executive Conference in New Orleans. In March, we will be in Florida, Iowa, Michigan and Louisiana.

Happy Trails...Tom Crouser

P.S. Stay Warm. Tom

Crouser & Associates - Helping Printers Prosper Since 1985

Crouser & Associates Performance Group program includes two on-site evaluations by Tom Crouser each year along with two group meetings. Management training is held during the group meetings along with participation in a meeting with non-competing printers. Join others who have decided to run their business instead of the business running them. Reply to by Email to Tom Crouser for more detailed information or call Clark Workman at (304) 342-5100. Or fax (304) 342-5187 or contact crouser@ibm.net.

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Date inserted: Wednesday, February 07, 1996 11:01:52 AM

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