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New Equipment; Gambling V Investing

Crouser Report OnLine April 6, 1996

Transmitted from Jacksonville, Florida

Dear Friends; I have been slower in answering my email this week, but last week we were traveling in Tennessee and Kentucky and it appeared I chose all of the hotel rooms without modem hookups. Yes, diary, there are still many hotel rooms hard wired in the United States. Anyway, on with the latest. Connecticut wants to know our opinion on this deal to buy equipment even though they have a 1.3 current ratio. Subj: new equipment
From: Connecticut
To: TomCrouser


We are currently spending at least $1500 per month with our service bureau for film and rc paper. We have an extensive dtp department with 4 networked Macs and would like to do direct to plate work.

We got a proposal from an equipment vendor for an ECRM 14 Imagesetter, Power Mac 7100 with 64megs of ram and a processor for $33,000. This is a demo unit. The lease payments for 3 years is about $1000 and direct material costs would be between $3000 and $5000 per year. So at this level other than for soft costs, such as pick up or delivery of film, delay time costs, and others we are at current levels at a break even point. Our quick ratio is not 2:1 , but more like 1.3:1.

It is not like we are creating a new market for ourselves, it is more like trading dollars from outside expense to equipment lease. What do you think?

The surest way to win is to buy something which will allow you to do it faster, better and/or cheaper when you plug it in tomorrow morning. You are right. Currently you appear to be at a break-even point more or less on this decision. You could trade the income dollars and have the equipment inside and under your control, which is beneficial. However, this is also a way to rationalize purchasing equipment so you quickly go out of business. Let s run through an analysis of this deal and I will try to point out the pitfalls.

Let s take your analysis that you are spending $1500 per month outside and can get the equipment for the same $1500 per month. Let us revisit your calculations with two other considerations. First, what other costs change? Do you now have people who are skilled enough to produce on this equipment or will you have to hire someone or add to someone s hours. Assuming you would have to hire, then you must add the cost of the person to your outgo and that would tilt the scales heavily to continue buying outside. But, let s assume the people issue is not a problem. Second, we would look to other costs which would change such as direct materials; utilities; maintenance contracts and add them to the operating cost side the same as we would have added the people cost. One would also look for additional installation costs such as redoing wiring; load factors on floors; installation such as renting a crane to move equipment; training; and other one time costs. Generally, not a factor in this situation, but it is in many. Again, let s assume those costs do not exist and we are still at an operating cash break-even of $1,500 per month.

Okay, let s see what happens to your current ratio when you do this deal? You said it s a 1.3 now. I ll assume you have $65,000 worth of current assets and $50,000 worth of current liabilities ($65,000/$50,000 = 1.3) Disregarding interest and a downpayment, you will be adding $12,000 to your current liabilities and adding nothing to your current assets. This will result in a reduction of your current ratio to 1.05 (($65,000/($50,000+$12,000)).

Okay, it will reduce my current ratio to 1.05. But, all I am doing is paying for my equipment with cash that I am avoiding paying to someone else. Nothing really changes.

Although it appears that nothing changes since you are exchanging outside purchase dollars with equipment payment dollars, ONE THING REALLY DOES CHANGE. When you are buying from the outside vendor, you buy only the amount you need when you need it. When you commit to the equipment, you have to pay the prescribed amount every month.

Specifically, you said you are buying at least $1,500 per month. Let s use some real data and use our purchase totals for the last twelve months. If we find we are spending an average of $1,500 then the deal is suspect for the cash flow you are counting on trading isn t there. Some months it will be only $800-$900 and other months it is $2,000. Generally, although you could work this out specifically, I would guess you will be damaging your cash flow, if the COST OF THE EQUIPMENT and the AVERAGE of what you are spending outside are the same.

If your purchases are LESS than the COST OF EQUIPMENT, then you are into a no brainer territory. Don t do it for it will cost you cash every month and further damage your current ratio.

If, however, your MINIMUM PURCHASES every month EXCEED the COST OF EQUIPMENT , then you may proceed with the gamble, IF THIS IS YOUR BEST GAMBLE. However, gambling on a break-even proposition isn t my idea of the best way to secure your future.

FIND A BETTER OPPORTUNITY: I don t know you situation specifically, but I rarely see a trade off of the same amount of outside dollars to inside dollars to be the best opportunity in your shop. I would certainly want to assure we are not overlooking other opportunities which would have a better pay back. But, if this is your best opportunity, you still might not want to do it.

GIVE YOURSELF A LITTLE CUSHION: Commented earlier that this was one way to rationalize investments and go out of business. Have a Chicago area client who has had one of everything equipment-wise. He bought his Didde-Glaser Press on the strength of the business he could do with one company and, although he did a considerable amount of business, it was short-lived. Same way with the Mark Andy label press. And the Heidelberg windmill. And on and on. He would analyze his investments and when he got to the point of trading dollars, he would buy. Then, something would change, and it wouldn t just pan out like he though. That, however, didn t stop him from using the same rational on the next piece of equipment, etc. Never did get to a 2:1 current ratio, however he is making progress today.

GAMBLE vs. INVESTMENT

THE REAL REASON WHY YOU STILL MIGHT NOT WANT TO DO IT: This won t solve your problem. The company s problem is not doing film and rc paper in-house. The company s problem and greatest threat is that it doesn t have adequate working capital.

So, WHY DO YOU HAVE A 1.3 CURRENT RATIO in the first place? I don t see this purchase of equipment doing anything to change this fundamental problem of the company. So, my fundamental advice is to determine why you have a problem with working capital. A cash flow analysis would quickly show this. Then, fix it. And, make this equipment decision within the context of solving the real problem.

GOOD GAMBLES vs. BAD GAMBLES

Had the opportunity this week to pay a regular visit this week to a Kentucky printer who took a very big gamble on equipment investment in years past (about $350,000 including interest) and has been digging his way out of it ever since. Well, they are digging their way out and, given another year of solid management choices, they will be a very successful company in our industry. One of our discussions, however, centered around gambles and I wanted to share it with you.

What is a good gamble? Consider this.

Odds 1 in 40 that you will win and the gamble is $5.

Is this a good gamble? Can t tell, can you? Why can t you? Well, first you don t have anything to compare it to. Maybe you could get a gamble which would give you 1 in 2 odds for the same $5. Secondly, it depends upon your own risk taking or risk adverse personality. Some folks tell me they won t gamble because it is against their faith, but yet they make significant equipment purchases based on the fact that the other guy got one. But there is a third factor we also must consider in judging whether a gamble is good or bad.

CAN YOU AFFORD TO LOSE?

Someone with $200 cash as pocket money may consider this a good gamble. Someone down to their last $5 in the world may consider this a bad gamble. So, good gambling or bad gambling depends to a great degree on our ability to sustain the loss. All investment, of course, is a form of gambling. A company with a 2.5:1 current ratio would be taking a better gamble than a company with a 1.3. That s because the stronger company could afford to loose the gamble and still survive. A company with a 1.3 who gambles, knocks their current ratio down to 1.0 and who sees the gamble not pay off could subsequently die.

GROWING UP IN KENTUCKY

All of us take huge gambles when we open our businesses. Reason we got into this business in the first place is to make some money. Had we had money, as Dr. Leon Danco suggests, we wouldn t have been danged fool enough to risk it in the printing business. Well, some of us don t grow up. We take these giant chances when we first go into business, but then we get stuck there. We risk everything on every investment. Everytime it is a roll of the dice for the whole wad, regardless of the size of the wad. And, that, friends, is a bad investment.

And that brings me back to my friend in Kentucky. You see, he knows that his $350,000 gamble was a bad gamble, even though he is going to win and it will pay off handsomely. After all. Someone does win the lottery. But, that, friends, does not make it a good investment.

We ll be visiting the great State of North Carolina this coming week and eventually end up in Folkston, Georgia where we will see a friend of the daughter s get married. I also wanted to tell you that I think I saw an eagle flying along the road in Kentucky and that, although it has been a tough winter, the blossoms are beginning to bud. It won t be too much longer. So, let s not suck up all our fumes from the print shop. Come out of your world enough to know what the real world is doing. Until next time. . . .

Happy Trails...Tom Crouser 1996 Power Pricing Seminar Featuring Tom Crouser s Pricing Systems With Special Comments On the 1996 NAQP Price Survey sponsored by Crouser & Associates.

Especially For Shops With Less Than 14 People Coming to:
San Francisco, April 27th.
Chicago, June 1st
Detroit, May 11th
Miami, June 22nd
Atlanta, May 18th
Colorado Springs, August 24th


Spend Saturday morning (8:30 -12 noon) with Tom Crouser and learn:

The 5 Strategies Of Printing Price Competition! These are the only ones available to you! Learn what they are and begin using them to increase your profit!

The Real Secret To Making Money In Print Shops- how to make lots of money with either a high or low price.

How the Printing Price Calculation Keeps You Poor - Using production standards for estimating, as most computer estimating programs do, keeps you from earning a decent living.

Calculating Your Costs the Easy Way - Learn two rules of thumb which allow you to quickly estimate a cost rate for anything you do!

Why Pricing Is Screwed Up In Printing - Why the price paid depends more on your negotiating skills than on your job cost. See how you do.

Cost, Pricing and Estimating - See how the differences in each may be costing you lots of money.

Plus! How the Crouser Method gets better prices! Throughout the session, Tom will use tools he has especially developed for the printing industry. See the new Crouser s Quick Estimator in action!

Using Customer Service To Get A Higher Price - An example of non-price competition you can hear.

Learn Where Printing Prices Come From - Tom relates a brief history of pricing in the printing industry. You will find it fascinating.

Also Hear Tom s Own Analysis of the results of the 1996 NAQP Price Survey sponsored by Crouser & Associates.

TO REGISTER: Email TomCrouser@aol.com with your name, address and telephone. You will be contacted regarding the meeting site. Or fax your reservation request to (304) 342-5187. Or call (304) 342-5100. The session is FREE but a ONE WEEK ADVANCE registration is required. Act now.

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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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