I wrote a post about vendor qualification when I first put this blog together (here). At that time, I introduced the idea of using the PIA ratios to help scrutinize a potential vendors fiscal “health” as compared to their peers. As the article below points out, there was an estimated 2,800 + shop closures last year alone, and in my opinion, there are more to come. So, the idea of comparing a vendor to their peers, my not be enough.  This article, from the PrintCEO provides a great option.

Do You Know Your Z Score? You Should!

By David Dodd on March 25th, 2010

It’s no secret that the past 12 to 24 months have been especially difficult for many printing companies.  Dr. Joe Webb is estimating that the printing industry lost 2,844 firms in 2009.  Bankruptcies, foreclosure auctions, and other closures have been well documented by WhatTheyThink as well as by other trade publications.

Having a clear picture of your company’s financial health is always important, but it becomes essential when business conditions are difficult and the margin for error is reduced.  And while no single tool or formula provides a complete picture of financial health, one popular measure is known as the Z Score.

The Z Score was developed in 1968 by Edward Altman, a financial economist and professor at NYU.  The original objective was to provide a way to assess creditworthiness.  Since that time, the Z Score has become a popular method of analyzing a company’s financial health and estimating the short-term risk of bankruptcy.

The Z Score isn’t perfect, but when it was initially tested, it was found to be 72% accurate in predicting bankruptcy within two years.  Subsequent testing found that the Z Score was 80%-90% accurate in predicting bankruptcy within one year.

The Z Score combines five common financial ratios.  Each of these ratios is multiplied by a weighting factor developed by Professor Altman.  The values obtained are then added together to determine the Z Score.

The specific ratios and weighting factors for privately-held manufacturing firms are shown below:

• (Working Capital / Total Assets) X 0.717
• (Retained Earnings / Total Assets) X 0.847
• (EBIT / Total Assets) X 3.107
• (Book Value of Equity / Total Liabilities) X 0.420
• (Net Sales / Total Assets) X 0.998

A Z Score of above 2.90 indicates that bankruptcy is not likely.  A score that is lower than 1.23 indicates that bankruptcy is a strong possibility.

Your Z Score should be calculated on a quarterly basis as one part of a comprehensive review of your company’s financial performance.  This quarterly financial health “check-up” needs to become a standard component of your management routine.  As I noted earlier, when times are tough and the margin of error is small, it’s more important than ever to monitor the financial health of your company in a thorough way, on a regular basis.

If you don’t have the time or resources in-house to perform this kind of financial review, you should consider getting assistance.  It doesn’t have to be costly or disruptive, and with online collaboration tools, it can usually be handled remotely.

I’ve created an Excel-based Z Score Calculator.  If you’d like a copy of this worksheet, e-mail me directly at ddodd(at)pointbalance(dot)com.

Living and working in Southern California has an inherent set of benefits (like being able to surf before and after work!). But, there are also some drawbacks – we battle massive brush fires every year and the occasional earthquake. The Northridge earthquake in 1994 was devastating to local business – the shop where I worked suffered major damage (being 4 miles from the epicenter) and was shut down for 10 days as our presses were repaired (our 6-Color “bounced” 5 feet off of its pad and “twisted”). Since then – disaster preparedness has always been an important aspect of business and personal life. As such, I always as the question “What if?”. Shockingly, many printers and designers have no firm or real plan in place to deal with the inevitable. I am fortunate to work with a company that has a documented disaster preparedness plan:

Infrastructure to Deliver Business Continuity Disaster Planning

For disaster planning Consolidated Graphics leverages the fault tolerant redundancies that are part of our primary data carrier’s collocation facility. Our equipment is installed in a hardened facility with photo ID card key access only. The entire facility is protected by an FM 200 fire suppression system. There are dual A/C handlers that trade off operating so one is a known functioning backup to the other. There are two separate power feeds from the local electric provider. An adjacent battery room provides backup AC power to our equipment and A/C units with a dedicated diesel generator behind that. Diesel fuel contracts are in place to ensure a constant supply. Network connectivity is direct to our data carrier’s IP backbone and Frame Relay networks. There are two separate physical network feeds coming in at opposite ends of the building. Our equipment is covered by a minimum service contract of 24×7 4hr response. In addition to that, we have shelf spares for a few key components. Finally, tape backup media is stored off site so that systems can be rebuilt and installed at another collocation facility or node on our WAN in the event of a total loss.

With regards to the data security procedures in place to prevent unauthorized access, maintain data accuracy and ensure the correct use of information we have appropriate physical, electronic and managerial procedures to safeguard and secure the information we collect online. Consolidated Graphics utilizes a state-of-the-art firewall for access control. Our sites use SSL encryption to secure data during transfer. While Consolidated Graphics has identity authentication standards, we can customize identity authentication based on the customer’s requirement. Our hardware is located in a secure data center with photo ID card key access only.

In the event of “Act of God” occurrences or catastrophic events, copies of all software and system specifications are stored offsite. In short order, entire systems and installations could be rebuilt and available, either from the same location or a different location depending on the extent of the incident. Incremental backups are performed nightly. Full backups are performed each weekend. Backup tapes are retained for a rolling 30-day period and are securely housed outside a 5-mile radius of the facility.

And, unfortunately- we have had the occasion to test the system:

In early February of 2008, a tornado struck Mercury Printing, a Consolidated Graphics company, in Memphis, Tennessee. Fortunately, no one was injured. However, the building was badly damaged and a large amount of materials held on-site in fulfillment was damaged or destroyed. Although the area did not have power restored for several days, Mercury was able to bring in generators within 24-hours to provide power to critical areas in the building. Accounting and pre-press were up and running within 24-hours which allowed files to be sent to roughly ten Consolidated Graphics operating companies in strategic locations around the country. This sister company outsourcing, coupled with the immediate relocation of shipping and receiving to a nearby warehouse, allowed Mercury to provide seamless service to clients in the face of a potentially devastating event. Although part of the building collapsed, Mercury’s client base saw no interruption in service.

So, I would always ask your vendor “What If…?”

Questions? Drop me a note.