What Price for Jobs? 3

The first article in this series looked at the amount of money a business has to invest in building, say, a store, restaurant, factory, office, or some sort of structure to house a work place where people can be employed.  It turns out that a business has to pay out a lot of money just to get ready to hire anyone.

The second article discussed the total cost of paying an employee's salary.  In addition to all the money the government requires that an employer withhold from an employee's stated pay, there's a roughly equal amount which the employer has to pay out but the employee never sees.  The fact that the employee doesn't see it doesn't mean that the boss doesn't feel every penny keenly, of course.

The total cost of employing someone is important because every penny has to be covered by income from sales.  If the business doesn't sell enough to cover its costs, it goes out of business.  Thinking about the total cost of each individual employee, as sensible bosses must if they plan to stay in business very long, makes it pretty clear why businesses aren't hiring enough people to put a dent in the Obama recession.

Financial Statements

Sally works at Bogen Communications in Ramsey, NJ; the last article explored how much she directly costs the company.  Bogen's operating realities are clarified in their 2009 annual report.

We'll focus on only a few of the numbers in the report.  We've left out small items so these totals won't add up quite as neatly as they do in the real report.

The numbers are in thousands, so Bogen had $44.8 million in sales in 2009.  Bogen has 83 employees, so that works out to a bit over a half-million in sales per employee.  That sounds like plenty of money to take care of Sally and her colleagues, but look at Cost of Goods Sold (CGS or COGS).

By accounting convention, COGS includes all costs directly associated with producing whatever product you managed to sell.  If you're in retail, it's what you drew from inventory and what you spent to replenish your inventory during the period.  If your store starts the month with $1,000 in inventory, you buy $500 worth of goods, and end the month with $800 in inventory, your CGOS was $700 - the $500 you spent plus the $200 by which your inventory went down.

Bogen is a manufacturing company, and by definition, factory labor, material costs, and manufacturing overhead are included when you calculate manufacturing COGS.  It cost Bogen a bit over $20 million to manufacture the $44 million worth of goods they sold in 2009.  Bogen had a gross profit, or operating profit, of a bit over $20 million in 2009.

This works out to a 44% operating margin in 2009.  That means that for every dollar they took in, making the goods they sold cost them 56 cents, leaving 44 cents with which they could meet other expenses and hopefully give their stockholders a profit.

By way of comparison, operating margins in the PC business range between 3 and 6% because there's so much competition: for every dollar you pay Dell, 96 cents or so go to China for the bits and pieces or to the factory workers screwing your PC together.  A 10% margin, Dell Computer would kill for.

Unfortunately, Bogen spent so much on marketing, which includes advertising and putting a sales force on the road to flog the goods, and on administration such as office support, billing, paying bills, and filling out tax forms that they lost money overall in 2009.  The 44 cents on the dollar wasn't enough to cover the rest of their costs.

The Obama administration did one good thing to fight the depression - they extended the period by which businesses could carry losses back in time and get back income taxes they'd paid in past years.  Bogen had paid enough income taxes in earlier years to get back $5 million as a tax refund, which went a long way toward keeping the company afloat.  That's fair - their 2009 losses wiped out their past profit so they shouldn't have to pay taxes for those years anyway.

Where's the Jobs?

Bogen's 2009 sales were about $10 million lower than their sales in 2008 and 2007.  Assuming that their operating expenses haven't changed too much, $10 million extra sales at 44% margin would give them $4.4m in extra operating profit, but that wouldn't cover their loss of $17 million in 2009.  They had to slash expenses to solve this problem.

The financial statement for the 2nd quarter of 2010 shows $1.181m for R&D and $3.390m for Sales, General and Administrative.  Multiplying those totals by 4 gives a rough estimate of $18.284m for the 4 quarters of 2010.  They haven't cut R&D much, but they whacked Sales, General and Administrative.

How do you whack SG&A?  You can cut advertising, but that can be suicidal.  Assuming you can't cut advertising too much, the bulk of the saving comes out of G&A - the paper-pushers, managers, and admin types in the office.

You can't save enough by turning down thermostats or by curtailing travel.  The only way to cut G&A significantly is to lay people off and hope the survivors will work hard enough to make up for it.

The last article shows that each Sally on the payroll costs $74,000 plus whatever it costs for her office, her share of HR, filing paperwork about her, and other administrivia.  The total cost could well come to $100,000 per Sally.  If so, laying off 10 Sallys saves a cool million bucks and cuts Bogen's losses dollar for dollar.

Saving the Farm

Their cost-cutting efforts were successful - Bogen showed a small operating profit in Q1 and Q2 - but the large reductions in G&A translated either into less advertising, which will hurt in the long run, or laying off a lot of employees, or a mixture of both.

Given Bogen's mind-bending losses in 2009, you'd expect them to be very careful about running up costs by hiring more people.  As cash comes in, they'll want to sit on it in case things turn bad again.

Indeed, the Wall Street Journal reported on Aug 6, 2010 p B6 that that's precisely what businesses are doing - they're sitting on cash instead of hiring.  Profits are up because of massive cost-cutting which involved laying off millions of workers as you can see from Bogen's numbers, but nobody wants to let costs creep back up again.

This is extremely painful.  Commentators who've never had to meet a payroll criticize "heartless bosses" for putting workers on the street when that's what they have to do to save the rest.  Bosses are human beings, believe it or not.  It's painful to look someone in the eye when you've worked with him or her for years and tell them they're no longer employed.  I know - I've done it.

In my case, I didn't do it nearly as well as Bogen's management - I waited too long to cut costs.  By the time I laid off a few people, there wasn't enough money to keep the company going and we all lost our jobs, including me.  Cost cutting at Bogen was essential to save the rest of the jobs, but the axed jobs aren't coming back any time soon because the recovery is taking so long.

What's worse, the regulatory uncertainty discussed in the previous article makes it virtually impossible to justify hiring anybody.  Nobody knows what Sally's health insurance will cost next year, although every businessman knows that AT&T took a billion-dollar charge against earnings the moment Obamacare passed.  Nobody knows what income taxes will be.  Nobody knows what energy costs will be or whether they'll be able to continue emitting carbon as their employees insist on exhaling while at the office.  (Maybe they can bag their carbon and take it home with them?)

Bogen's management would have to be idiots to hire anyone under these circumstances.  Their success in getting their company back into profit after a disastrous 2009 shows that they're anything but idiots which is why they're sitting tight.

Nobody, but nobody, will be hiring unless absolutely necessary until the regulatory climate settles down.  Given the complexity of Obamacare and financial reform coupled with the truculence of the EPA about going after factories which (gasp) use energy, it may be years before businessmen understand the rules well enough to figure out whether they can make a profit or not.

Until then, if you have a job, be grateful.