What Is the Labor Efficiency Ratio and Why You Should Care
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If you were to get run over by a bus today, what would it take for your family to continue your business? Who could accurately replace you? On today’s show, Greg and I discuss the Labor Efficiency Ratio (LER) and what it means to your business.
Greg Crabtree is a speaker, author, entrepreneur, and financial expert. In 2011, Greg published his first book, Simple Numbers, Straight Talk, Big Profits! where he shares his core principles on how to turn your business into a wealth building machine.
Using LER to Increase Profit
Greg Crabtree explains that there are two types of laborer categories: direct labor and management labor. Based on the role you play in your business and what category you fall in, you will have to find a person that matches your category type in order to successfully carry on the business
The Labor Efficiency Ratio can help business owners create a clearer picture of what your role is within the company. So instead of working on the business, you’re working more effectively in the business.
Greg shares a quick example of applying this methodology in real time. One of his clients had $600,000 in revenue and 25% of that was profit split between two owners. However, their main issue was that they were having cash flow problems.
Greg understands that if you’re having cash flow problems at 25% profit, then there must be something fundamentally wrong with the business. Greg found that in reality, the owners were only making 4% in profit.
Greg then worked with the owners on how they could increase their contribution margin and increase their numbers by $140,000. For this particular business, they had the right people, but they were just not getting the right kind of accountability out of them. After Greg gave them a new set of goals to strive for, which they hit flawlessly. The two owners ended up making 19% profit in their first year. Greg believes that you must begin by holding the management team accountable and defining clearly what they must strive for in order to earn their wages or bonuses.
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Scaling Up is the best-selling book, by Verne Harnish and the team at Gazelles, on how the fastest growing companies succeed where so many others fail. My name is Bill Gallagher with Humanisteq Coaching and I’m one of the Gazelles business coaches. We help leadership teams to get the 4 Decisions around People, Strategy, Execution, and Cash right so that they can Scale Up successfully and beat the odds of business growth success. Our 4 Decisions are all part of the Rockefeller Habits 2.0 (from the original best-selling business book, Mastering the Rockefeller Habits).