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How to Make Your Business More Financially Efficient

Strategy
November 21, 2024•3 min read

As a business owner, trainer, and author, Crabtree has a lot of experience helping companies understand and make the most of their financial data. Here are the most important things I learned from him, along with steps business owners can take to improve their finances.

Key Takeaways

1. Focus on Gross Margin, Not Just Revenue

For Crabtree, the most important number for a business is not its income, but its gross margin. To find the gross profit, take the sales amount and subtract the cost of goods sold (COGS), which comes before the cost of labor. This number gives a better picture of how profitable a business is and how healthy its finances are.

2. Labor Efficiency Ratio (LER)

The Labor Efficiency Ratio (LER) is one of Crabtree's most important discoveries. He found that getting a $2 gross margin for every $1 of labor cost is an important metric for most companies. This number helps companies figure out how productive their workers are and how to best handle their labor costs.

3. Importance of Proper Capitalization

Crabtree stresses how important it is for companies to keep enough cash on hand and not rely too much on debt. He says that you should have enough cash on hand to last at least two months and not use up any of your line of credit. This makes sure the company has enough money to run and can handle changes in the market.

4. Market Dynamics and Growth

Crabtree points out that the market is currently experiencing a demographic shift, with population growth stalling. This means that businesses should focus on gaining market share rather than relying on overall market growth. He also notes that inflation and wage increases are here to stay, which will continue to impact business costs.

5. Segment Analysis

It's important for companies with more than one division or segment to look at the performance of each one separately. This helps figure out which parts make the business profitable and which ones don't. Businesses should think about outsourcing or ending parts of their operations that aren't making them money.

Action Steps

1. Calculate and Monitor Your Gross Margin

To find your gross margin, start by taking your income and subtracting your non-labor COGS. You'll have a better idea of how well your business is doing financially after this. Check this number often to make sure that your business is making enough money from its main activities.

2. Implement the Labor Efficiency Ratio (LER)

Calculate your LER by dividing your gross margin by your total labor costs. Aim for a ratio of at least 2:1. If your LER is below this threshold, analyze your labor costs and productivity. Consider whether you need to adjust your pricing, improve processes, or address labor inefficiencies.

3. Maintain Adequate Cash Reserves

Ensure that your business has at least two months of cash reserves. This will help you navigate periods of low demand or unexpected expenses without relying on debt. Regularly review your cash flow and adjust your spending to maintain these reserves.

4. Analyze Segment Performance

If your business operates in multiple segments, analyze the profitability of each segment separately. Identify any segments that are not contributing to your overall profitability and consider whether to improve, contract out, or discontinue these segments.

5. Stay Informed About Market Trends

Keep an eye on market trends, particularly in terms of population demographics and inflation. Adjust your business strategies accordingly to stay competitive. Focus on gaining market share and improving efficiency rather than relying solely on market growth.

By implementing these strategies, business owners can gain better control over their financial health, improve profitability, and navigate the complexities of the current market environment.

Resources

Website: https://gregcrabtree.net/

LinkedIn: https://www.linkedin.com/in/greg-crabtree-simple-numbers/

Grab Brad's tell all book: The Contractor Profit Blueprint

https://thecontractorprofitblueprint.com

Visit our official website:
www.thecontractorprofitblueprint.com

gross marginentrepreneurfinancial expertbusiness strategyprofit target
As a former Marine from Southern Indiana, Brad understands the importance of leadership, grit, and determination. After the Marines, Brad worked various jobs until he founded a successful construction business specializing in high-end Handyman and Residential Remodeling, completing over 2,500 jobs for 900+ customers. Now focused on coaching, Brad helps contractors break free from the crazy cycle of struggle, driven by a passion to support those striving to build businesses with integrity, ensuring they don't give up on their dreams. He believes everyone has the opportunity to create abundance in their life, business and community, but oftentimes they fall short due to a lack of knowledge. His mission is to grow people, create community and live abundantly.

Brad Huebner

As a former Marine from Southern Indiana, Brad understands the importance of leadership, grit, and determination. After the Marines, Brad worked various jobs until he founded a successful construction business specializing in high-end Handyman and Residential Remodeling, completing over 2,500 jobs for 900+ customers. Now focused on coaching, Brad helps contractors break free from the crazy cycle of struggle, driven by a passion to support those striving to build businesses with integrity, ensuring they don't give up on their dreams. He believes everyone has the opportunity to create abundance in their life, business and community, but oftentimes they fall short due to a lack of knowledge. His mission is to grow people, create community and live abundantly.

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