If you’ve grown your team this year and still feel like the money isn’t showing up the way it should, you may not be imagining it. Busier and more profitable are not the same thing, and that gap is one of the most common things we help growth-stage business owners untangle.
It’s not usually a sign you’re doing something wrong. It’s just that nobody ever showed you what to measure.
Greg Crabtree’s book Simple Numbers, Straight Talk, Big Profits! gives business owners a way to actually see whether their team is helping them make money or quietly eating the profit. We work with growth-minded businesses every day who are in exactly this spot, so here’s the framework in plain terms, and how to use it in your own business.
Start with an honest owner’s salary
Before you can measure anything else, you need an honest starting point. Crabtree’s first rule is that you pay yourself a fair, market-based wage for the actual work you do in the business, kept separate from whatever return you take as the owner.
Underpaying yourself on paper doesn’t make your business look leaner. It makes every number after that one a little bit false. Your labor costs look lower than they are, your margins look better than they are, and you end up feeling proud of profit that isn’t fully real. Getting this number right is the foundation for understanding your true numbers.
Set a real profit target
Crabtree treats profit the way you’d treat oxygen: not optional, and not something to figure out later. His benchmark is that a business earning 5% pretax profit or less is running on fumes. Around 10% is a genuinely healthy business. 15% or more is a great one.
Once you have a real target, something useful happens: you know exactly how much of your revenue is left over for everything else, including payroll. Your revenue is 100% of what you have. Subtract your profit target and your non-labor overhead, and what’s left is your salary cap for the whole team. Not a feeling, but a number you can actually check.
Measure labor in dollars, not headcount
Here’s the part most owners never get shown, and it’s the part that actually tells you whether your team is profitable.
Counting employees doesn’t tell you much on its own. Two people doing the same job, at different pay and different productivity, aren’t the same investment for your business. What matters is the relationship between what you spend on labor and what that labor brings back in gross profit. Crabtree calls this the Labor Efficiency Ratio, or LER.
In plain terms: for every dollar you spend on total wages, how many dollars of gross profit is that producing? Companies hitting healthy profit targets were generally producing close to two dollars of gross profit for every one dollar spent on labor. That 2-to-1 relationship is a reasonable benchmark to aim for.
It helps to look at this in two pieces:
- The people delivering the work directly (technicians, field crew, stylists, whoever’s hands-on with the client) measured against the gross profit they generate.
- The people managing or supporting that work measured against the margin left over after direct costs.
Looking at both tells you where the pressure is actually coming from. If the front-line number is weak, that’s usually a pricing or productivity conversation. If the management side is weak, it usually means you’ve added oversight faster than the team underneath it can support.
Why this changes how you hire
Under this framework, “we’re swamped” isn’t enough of a reason to hire. Neither is “revenue’s growing.” The better question is whether your current team is genuinely maxed out on productivity, and whether the new hire’s cost still keeps you near your target ratio.
Hire too early, and you’ve added a cost with nothing yet coming back to offset it. Wait too long, and you burn out the people carrying the extra weight, which shows up eventually as mistakes, turnover, or you doing everyone’s job at once. The goal isn’t to avoid hiring. It’s to make the decision on a number instead of a gut feeling under pressure.
A simple way to check your own numbers
If you’ve never looked at this before, it doesn’t take much to get a first read:
- Pull your total gross profit for the trailing twelve months.
- Pull your total labor cost for the same period.
- Divide your gross profit by your labor cost (gross profit ÷ labor cost). That’s your current ratio.
- Then split labor into “direct” (the people delivering the work) and “management” (the people overseeing or supporting it). Divide gross profit by direct labor cost to get your direct ratio. Then subtract direct labor cost from gross profit to get the margin left over, and divide that by management labor cost to get your management ratio.
Once you have a number, here’s how to read it: a ratio of 2.0 means every dollar you spend on labor is bringing back two dollars of gross profit. That’s the healthy range. A ratio below 2.0, say 1.5, means you’re only getting a dollar-fifty back for every dollar spent, and that gap is quietly coming out of your profit. The higher above 2.0 you are, the more room you have. The lower below it, the more your team is costing you.
You probably won’t land right at 2-to-1 on the first try, and that’s fine. What matters more is the direction it’s moving. Climbing over time means your team is getting more productive as you grow. Slipping means growth is quietly costing you money, even while the top line looks great.
This only works if the numbers underneath it are solid. If you’re not confident your books are clean enough to trust a calculation like this, that’s usually the real starting point, and it’s exactly where we come in.
If you’d like help pulling your own numbers, reach out. We’re happy to walk through it with you.