The Most Powerful Metric to Drive Growth & Profit You Are Not Using
The Most Powerful Metric to Drive Growth & Profit You Are Not Using
For most entrepreneurs, numbers and accounting range from necessary evil (at best) to terrifying (at worst). I like to equate the numbers of your business as a foreign language, that tell a story about your business. As a business owner, you don’t need to be fluent, but you do need to know some key phrases, like “Where’s the bathroom”?
One number that every owner needs to understand is Direct Labor Efficiency (DLE). It will become a powerful tool that you will actually WANT to know. And this number is important, even if you don’t have employees yet, more on that later.
Definitions:
Let’s lay out a couple of foundational elements. First is Cost of Goods Sold (COGS). This is a generic accounting term that describes every DIRECT cost to produce your goods or services. Think of it as “If I sell one additional good/service to a customer, it will cost me $X.” Those are your direct costs. For purposes of computing the Direct Labor Efficiency, we exclude Labor.
The second term is Gross Profit. Again, for our purposes, we are not going to use the traditional accounting definition. Gross Profit is simply your revenue less your direct costs (COGS).
To compute your Direct labor Efficiency you simply divide your Gross Profit by your Direct Labor. Direct Labor is all of the labor directly involved in producing your goods or services. The higher the number, the better.
How To Use
You should compare your DLE over time and to your industry. As you grow, your DLE should NOT go down. Comparing it to your peers, you can see if you are where you should be. You can obtain industry information from a variety of sources, but if you need help, ask CORE!
When you’re looking to hire new employees, your DLE should be increasing. If your DLE is static (or dropping) you do NOT need to hire more people. Look at your current staffing and find the areas where you are not productive. Furthermore, have a clear idea of how these new employees will increase your Gross Profit.
One of the likely situations where you need to hire people, is that you are behind on delivering your goods or services, in other words, a backlog. When you hire additional people, you will be able to clear the backlog, and generate additional Gross Profit.
As you continue your growth, you can use derivatives of the DLE, such as Management Labor Efficiency and Marketing Labor Efficiency to manage profitability in your business. Thinking you need to hire a Sales Manager? These ratios will give you a clear expectation of how much you need to increase your profit to justify the hire.