Catalyst Strategic Consultants

How does your business need to grow?

Sense from Number$: Greg Crabtree

160The book is called Simple Numbers. It’s on Amazon – ebook and other formats. And Greg’s roundish face will be right beside the templates on YouTube if you’re curious about exactly how to recast your biz $$$ so they actually tell you something. While it might still do you some good. A lot of good.

I’ve never been great at accounting. At Richard Ivey, when I went, we found out about contribution margin it was a revelation. Finally, something out of all the gobbledygook that I could understand and use.

Greg goes much further. Here are some of the highpoints:

– revenue is a vanity number. The number that allows one business to be directly compared with another as an economic engine is Gross Profit or Gross Margin. And don’t put any labor cost against that [yet] unless it’s straight pass through subcontractors or cost of goods sold.

– Once you take your direct labor cost and relate it to your GP, you can see how productive your labor is: eg. how much GP does each $ of labor produce?

Gross Profit/ direct labor = Labor Efficiency Ratio Don’t include your admin and management salaries there unless they actually produce revenue – then allocate a %age.

– to see actual Net Profit, normalize the owner’s compensation. That is, the owner should be paid a market wage, not live off the income the biz is generating. Lots more in the book on this.

– You can also see how productive your management is – through a Management Efficiency Ratio. How much GP does the biz produce for every management and admin $ spent?

– 10% Net Profit before tax [not EBITDA – he argues “Since when was depreciation and interest expense not real”?] is the new break even. Greg thinks if you’re at 5% normalized [eg owner’s comp not disguised], the biz is on life support, one knock away from crisis. 10% is a good biz. 15% is a great biz. Over 15%, take it while you can, somebody’s going to find out about you and compete.

There is more Straight Talk, and Big Profits promised by the subtitle.

– a “salary cap” is in effect. At your biz! Just like the sports teams. Simply work it back from your desired [or needed – see above] net profit, take out your other expenses and see how much you have to work with.

– debt is not capital. Your equity is what you own minus what you owe. Debt means you have upped the ante. You must now produce more GP in the future to pay the interest and to pay it back before you can entertain the possibility of a return [i.e. dividends].

– and dividends should be deferred until you make enough retained profit in the form of 2 months cash equal to operating expenses. Plus you should not have dipped into your operating line for more than 30 days consecutively.

Wow, that sounds like a tough test. It is about discipline – and that allows for long term real health of the biz, not numbers that make the owner feel good temporarily.

There’s lots more where those come from. Have a look, it’s a revelation in demystification.

Doug Bouey
Catalyst Strategic Consultants Ltd.

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Doug Bouey, President
Catalyst Strategic Consultants Ltd.

Calgary, AB // Phone: 403.777.1144


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