How Labor Costs Can Toss Your Business Into A Black Hole - Simple Number, Straight Talk, Big Profits! Chapter 3
Simple Numbers, Straight Talk, Big Profits! by Greg Crabtree
Chapter 3: “Labor Productivity: Your Key to Surviving the Black Hole”
“The teams that win are the teams that get the most productivity for every dollar of labor.” - Greg Crabtree
I love chapter 3; this chapter is a strong reminder to the importance of watching our labor costs and productivity. I find that many small businesses do not have compensation metrics, compensation tables, or compensation caps. Having the right people “on the bus” ensures that you are maximizing your labor productivity, setting compensation caps ensures you stay with your operating budget.
Another observation I have made is when small business owners are not clear on their compensation plan, they tend to have irregularities in compensation within the organization. This can lead to declining employee morale when people doing the same job are paid differently.
My advice is that small business owners should have their compensation plans in their annual budget per position type. For example, if your business does a million in revenue, off the top, your pretax profit is $100,000. If you leave $900,000 for everything else including salaries, set your compensation plan on market rates and then plug those rates into your budget by position type. To reduce labor cost, Mr. Crabtree recommends outsourcing. Aside from the CEO and sales roles, as much of our daily running of the business should be outsourced because this is a great way to maximize profit.
Here are the key takeaways from chapter 3:
As your business continues to grow it is important that you hire smart. Start by hiring into functional areas of your business.
Maintain a minimum pretax profit of 10% or greater as you grow to the $5 million revenue level, and leave any profits after taxes in the business to fund the growth instead of relying on debt or outside capital.
To maximize your productivity of labor avoid labor creep and don’t hire an employee for a function that you can do, consider what functions you can outsource and refine your management team.
Calculate and maintain your salary cap, this also includes your market cap salary.
If you are exceeding your salary cap, decide what to do about it. At this juncture you would need to decide, are you going keep your current staff without hiring additional staff until you are profitable or are you going to conduct layoffs?
This is one that can be a bit challenging but necessary, Mr. Crabtree suggest that you get to 15% pretax profit before your raise your salary cap and drive your profit down to 10%.
**Remember that the higher your pre-tax profit is, the quicker you reach the cash positive state.
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