Scaling Your Business with Simple Numbers: Insights from Greg Crabtree

The conversation kicks off with Greg's philosophy that most financial statements obfuscate the core drivers of a business. He advocates focusing on labor as it creates revenue, not the other way around. Greg outlines his pioneering "Labor Efficiency Ratio" which measures gross margin against total labor cost. He demonstrates how analyzing this ratio, along with the splits between direct and management labor, illuminates operational strengths and identifies underperformance. Greg emphasizes that beyond just a health diagnostic, these ratios guide strategic labor deployment.
The dialogue dives into Greg's insights on achieving exceptional returns on invested capital, targeting at least 50% for most businesses. He outlines a framework for calculating the true equity invested and setting profit targets accordingly, illustrating the superior returns small businesses can generate.
Alan and Greg discuss Greg's "100 Company Model" - an aggregated real-time data set across industries that provides unique economic insights. They analyze current trends showing an "upstairs-downstairs" economy, with management failing to adjust labor despite declining revenues for a third of companies. Greg stresses monitoring rolling 3-month labor and profitability metrics to navigate market volatility. He advocates building a capital buffer to withstand potential shocks after the 2024 election. Throughout, Greg emphasizes making data-driven decisions rather than relying on intuition alone.
Episode Highlights:
[2:15] Focusing on labor-driving revenue instead of revenue-driving labor
[7:00] The "Labor Efficiency Ratio" framework
[10:48] Using DL/ML ratios to analyze labor strategy beyond just diagnostics
[18:22] Achieving exceptional 50%+ returns on invested capital
[28:00] Insights from Greg's "100 Company Model" data set
[40:24] An "upstairs-downstairs" economy with mismanaged labor costs
[43:30] Monitoring rolling 3-month metrics to navigate volatility
[48:30] Advocating for data-driven decision-making over intuition
Quotes:
• "The numbers are not unique, and we have perpetrated this crime upon entrepreneurism."
• "You can't make one general statement about the economy and be correct."
• "If you carry inventory, how much gross margin do you get for a product you don't have? Nothing."
• "You've got to look at it and say, 'Am I capital efficient or not?'"
Episode Resources:
• Greg Crabtree on LinkedIn ( / gregcrabtree )
• Simple Numbers website (www.simplenumb...)
• Alan Pentz on LinkedIn ( / alanpentz )
• Corner Alliance website (www.corneralli...) The Small Business Podcast is handcrafted by our friends over at fame.so (fame.so/?...)