3 Metrics To Maximize Efficiency and Grow Your Bottom Line

We are, undoubtedly, in a season of economic contraction, but that doesn’t mean you can’t still grow your business.

Yes, customers are becoming more price sensitive. Yes, many customers will start buying less (a fact that’s applicable to both B2B and B2C companies). But even with sales slowing, you can improve your profitability and grow your bottom line.

Many companies operate with a mindset of, “we need to grow our top line year over year over year,” but it’s simply not a realistic approach during economic downturns.

What is realistic, however, is growing your bottom line year over year.

The name of the business growth game (particularly in hard times) is all about efficiency. With the right financial knowledge and the right metrics at your fingertips, you’ll not just survive —but thrive — in 2023.

So how do you become a lean, mighty, money-making machine?

Focus in on three metrics to inform your decision-making:

·         Revenue per labor dollar

·         Overhead to plan

·         Gross margin

All three metrics inform business choices that will grow your bottom line, which means you’re making more with less.

Let’s discuss.

1. Revenue per Labor Dollar

This metric is based on a relatively simple equation:

revenue ÷ labor dollars

We recommend you track your revenue per labor dollars monthly, but you can look at this number annually, quarterly, weekly, heck, even daily. This metric quantifies your employees’ efficiency, or rather, how well they’re producing your product or service.

Some important caveats: your labor dollars should include all labor expenses that support the direct creation of your goods or services. If you’re in manufacturing, this means your production labor. If you’re in a service-industry, this means the individuals who provide your services to customers. Some labor isn’t directly tied to what you’re selling, and these costs should instead be categorized as an overhead expense (more on that later). So, while an office assistant is an essential member of your team, his or her salary shouldn’t be part of the equation here.  

Determining what a “good” revenue per labor dollar figure is depends on your industry, but typically, if you’re below a 2:1 return it’s unlikely you’ll make a profit. Knowing an appropriate benchmark to set depends on your unique circumstances, so do some research to determine a number that makes sense given your unique circumstances.

In addition to a target, you should also set your floor.

Just as our cash headroom tool has warning numbers and target numbers, you need to predetermine these benchmarks for yourself, too. We suggest a 2.5:1 minimum. As you reach that minimum, you can incrementally set your sights from there.

2. Overhead to Plan

Overhead to plan is an important number because it determines the efficiency of your business activities.

The reason this metric is overhead to plan (and not overhead to prior year) is that your overhead can and will changed based on your business’s current needs.

This number is about assessing if you’re spending what you intended to spend back when you set your budgets and business priorities for the year.

Why does this matter? Well, if you’re not using the money you had originally allocated for overhead costs, it’s a pretty good indicator you aren’t doing what you need to do to support your business. Short term savings can equal big term losses (in revenue, but also in the big picture operations and intentional growth of your company).

On the flipside, if you’re overspending, that’s a problem, too because any overspend directly chips away at your profitability.

Many want to compare their overhead spending as a year to year or month to month comparison, but this is a shortsighted approach that doesn’t provide the appropriate context for understanding whether or not you’re operating efficiently.

Why? Because things change.

Some years you may set a larger marketing budget than others. Or you may need to outsource more work while you carve out an extended search for the ideal, qualified candidate to fill an empty role.

Priorities can and do change in any business, so comparing your overhead spend today with your overhead spend a year ago is like comparing two different businesses. Yes, there may be some learnings, but you’re not getting a true and accurate picture to inform your next move.  

3. Gross Margin

This one’s really simple. If you sell products, gross margin is how effectively and efficiently you’re monetizing your raw materials (including your direct labor expenses). If you sell services, gross margin is how effectively and efficiently you deliver those services.  

Gross margin is formulated as a percentage:

(revenue – COGS) ÷ revenue

Every percentage point you increase your gross margin, either by growing revenue or by growing your cost of goods sold (COGS), incrementally grows your bottom line.

The Magic’s in the Numbers

Here’s where things get interesting.

Let’s look at a scenario to show how much power these metrics have over your bottom line. Improving efficiency isn’t about painting with broad strokes. It’s about identifying targeted, incremental changes and understanding how these small adjustments make a big impact when applied to your entire business.

Let’s say you set a very minimal sales goal for the year: Retain your current sales and grow just $75,000. Not too daunting, right? For a business already doing $2,500,00 in sales, $75,000 feels doable.

But your $75,000 sales goal shouldn’t limit your net income. Look to your efficiency-focused metrics to inform additional incremental changes that increase your bottom line, too.

Maybe you know you have some sourcing issues for some of your materials and so you decide that by shopping around for some new suppliers you’ll be able to reduce your material costs by 2%. You’ve also noticed you’re overusing contracted labor, so you feel confident you can decrease your labor costs by 0.5%. With just a few itty-bitty tweaks, you’ve increase your net income from $205,000 to $316,000.

Here’s where it gets even more impressive. If you were to just focus on your top line, you’d have to grow by almost 10% to generate the same impact on your bottom line. So, instead of needing to generate $75,000 of new revenue, you’d have to find almost $250,000 in revenue.

What feels more feasible? Bringing in $250,000 worth of new sales or bringing in $75,000 of new sales and adjusting some of your COGS?

Heck, you could probably account for most of (if not all of) your $75,000 increase in sales with a small price increase.

Putting It All Together  

So how do you put these metrics into practice?

1. Look at the trends.

Get your metrics in a trailing 12-month report. (Not sure how to do that? We can help.) Then look for patterns. Where have you gone up? Where have you gone down? If certain data points jump off the page, you may want to dig deeper and explore your “been there” and “look here” data to uncover the underlying issues.   

2. Identify your incremental shifts.

As is clear in the example above, 1% and 2% shifts add up — quickly. Identify small opportunities where you know you’ll win and prioritize those efforts. Where can you make small cuts or incremental changes that will decrease your expenses?

 As big believers in open book management, we recommend sharing these three efficiency metrics and the incremental changes you plan to make. This is a great way of creating buy-in with your team while also increasing company-wide accountability for your efforts.

And remember, our economy is cyclical. This season of economic contraction won’t last forever. And when the good times return, the work you’ve invested in becoming a more efficient company will allow you to hit the ground running and maximize your profits.