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In this episode of Grow a Small Business, host Michael Denehey interviews financial expert Greg Crabtree from Carr, Riggs & Ingram (CRI) shares the principles behind his company, Simple Numbers, which successfully generated $20M in revenue with a lean team of 30 members. Greg discusses key metrics for small business success, including the importance of maintaining two months of cash flow and the Total Labor Efficiency Ratio (LER). He offers actionable insights for optimizing profitability and managing capital effectively.

Key Takeaways for Small Business Owners:

Simplify Financial Reporting: Use Simple Numbers to present financial data clearly and make it actionable, moving beyond traditional accounting practices.

Focus on Gross Margin: Prioritize gross margin over revenue to accurately assess business health and profitability. Revenue alone can be misleading.

Implement the Total Labor Efficiency Ratio (LER): Aim for $2 of gross margin for every $1 of labor to ensure efficient use of resources and boost profitability.

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Maintain Two Months of Cash Flow: Having two months of operating expenses in cash and zero line of credit debt is crucial for financial stability and effective decision-making.

Avoid Overcapitalization: More than two months of cash can lead to complacency. Properly manage excess capital to avoid underperforming investments.

Use Rolling 12-Month Data: Analyze financial metrics over a rolling 12-month period rather than monthly to get a more accurate picture of business performance.

One action small business owners can take:

One actionable step small business owners can take is to calculate their Total Labor Efficiency Ratio (LER). Aim to achieve at least $2 of gross margin for every $1 spent on labor. This metric will help you gauge labor efficiency and ensure that your business is operating profitably.

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Quotable quotes from our special Grow A Small Business podcast guest:

Revenue is vanity; gross margin is reality – Greg Crabtree

The most important number on the P&L is the contribution margin, not profit – Greg Crabtree

Simplify your financial data to make it actionable and insightful for better decision-making – Greg Crabtree