Labor KPIs

Luke Templin
April 29, 2023

The Mind 🧠 of a CFO

Read time: 1:42 minutes

Welcome to The Mind of a CFO newsletter. The newsletter is designed to help entrepreneurs grow in business 📈, mind 🧠, body 💪, and spirit🧘.

We will give our CFO's take on a topic to grow your business profitably each month.

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♻ CFO’s Retake - Financial KPIs

Labor Efficiency Ratios (from Greg Crabtree’s Simple Numbers)

Labor is the #1 expense in the services business but rarely do we see metrics on it.

Businesses should be tracking the Direct Labor Efficiency Ratio (dLER) and the Management Labor Efficiency Ratio (mLER).

Direct Labor Efficiency Ratio (dLER)

Tracking dLER will give you a better grasp of the efficiency of your direct labor. This ratio will tell you how much every $1 spent on direct labor equates to X dollars in gross profit.

dLER can be calculated by dividing the gross margin by direct labor costs. While the ideal dLER is unique to each company, $3 or better is a good target amount for this KPI.

Below is an example of how to calculate dLER:

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Management Labor Efficiency Ration (mLER)

mLER measures the efficiency of management labor. This ratio will tell you how much every $1 spent on management labor equates to X dollars in contribution margin.

mLER can be calculated by dividing the contribution margin by management labor costs. mLER is similar to dLER in that the ideal number is unique to each company, however, $3.50 or better is a good target for this KPI.

Below is an example of how to calculate mLER:

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Thanks for reading, Luke Templin!

P.S. There are two ways to work with Luke to grow your business profitably.

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