Unlock Profitable Growth: Storytelling with Simple Numbers

Are you overwhelmed by complex financial reports that seem more confusing than enlightening? Do endless spreadsheets and accounting jargon leave you unsure about your business’s true performance?

It’s time to cut through the clutter and focus on what really matters. According to financial expert Greg Crabtree, mastering Simple Numbers is the key to unlocking sustainable profitability and driving explosive growth.

In this article, we’ll delve into Crabtree’s Simple Numbers philosophy and explore how simplifying your financial data can transform your business. We’ll break down complex concepts into straightforward strategies, empowering you to make informed decisions and turn your enterprise into a wealth-building machine.

The Challenges with Traditional Financial Reports

For many entrepreneurs and business owners, traditional financial reports are a source of frustration. Laden with intricate details and obscure terms, these reports often hinder rather than help in understanding your company’s financial health.

Many business leaders face challenges such as:

  • Inaccessible Language: Financial statements packed with accounting jargon that require a translator to decipher.
  • Data Overload: An overwhelming volume of numbers that obscure real insights.
  • Delayed Information: Reports that arrive too late to inform timely decisions.
  • Misleading Metrics: Focusing on total revenue without considering profitability.

Consider Sarah, a small business owner who received a 30-page financial report every quarter. Despite the extensive data, she struggled to pinpoint areas for improvement. The complexity masked declining profit margins and rising labor costs, stalling her business growth.

Traditional reports can leave you feeling powerless, unsure of how to steer your business toward success. But there’s a better way.

Greg Crabtree’s Philosophy of Simplicity

“If your business requires financials for outside parties using  Generally Accepted Accounting Principles, I just take them and create an alternative presentation that is mathematically pure to use for managing operations.”

Greg Crabtree wearing a black shirt, showcasing expertise and professionalism.
– Greg Crabtree

Greg Crabtree, an experienced financial consultant and author, believes that simplicity is the ultimate sophistication in financial management. His Simple Numbers approach cuts through complexity, focusing on the essential metrics that drive profitability and growth.

Why Simplicity Matters

“You can’t manage a business from GAAP. GAAP unintentionally tends to hide the truth rather than illuminate it.”

Greg Crabtree wearing a black shirt, showcasing expertise and professionalism.
– Greg Crabtree

Greg Crabtree works to simplify numbers to create greater understanding by making numbers clear. Once you clear the confusion you can make decisions based on the numbers. By simplifying financial data, you gain:

  • Clarity: Understand your business performance at a glance.
  • Confidence: Make informed decisions based on clear insights.
  • Communication: Easily share financial information with your team.
  • Control: Identify problems early and take decisive action.

Crabtree’s philosophy is born from years of helping businesses like yours transform confusing numbers into actionable intelligence. He proves that you don’t need a finance degree to master your company’s finances—you just need to focus on the Simple Numbers that matter most.

The Simple Numbers Approach

The Simple Numbers methodology zeroes in on two key components:

  1. Gross Margin: Your true top line.
  2. Labor Efficiency Ratio (LER): A measure of labor productivity and profitability.

By concentrating on these factors, you can gain a clear picture of your business’s health and make strategic decisions to drive growth.

Implementing Simple Numbers in Your Business

Ready to embrace simplicity? Here’s how:

  • Reframe Your Financial Statements: Focus on gross margin and LER in your reports.
  • Set Clear Profit Targets: Define attainable goals based on simplified data.
  • Monitor Cash Flow: Pay attention to actual cash movements, not just accounting figures.
  • Eliminate Unprofitable Activities: Identify and stop products or services that drain resources.

By implementing the Simple Numbers approach, you can turn confusion into clarity and set your business on a path to unstoppable profit.

Understanding Gross Margin as the True Top Line

“I’ve even recommended that we put a swear jar in the office and every time you say ‘revenue’ you get charged a dollar and have to put it in the swear jar. Internally we should only talk margin.”

Greg Crabtree wearing a black shirt, showcasing expertise and professionalism.
– Greg Crabtree

Do you believe that revenue is the most important number on your financial statement?

Think again. While revenue shows how much money is coming in, it doesn’t reveal how much you’re actually earning. That’s where gross margin comes into play.

What Is Gross Margin?

Gross margin is the money left after subtracting the cost of goods sold (COGS) from your revenue. It represents the actual earnings available to cover operating expenses and generate profit.  There is not complete agreement among the accounting world on whether direct labor should be in COGS.  Simple Numbers philosophy NEVER mixes labor with something that is not labor.

Gross Margin = Revenue – Cost of Goods Sold

Think of gross margin as the fuel that powers your business engine. It’s the money you have to work with after covering the direct costs of your products or services.

Why Gross Margin Matters More Than Revenue

Focusing on gross margin rather than revenue provides a more accurate picture of financial health because:

  • Revenue Can Be Misleading: High sales don’t guarantee profitability if costs are equally high.
  • Gross Margin Reflects True Value Added: It shows what the market values for what you add to materials or sub contractors.
  • Enables Better Comparisons: Gross margin allows you to compare performance over time or with other businesses, regardless of size.

By prioritizing gross margin, you can make informed decisions about pricing, cost management, and strategic investments.

Example: The Impact of Gross Margin

Imagine two businesses:

Company A: Revenue of $1 million, COGS of $700,000, Gross Margin of $300,000.

Company B: Revenue of $800,000, COGS of $400,000, Gross Margin of $400,000.

Financial comparison of Company A and Company B showcasing revenue and gross margin.
Company A and B comparison: revenue, COGS, and gross margin analysis.

Both sections are visually balanced, with building images centered above or to the left of the corresponding financial details, allowing for a clear comparison between the two companies based on revenue, COGS, and gross margin.

Although Company A has higher revenue, Company B earns more gross margin. Company B is in a better position to cover expenses and generate profit, highlighting why gross margin is the true top line.

Harnessing the Labor Efficiency Ratio with Simple Numbers

Prior to 2019, labor chased revenue, meaning as revenue rose you hired more labor to catch up. However, in 2019 the US labor market faced a paradigm shift. The major labor shortage that businesses are facing today started in 2019. As an effect, labor costs rose because workers were able to demand more pay. As they demand more pay, businesses are left with no choice but to raise prices. Labor costs are often one of the largest expenses for a business. Understanding how effectively your labor contributes to profit is crucial. That’s where the Labor Efficiency Ratio (LER) comes in.

What Is the Labor Efficiency Ratio?

“Labor is the only cost that comes to work with an attitude.”

Greg Crabtree wearing a black shirt, showcasing expertise and professionalism.
– Greg Crabtree

LER measures the efficiency of your labor force in generating gross margin. It’s important to strip labor out and analyze it individually because it fluctuates differently than other costs.

Total Labor Efficiency Ratio = Gross Margin / All Labor Costs

This ratio shows how many dollars of gross margin you’re earning for every dollar spent on labor. For the majority of businesses, an LER greater than 2.0 is considered healthy, indicating efficient use of labor resources. This means that for every dollar spent on labor, whether direct or management, the company should generate two dollars of gross margin. Although there are exceptions in specific industries like distribution and retail, this ratio serves as an excellent guideline for assessing labor efficiency for 90% of businesses, helping them remain competitive and profitable.

If you pick any single metric to focus on, getting to a 2.0 in total labor efficiency is the most important metric to focus on. There are different strategies to get to this point. Businesses have three primary options:

  1. High direct labor with low management labor
  2. Low direct labor with high management labor
  3. Balanced approach.

Each strategy has its pros and cons, and the best choice depends on the nature of the business and its operational model. Understanding these options allows CEOs and executives to structure their labor force in a way that maximizes efficiency and profitability.

Why LER Matters – The three Ps

  • Pricing: The first thing to look at if LER is too low if pricing.  If you are underpriced on the market, there are not enough costs to cut.
  • Productivity: The next thing to consider is “are all teams working at peak performance”?  You can compare prior periods where LER was on target and see what is happening now that is different.
  • Process:  If teams are working at optimal effort and the work is priced correctly, look for process improvement and technology assists to improve throughput with little to no cost added.

Example: Improving LER

Suppose your business has a gross margin of $500,000 and labor costs of $300,000, resulting in an LER of 1.67. By optimizing staff schedules and improving processes, you reduce labor costs to $250,000 without affecting sales, raising your LER to 2.0.

This improvement means more profit and better resource utilization.

Segment Information and Cost Analysis

Segment information and cost analysis are crucial for understanding which parts of your business are truly driving value. The “Turn on/Turn off” methodology helps in associating specific costs with particular business segments. This simple yet highly effective method allows you to determine if a cost will go away if a segment is discontinued. Such clarity ensures that only essential expenses are tied to the actual drivers of revenue, providing a more accurate picture of profitability and efficiency.

No business can afford to let underperforming activities drag them down, especially in a competitive market.  Either fixing or discontinuing low-value activities is essential. By identifying and removing these inefficiencies, companies can focus their resources on higher-value tasks that drive growth and profitability.

Creating a Simple Numbers Profit & Loss Statement

In today’s complex business environment, simplicity often yields the greatest clarity. One of the foundational pillars for effective business strategy is having a simple, yet comprehensive financial reporting structure. An eight-line Profit & Loss (P&L) statement is advocated as the optimal format. The eight critical lines include:

  1. Revenue
  2. Cost of Goods Sold
  3. Direct Labor(the engine of the business)
  4. Facilities
  5. Marketing
  6. Management Labor
  7. Payroll Taxes and Benefits
  8. Other Overhead Costs.
P&L example showcasing revenue, expenses, and net income for business analysis.
P&L Example showing revenue, expenses, and net income analysis for business growth.

This structure allows CEOs and executive teams to quickly grasp the financial health of the organization, making rapid, informed decisions possible. P&L statements give every industry a picture of their engine and the chassis.

Building Your Simplified P&L

  • Consolidate Expenses: Group similar costs to avoid unnecessary detail.
  • Highlight Key Metrics: Emphasize gross margin and LER.
  • Focus on Cash: Pay attention to actual cash movements.
  • Regular Updates: Keep information current for timely decisions.

By simplifying your P&L, you gain a clear view of your financial performance, making it easier to spot trends and take action.

Reporting Times

Forget about fiscal years. Business owners should be managing their businesses based on rolling 12 and rolling 3-month reports. These types of trend reports offer a more accurate representation of a company’s financial health over time. By averaging out seasonal fluctuations and short-term anomalies, businesses can make better strategic decisions based on sustained performance metrics.

Practical Steps to Simplify Financial Data

Simplifying your finances doesn’t have to be daunting. Here are actionable steps to get started:

1. Standardize Reporting

Use consistent templates for all financial reports to streamline analysis. Consistency makes it easier to compare data over different periods and identify patterns.

2. Prioritize Key Metrics

Focus on gross margin and LER—the Simple Numbers that drive your business. Avoid getting bogged down by less impactful figures that can distract from the bigger picture.

3. Limit Jargon

Use plain language in financial communications to enhance understanding across your team. When everyone speaks the same language, collaboration improves.  Make sure your team knows the definition of key financial terms you use to manage by.  You will have to reinforce it multiple times until they mentally own it.

4. Embrace Technology

Utilize user-friendly accounting software that supports simplified reporting. Tools like QuickBooks or Xero can automate tasks and provide real-time insights.

5. Educate Your Team

Invest in financial literacy training so everyone understands the numbers. When your team is financially savvy, they’re better equipped to make decisions that benefit the business.

Schedule A Workshop

Learn financial insights and strategies to drive profitable growth in your business with Greg Crabtree’s workshops.

6. Regular Financial Reviews

Hold monthly financial meetings to review the Simple Numbers. Regular check-ins keep everyone aligned and allow for timely adjustments.  You can also have a Simple Numbers Consultant schedule monthly accountability reviews with you and your team if you find internal review insufficient for clarity.

7. Set Clear Financial Goals

Define specific, measurable objectives for gross margin and LER. Clear targets provide motivation and a benchmark for success.

Overcoming Resistance to Change

Change can be challenging, but the benefits of simplifying your finances are worth it.

Common Obstacles

  • Fear of the Unknown: Concern about abandoning traditional methods.
  • Misconceptions: Belief that more data equals better management.
  • Comfort Zones: Resistance to changing established routines.

Strategies to Succeed

  • Communicate Clearly: Explain the benefits to your team.
  • Provide Training: Equip everyone with the knowledge to adapt.
  • Lead by Example: Embrace the approach yourself to inspire others.

Remember, simplifying your finances isn’t about cutting corners—it’s about focusing on what truly matters.

Common Misconceptions About Simplifying Finances

Some business leaders hesitate to simplify their financial data due to misconceptions.

Myth 1: Simplicity Means Oversimplification

Reality: Simplifying doesn’t mean leaving out crucial information. It’s about focusing on the most impactful data to make better decisions.

Myth 2: Only for Small Businesses

Reality: The Simple Numbers approach benefits businesses of all sizes. Large corporations can gain strategic advantages by focusing on key metrics.

Myth 3: Requires Financial Expertise

Reality: Greg Crabtree’s methodology is designed to be accessible. You don’t need to be a financial expert to understand and apply these principles.

The Role of Financial Discipline

Financial discipline is essential in applying the Simple Numbers approach effectively.

Stay Consistent

Regularly update and review your financial data. Consistency ensures accuracy and reliability.

Avoid Emotional Decisions

Base your decisions on clear, quantified data rather than gut feelings. The Simple Numbers provide an objective foundation.

Plan for Taxes

Incorporate tax planning into your financial strategy. Understanding your tax obligations helps in forecasting and avoids surprises.

Key Takeaways

  • Focus on Gross Margin: It’s the true indicator of your earning power.
  • Monitor LER: Ensure your labor costs are generating sufficient profit.
  • Simplify Reporting: Use the Simple Numbers P&L approach for clarity.
  • Educate and Involve Your Team: Collective understanding drives success.
  • Embrace Financial Discipline: Consistency and objectivity are crucial.
  • Plan for Growth: Simplified finances support sustainable expansion.

Let Data Tell the Story with Simple Numbers

Unlocking profitable growth doesn’t require complex equations or convoluted reports. By mastering Simple Numbers, you can gain clear insights, make confident decisions, and drive your business toward unstoppable success.

Now is the time to cut through the confusion and take control of your financial future. Simplify your numbers, and watch your profitability soar.

Don’t let complicated finances hinder your dreams. Embrace the power of Simple Numbers today and transform your business into a wealth-building machine.

Ready to revolutionize your financial understanding? Discover how Greg Crabtree’s Simple Numbers approach can unlock your business’s full potential.

Remember, simplicity isn’t just a philosophy—it’s a practical strategy for success. Start your journey toward financial mastery now.

The content provided on Greg Crabtree’s blog is for informational purposes only and is not intended to be construed as professional or financial advice. While we aim to present accurate and up-to-date information based on Greg Crabtree’s Simple Numbers concepts, we cannot guarantee its completeness, reliability, or suitability for your specific circumstances. Readers are encouraged to consult with their accountant or other qualified professionals before making any business decisions based on the information contained in this blog.