Two numbers that help you make confident, scientific decisions about hiring and back-office investments—instead of guessing your way through "beer math."
Here are a few more numbers that can help you make confident decisions about hiring. I geek out on these next few numbers, but for Christian, these numbers were more of an acquired taste. The words—Direct Labor Efficiency Ratios (dLER) and Management Labor Efficiency Ratios (mLER)—as defined in Simple Numbers, Straight Talk, Big Profits!, were hard to interpret, at first. But when I actually conceptualized what they were, the numbers became meaningful and quite helpful. They're both numbers that can help you invest strategically, make smart tactical decisions about people, and ensure health in your business as it grows.
Let's talk about the Direct Labor Efficiency Ratio first. This refers to the people actually doing the work and is calculated by their productivity (revenue generated or delivered) divided by their salary cost. We can apply this to a landscaping situation: "direct labor" describes the folks out there mowing the grass, directly executing the service. Specifically, it describes how efficient each one of those people are at performing their tasks.
The dLER describes the efficiency of the people who are actually carrying out the work with clients—the "direct labor."
So, if I'm running my landscaping business and I want to know if I can hire more mowers, I need to look at this number. One of my mowers can do forty lawns in a week. His dLER is really good! But another guy can only mow twenty lawns in a week. His dLER is bad. Until I understand what good output is and consider average costs of my labor, I don't know what a realistic efficiency ratio range should be. I'm not out there doing the work. I'm in my office looking at financial statements. Is 100 lawns per week crazy-town? Is that a sign the guy is mowing lawns badly? Or, is four lawns per week ludicrous? Is that a sign the gal is sleeping on the job? What should I realistically be expecting of my employees?
Once I start measuring everyone's dLER, I can start to see what a healthy range is. Maybe I determine that the best mowers are consistently hitting fifty-five lawns per week, so that's generating a dLER of 3.0—in other words, they are producing 3x their salary cost. The dLER becomes a tool to manage, both in how I hold employees accountable and in the workload that I assign. Once the dLER starts creeping up past a healthy threshold—say, to 3.25—I probably need to hire more people to help. If I don't, I may be asking my employees to do too much, and their quality may be dropping or they may burn out.
That's why the dLER is ultimately about the right, healthy number for your business. You want it to reflect a high level of efficiency, but not so high you're sacrificing service quality or team member quality of life. But if it floats down too low, say 2.5, that signals something else: perhaps this department isn't executing efficiently; maybe they are overstaffed; do we need to update our pricing? The number gives us a vantage point to manage the business and set realistic targets.
However—that number doesn't take into account the people who aren't executing the direct labor. What about all the back-end folks that are key to making the business engine run? The accounts receivable person, the office manager, the HR director? How do we measure them?
This brings us to term number two: Management Labor Efficiency Ratios (mLER). This number is going to help you evaluate the back-office team. They're not the ones executing the work, but they're still vital to help the whole business run smoothly. You want to know, "Am I too bloated in my back-office team? Do I have too many managers? Or are we actually stretched too thin, and I need to hire someone else?"
The mLER measures the efficiency of your back-end office staff.
Here's why these numbers get us so excited: by understanding your Direct Labor costs and your Management Labor costs, you can make confident forecasts and decisions that impact the future of the business in a scientific and healthy way. Without these numbers, you're just guessing—doing beer math. With these numbers, you can invest strategically!
The key to running a profitable business is keeping your d/LER high and managing your back-office costs. You could look at any profitable company in the entire world and their ranges for the d/LER and the m/LER would be similar to what we've described, adjusted for industry specific attributes. And based on their revenue numbers, you could guess how many people they have delivering the work, and how many people they have in the back office.
That's just the physics of business. It may be nerdy—but it's super helpful for that bottom line!
This is one of many measuring tools we share in The Good Business. Grab a copy to get the complete framework for bootstrapping a business to $10M and beyond.
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