include work that you have contracted out to a company to handle ; that is a COGS item in our approach . Also , do not split people ; the whole cost goes in .
• Management labor is , by default , all labor that is not direct . This typically includes owner ’ s compensation at a market rate . If you are underpaying yourself as an owner , you must add in what true compensation should be . It also includes your marketing and sales labor .
Once you have your definitions , look at rolling 12 performance ( highest quality number ) and rolling 3 ( next highest ). Monthly LER can be volatile due to non-MRR activity . From our work with the TMT Mastermind Groups and other clients in the industry , we know the top performers hit 4 for dLER and 4 for mLER . At this level , the company is typically performing at 20 % -plus net profit and over 200 % return on invested capital . We also know the median for the group runs around 3.5 dLER and 3.5 mLER . At that level , it would typically produce 12 %– 15 % net profit .
Using LER For Decision Making
• Monitor movement of LER on R12 and R3 to see clearly “ is it getting better ” or “ is it getting worse .” You can ’ t hide from the outcome !
• If dLER is at target and mLER is low , you either need to grow the contribution margin to justify the management labor you have , or you have management labor that is not necessary and needs to be trimmed .
• If mLER is at target and dLER is low , it is showing that your management labor is not being effective to get the unit economics out of the direct labor team . Management labor effectiveness is the ultimate key to profitability . When management does its job well , everything tends to work .
• If both metrics are low , your action starts with evaluating your management team first , then either trim labor to an acceptable metric or take the risk of growing into it .
Following these guidelines have helped many of our clients hit their targeted profit and turn their business into a valuable wealth-building engine . n
Greg Crabtree , CPA , Partner , Carr Riggs & Ingram LLC . Author of " Simple Numbers , Straight Talk , Big Profits " and " Simple Numbers 2.0 : Rules for Smart Scaling " Greg . crabtree @ cricpa . com
Website : SimpleNumbers . me
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22 | MSPSuccessMagazine . com • VOLUME 2 ISSUE 3