As you grow, how do you know if you need more or less people to be productive and efficient?
Without a good measurement to track either of those things, you’re in danger of not having enough people and brainpower to get the work done.
Or, more often, hiring and paying for more people without actually creating any more gross profits or results.
Striking the Right Balance
To strike the right balance, you have to know your Labour Efficiency Ratio (LER).
In simple terms, that number helps you to measure, analyze, and optimize labor productivity – to know how many dollars of people costs it takes for every dollar of profit.
In other words, to know how effective the people in your business are at creating value.
“Labor is the only cost that comes to work every day with an attitude.
It’s got some good days, and it’s got some bad days.”
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- Greg Crabtree
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The LER Calculation
LER is determined by dividing the gross profit by the total dollars spent on labor.
His rule of thumb, for almost every business, is a 2:1 ratio:
Every dollar of labour (direct and management combined) should generate at least $2.00 of gross profit.
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- Figure out where you are today. You may need to do your own research to validate that the 2:1 ratio fits your industry.
- In your macro decisions and macro reporting, keep your eye on that 2:1 ratio to strike the right balance.
If you really have the amazing, high-performing, productive team you say you do – and a great strategy in the market – your LER will show it.
“It’s not about bodies but dollars.”
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- Greg Crabtree
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Here’s a video clip of our conversation about LER.
And a link to the complete interview.
The Challenge
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- If you haven’t already calculated your LER ratio, I highly recommend that you do.
Other Blogs
- Crafting a Life of Productivity Fuels Peak Performance
- Master Productivity Using the Ivy Lee Method
- Productivity Hack: The 53-Minute Master Plan
Older Podcasts
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