Are You Increasing Your Prices Enough?

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We’ve seen a significant uptick in inflationary pressure across the country, with no signs of it abating.  Labor increases are driving all costs up, so now is the time to manage your margins diligently — and to determine if you’re increasing your prices enough.

Gross Margin and Labor Efficiency

Gross profit is revenue less any direct material costs, including subcontracted work.  For a construction company, for example, direct material costs would be sticks and bricks as well as subcontractors.  The remainder is your gross profit.

I’m a subscriber to Greg Crabtree’s Simple Numbers concept, which relies heavily on maximizing labor efficiency.  Most small- and medium-sized businesses do not track or monitor this number, but it is a simple concept.  Direct Labor Efficiency (as opposed to administrative or marketing labor) is your gross profit divided by your total labor costs (including benefits and taxes). For example, if your gross profit for the period is $3MM and your direct labor costs are $1.5MM, your labor efficiency ratio would be 2.0.

A good target for Direct Labor Efficiency is 2.75, but that will vary by industry.  Consider benchmarking your numbers against industry averages to start.

Gross Margin is a related metric that is the percentage of your direct materials and direct labor to revenue. For instance, if your revenue for a period was $4MM and your direct materials plus direct labor is $2.5MM, then your Gross Margin Percentage is 37.5%.  Although gross margin is important to monitor, normally, you don’t have as much control over your vendor pricing as you do with maximizing your labor.  That is why we recommend focusing on maximizing Labor Efficiency.

How to Maximize Labor Efficiency

There are a number of strategies to maximize labor efficiency. However, my experience leans towards involving your operations/production team in solving the problem and incentivizing them based upon the results.  Top-down approaches don’t usually work as well as letting people solve the problem themselves.

Give them a clear understanding of the problem they’re trying to solve.  In these instances, I recommend breaking the problem down to an as granular level as possible.  For instance, don’t simply identify one location that has better labor efficiency than another and say fix it.  Go to the shop floor, find the differences, and solve those problems.

Pricing As a Strategy

More than likely, you have some discretion in increasing your prices immediately.  Analyze your customers by gross margin and unload the bottom 10-20% of them.  Most of the time, you will find that you have large volume customers that aren’t contributing much margin.

Reciprocally, you have the top 10-20% of your customers that will pay you more.  Have conversations with them to determine if there are any revenue opportunities (e.g., items/services that are ancillary but you don’t currently offer). Combining those two actions will have a tremendous impact on your gross profit and bottom line.

Should you need help in executing your financial growth, consider outsourcing a fractional CFO to guide your team through the business growth process. Learn more about fractional leadership here.

About the Author

As CEO of Core Group, a profit-first business and financial services firm, and a Forbes Business Council member, Christian Brim and his team help companies grow their business while saving taxes. To learn more, contact Christian on LinkedIn or visit coregroupus.com.

Jumpstart Your Business Growth With a Fractional COO

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“I dream things that never were, and I say ‘Why not?'” — George Bernard Shaw

As an entrepreneur, you leapt headlong into your venture without all the answers, confident you’d figure out what you need to know along the way. Wearing many hats and spinning lots of plates, you inspired others to join you, and, together, you grew. Now your business has hit an impasse or plateau. You know what got you here isn’t going to get you where you want to go. But you’ve maxed out your capacity and don’t have the in-house knowledge, skills, experience, or perspective to do what’s necessary to take things to the next level.

If this sounds like you, congratulations! You’ve already built a viable small business. What’s more, you may be just one key hire away from jumpstarting your next phase of breakthrough growth.

Why a Fractional Leader?

With the fractional model, you gain access to a higher level of executive leadership whose talent and experience would otherwise be unavailable to you. Fractional leaders aren’t cheap, but they can be affordable to a small business or cash-strapped startup because they work only part-time for each client and typically don’t require benefits or equity.

In essence, you’re “renting” a fractional executive for a period of time to help your business grow to the next level. Once your fractional executive has accomplished that goal for you, they’re usually happy to help you find, hire, and groom their full-time replacement, if necessary. Then they move on to their next growth challenge — generally what excites them most.

You may be wondering: With so much to do, how can a fractional executive possibly transform my business if they’re not working full time? The short answer is it depends on how you use them. If you’re looking for someone to take mundane tasks off your plate, you’re unlikely to achieve the level of growth you’re seeking.

But if you let them focus primarily on growing the business, an experienced fractional exec can get the job done much faster, more effectively, and with far less risk than a first-timer. One way to think of it: hiring a fractional executive is like plugging your business into a higher voltage battery. While you may not need to use all the battery’s power to run your company just yet, the engine that will drive your business’s growth won’t even start without it.

Why Start With a Fractional COO?

Today, you can hire all kinds of fractional executives — CMOs, CFOs, CHROs, etc. Many founders/CEOs build whole teams of fractional executives to grow their businesses. However, if you’re considering your first fractional hire, and you need help growing your business more or less across the board, you may be best off starting with a fractional chief operating officer (COO).

Why? While the function of a COO varies from business to business, the scope of a true COO’s responsibility is the entire organization, not just a single business function. They must take a holistic view of the business and understand how it all works together as a dynamic system — made up of interconnected functions, processes, inputs and outputs — itself part of an even larger system, for example, the marketplace.

In addition, a fractional COO often has deep hands-on experience in most, if not all, aspects of a business — sales, marketing, product development, finance, technology, HR, customer service. They not only understand the system as a whole but also have at least working knowledge of the different subsystems and how they all relate to each other and the whole.

To use a medical analogy, one of the functions of a good COO is to serve as a sort of trusted primary care physician who can evaluate the health of your entire business, make accurate diagnoses, prescribe the right treatments or cures, and refer you to specialists as necessary.

To carry the analogy further, they must also have an excellent bedside manner, knowing how to communicate effectively with all different types of employees, across all functions and contexts, 360 degrees, as well as customers, vendors, partners, investors, and so on.

Executing for Business Growth

However, the “doctor” analogy stops there. A fractional COO isn’t a mere consultant who spends the metaphorical equivalent of 15 minutes examining your business, writes you a prescription, and then beats a hasty retreat. No, a fractional COO works in your business as well as on your business, moving fluidly from analysis, strategy, and planning to execution; driving progress each week; holding people accountable for results; testing, measuring, learning, and — if they’re doing their job — continuously improving performance and growing your top and bottom lines.

As Oliver Wendell Holmes said, “Many ideas grow better when transplanted into another mind than the one where they sprang up.”

A great fractional COO will take your vision and run with it, in the process making your long-sought business dream a present-day reality. You can learn more about the benefits of fractional leadership here.

About the Author

Mark Scrimenti is a Fractional COO and Fractional Integrator for businesses running on EOS. He has 15-plus years of leadership experience in e-commerce, digital product development, sales, marketing, and customer experience. Connect with Mark on LinkedIn or visit his website at vividpathconsulting.com if you’re ready to jumpstart your own business’s growth.