The longer we do this — the accountant / trusted advisor thing — the more we realize something: business isn’t nearly as complicated as most people make it. At the end of the day, there are only a handful of numbers that tell you whether your business is healthy, scalable, and valuable.
And there’s one in particular that might be the best diagnostic tool you’re not using: Gross Profit per Labor Dollar.
Why this one matters most
Forget total sales. Forget top-line growth. If you want to know whether your business actually works, look at what every dollar of labor produces in gross profit.
When you measure Gross Profit instead of Sales, you level the playing field. Your manufacturing company, your landscaping business, your CPA firm — they all become comparable because you’re focusing on the true value created after direct costs.
If you include direct labor in your cost of goods sold (COGS), here’s the formula you want to use:
Gross Profit + Direct Labor = No-Labor Gross Profit
No-Labor Gross Profit / All Labor = The Magic Ratio
And by “Labor,” we’re talking salaries and bonuses — including independent contractors. (Don’t include specialty subs if you’re in construction.)
The magic formula
Here’s your north star: for every $1 of labor, you should generate at least $2 of gross profit. Shoot for $3 if you can. Beyond that? It’s rarefied air.
We’ve studied this across BGW’s entire client base. Almost no one consistently breaks that 3X barrier — but plenty can hit 2X or 2.5X once they start paying attention.
And here’s the kicker: when we ask most 2X companies whether they could generate 20% more sales without adding any new “belly buttons,” nearly every one of them says yes. That’s proof the measure works.
What this looks like in real life
Scenario 1: Sell more (without hiring more).
Gross profit = $100.
Labor = $50.
That’s a 40% gross margin.
If you push sales so that gross profit jumps to $125 (without adding cost), your bottom line rises from $50 to $75. At a 5X valuation multiple, your company’s value goes from $250 to $375. That’s a 50% jump in value — and more cash in the bank.
Scenario 2: Cut costs.
Can’t grow sales right now? Trim labor from $50 to $40 while maintaining $100 in gross profit. Now your company’s worth $300 instead of $250. You didn’t work harder — just smarter.
How much cash should you keep on hand?
You can even use labor to size your cash cushion. A half-month of payroll is a good starting target. If you’re below that, work toward it. The upper limit? Four times payroll plus one week of COGS.
Operate between those guardrails and you’ll almost never have a cash flow crisis. Too much cash sitting idle, and you’re probably missing better returns elsewhere.
Your homework
Run the numbers. Seriously.
Look back at 2023, 2022, and maybe one “normal” pre-pandemic year like 2019.
Then ask yourself:
Have you ever hit 2.0?
If not — why not?
If you have, and you’ve slipped — what changed?
If you’ve been stuck at 2.0 but not 2.5 — what inefficiencies could you root out to get there?
Most businesses can reach 2.5 with focused effort. Beyond that, it’s about discipline, process, and relentless documentation.
If you only tracked one ratio to understand the health of your business, make it Gross Profit per Labor Dollar. Because when that number’s right, everything else — cash flow, profitability, valuation — falls into place.
Good luck. And if you want help running your numbers, we’re always up for that conversation.