Why is business so much like golf? It seems our biggest infatuation is with how much sales. The equivalent to how far you can drive the ball. But we all know long drives do not always convert to low scores. In fact, strokes gain by putting seems to a better measure. You could relate this, I guess, to gross margin because other things have to happen to accomplish better scores as well.
But in business, gross margin as a product of every hour we pay in payroll may be a hidden gem or best score indicator.
Consider, you might make $45 on every $100 of product you sell. And, you might even make $50 on every $100 of labor you bill. And, some will make $60 on every $100 consumable parts they bill. On a given proposed project this might mean: (with a 60-30-10 mix) $27 Product; $15 Labor & $6 of parts for every $100 bid. Now, that’s $48 per $100 bid. Most would say a nice margin.
But this margin can quickly be absorbed if staffing and productivity chips away at it. If we did $2M in revenue and our margin held up; we could realize a $960K (48%) gross margin. But did we shoot a good score for this round of golf?
It goes back to our staffing and their productivity. If we have a total payroll of $330K after direct labor is taken out (it’s in the labor margin, right?), we would do well. That would be a gross payroll of $480K because direct payroll is $150K in this example. The truth is 24% payroll cost is rarely achieved by most CI companies.
So, we must have higher margins than the example. At a payroll of $600K (30% of Revenue) we would need to have $1,050K in gross margin, or a 52.5% margin (4.5 points higher). Only real way to achieve this is with higher labor margins (60% to 64%), (greens hit in regulation). You need to produce higher gross margins for the entire staff.
So, how close are you to your desired game? Take you annual payroll and double it. That is the gross margin you need to attain without labor cost of goods. A $1M payroll should have $2M in gross margin and $3.33M in revenue will need to be produced.
Simply put, get your Gross Margin (without labor cogs) to 2x your payroll and your revenue at 3.33x your payroll. And, you will be shooting below par for a long time.