Revenue per employee can rise while the business becomes less profitable. Pricing, bought-in costs and the mix of work all affect what remains available to pay the team and cover overheads.
Greg Crabtree’s Simple Numbers approach uses a labour efficiency ratio to relate gross margin to labour spending. For the total ratio, gross margin is measured before labour costs and divided by total labour cost, using consistent definitions.
Get the definitions right first
The gross margin in this calculation may differ from the gross profit in your accounts. Simple Numbers separates labour from non-labour costs. If direct labour is already included in cost of sales, reconcile that treatment before calculating the ratio.
Ask your finance lead to set out exactly what is included and keep the approach consistent between periods. Otherwise, an apparent improvement may simply reflect a change in classification.
Use the trend to ask better questions
In a simplified illustration, R6 million of gross margin before labour divided by R3 million of labour cost gives a ratio of 2.0. That arithmetic alone does not tell you whether the business should hire, cut costs or change prices.
A falling ratio may prompt questions about underused capacity, a less attractive sales mix, rework or an investment in people ahead of demand. Those explanations call for different decisions.
Connect a hire to the constraint
Before adding a role, clarify the work it will enable and the result you expect. Is the business short of capacity, or is existing capacity tied up in poor processes and repeated work?
Look at the ratio alongside service quality, retention, workload and the company’s growth plans. A single financial measure cannot capture the full value of a team or determine the right staffing decision.
Framework: Greg Crabtree’s Total Labor Efficiency Ratio. Accounting definition: Simple Numbers book excerpt.