The Labor Value Multiple and Why It’s the Most Important Metric for Service Businesses
Hi, I’m Cal Wilder, founder and CEO of SmartBooks Corp. I’ve been fortunate enough over the years to consult with hundreds of small businesses, and one question I get asked a lot is: What is the single most important financial metric I should focus on? My answer: Labor Value Multiple.
What Is the Labor Value Multiple?
Well, if you own or manage a service organization, that metric is Labor Value Multiple, or LVM. If you need a refresher on what LVM is, check out the SmartBooks blog for articles on defining and calculating LVM, but in short, LVM is your service revenue, plus any mark-up on the resale of third party goods and services that you bill through to clients, divided by the cost of your client service employees for delivering those services. LVM is a direct measure of how valuable your customers perceive your services to be, as reflected in the price they’re willing to pay, compared to your salary cost to deliver those services. It’s a simple number, like 3.5X, 3.0X.
How the Labor Value Multiple Guides Business Decisions
Now, you do need to calibrate LVM for your own business to determine what specific LVM you need to hit in order to be profitable and to have the kinds of profit margins you want to have. LVM is one simple metric, but it can guide a number of critical business decisions such as staff hiring, staff downsizing, individual client and project profitability, pricing decisions, your company revenue target, and even annual salary increases. These can all be driven by one simple metric: Labor Value Multiple.
If you’re interested in learning more, be sure to check out the SmartBooks blog for content on Labor Value Multiple and other financial metrics related to service businesses, or reach out to me directly to discuss specifically how to apply the concept to help you manage your business.