Free tool
What does a dollar of wages bring back?
For most businesses wages are the largest cost and the least measured. This works out how much gross margin each dollar of them returns, splits it between the people who do the work and the people who run it, and tracks it across your own periods. It gives you no target to hit, on purpose.
Labour efficiency
Worked from figures entered by the reader. Indicative only, and not advice of any kind.
Slipping-9.3% across the run
Each dollar of wages is bringing back less than it was. Usually people arrive before the work does, which is fine for a while and worth watching.
| Period | Gross margin | Wages | Ratio | With on-costs |
|---|---|---|---|---|
| H1 last yearYour best | $930,00064.1% | $485,000 | 1.92x | 1.67x |
| H2 last year | $1,018,00063.2% | $538,000 | 1.89x | 1.65x |
| H1 this year | $1,079,00062.7% | $596,000 | 1.81x | 1.57x |
| H2 this yearYour weakest | $1,143,00062.0% | $657,000 | 1.74x | 1.51x |
Best and weakest are yours, across the periods you entered. There is no industry line on this table and no target, deliberately.
Direct labour
2.38x
Gross margin per dollar of direct wages, latest period.
Management labour
3.76x
Contribution margin per dollar of management wages.
Against your best
1.92x
Your high was H1 last year.
Gross margin grew
22.9%
First period to last.
Wages grew
35.5%
Over the same run. The gap between these two is the ratio moving.
- There is no target line on this page, deliberately. Greg Crabtree, who developed this ratio, does publish one: he targets 1.90 to 2.10, and about 2.50 for retail and distribution. It is not drawn here because the data behind it has never been published, it is US data, and his labour figure is wages with payroll taxes and benefits sitting elsewhere, while an Australian wage carries super, workers compensation and payroll tax on top. His own advice is to read the ratio as a trend against your own rolling highs and lows, which is what this does.
- Labour grew 35.5% across these periods while gross margin grew 22.9%. That is the shape of a business adding people faster than it is adding margin, and it is the thing this ratio exists to make visible early.
- The most recent period is the weakest of the 4 entered. Worth knowing what changed: a hire that has not landed yet, work sold at a thinner margin, or time going somewhere it did not used to.
Why there is no target
There is a published number. It just does not measure what you measure.
Search this ratio and you will be told to aim at about 2.0: two dollars of gross margin for every dollar of wages. That number is Greg Crabtree’s, who developed the ratio, and he stands behind it. He targets 1.90 to 2.10, and around 2.50 for retail and distribution, on the basis that businesses in his client data sets which hit 15 to 20 per cent profit to gross margin kept landing on roughly two dollars back per dollar of total wages.
We have not drawn it on this page for three reasons. The data set behind it has never been published, so there is no sample size, composition or industry mix to check, and this site puts the ATO benchmarks on a page precisely because you can go and download them. It is US data. And the one that decides it: his labour figure is wages, with payroll taxes and benefits sitting in operating expenses, while an Australian wage carries superannuation, workers compensation and payroll tax on top. Your ratio and his 2.0 are not measuring the same thing, so putting a line at 2.0 across your numbers would be a comparison the arithmetic does not support.
His own advice is to read the ratio as a trend rather than a snapshot, against your own rolling highs and lows. That is what this page does, and if you want to hold yourself to 1.90 knowing where it comes from and what it leaves out, the number is right there in the wages-only column.
The method
Five lines, and what each one is telling you.
| Line | How it is worked out | What it tells you |
|---|---|---|
| Gross margin | Revenue less direct costs. Materials, subcontract and freight, but never wages. | Wages are the thing being measured, so they cannot also sit in the number doing the measuring. |
| Direct labour ratio | Gross margin divided by the wages of the people who do the work. | Whether the work is priced and delivered efficiently. The number that moves when you win work at a thinner margin or when a crew is carrying someone. |
| Management labour ratio | Contribution margin, being gross margin less direct wages, divided by management wages. | Whether the layer above the work is carrying its weight. A business can be strong on one ratio and weak on the other, which a blended figure hides. |
| The on-cost column | The same ratio again, with superannuation, workers compensation and payroll tax loaded onto the wages. | The ratio is usually defined on wages alone, and no Australian employer pays only wages. This is the version that tells you whether the next hire works. |
| The trend | The movement from your first period to your last, and where the latest sits against your own best and weakest. | The only comparison this page offers. There is no industry line and no target. |
Gross margin
- How it is worked out
- Revenue less direct costs. Materials, subcontract and freight, but never wages.
- What it tells you
- Wages are the thing being measured, so they cannot also sit in the number doing the measuring.
Direct labour ratio
- How it is worked out
- Gross margin divided by the wages of the people who do the work.
- What it tells you
- Whether the work is priced and delivered efficiently. The number that moves when you win work at a thinner margin or when a crew is carrying someone.
Management labour ratio
- How it is worked out
- Contribution margin, being gross margin less direct wages, divided by management wages.
- What it tells you
- Whether the layer above the work is carrying its weight. A business can be strong on one ratio and weak on the other, which a blended figure hides.
The on-cost column
- How it is worked out
- The same ratio again, with superannuation, workers compensation and payroll tax loaded onto the wages.
- What it tells you
- The ratio is usually defined on wages alone, and no Australian employer pays only wages. This is the version that tells you whether the next hire works.
The trend
- How it is worked out
- The movement from your first period to your last, and where the latest sits against your own best and weakest.
- What it tells you
- The only comparison this page offers. There is no industry line and no target.
A worked example
Revenue up, wage bill held.
The same business across two halves. Revenue rose about seven per cent and the wage bill barely moved, which is what an improving ratio actually looks like from the inside. It did not come from cutting anyone.
Improving+9.7% across the run
Every dollar of wages is bringing back more margin than it was at the start of this run.
| Period | Gross margin | Wages | Ratio | With on-costs |
|---|---|---|---|---|
| BeforeYour weakest | $1,143,00062.0% | $657,000 | 1.74x | 1.51x |
| AfterYour best | $1,267,00064.0% | $664,000 | 1.91x | 1.66x |
Best and weakest are yours, across the periods you entered. There is no industry line on this table and no target, deliberately.
Gross margin grew
10.8%
First period to last.
Wages grew
1.1%
Over the same run.
That is the whole reading. There is no line on the chart it had to clear and no industry it is being measured against. It is better than it was, and the gap between the two growth figures is exactly why.
What this does not cover
- Any benchmark, target or industry range, deliberately. See the note below
- Whether a particular hire was the right one, which no ratio can tell you
- Seasonality, so periods of unequal length will produce a trend that is not there
- The owner's own time, unless you put it into one of the wage rows yourself
- Anything about tax treatment of wages or on-costs, which belongs with a registered tax agent
Wondering what a better ratio is worth?
The profit and cash levers calculator prices the same improvement in dollars: what a point of margin or a point off the cost base does to profit, to cash, and to what a lender would lend against the result.
Want the finance arranged as well?
This site does the analysis and the documents, and does not arrange credit. The broking is done by The Lending Lab, a separate business run by the same person. Send a few details and Nick handles it himself.
Common questions
Greg Crabtree, who developed the ratio, targets 1.90 to 2.10, and around 2.50 for retail and distribution. This page does not draw that line across your figures, for three reasons: the data set behind it has never been published, so there is nothing to check; it is US data; and his labour figure is wages, with payroll taxes and benefits sitting elsewhere, while an Australian wage carries superannuation, workers compensation and payroll tax on top. Your ratio and his target are not measuring the same thing. So the comparison offered here is you against your own best and weakest.
If you want to, use the wages-only column rather than the on-cost one, because that is the column built the way his number is defined. Just know what you are holding yourself to: one practitioner's observation across US client engagements, with the sample never published. It is a reasonable working figure and it is not a standard. The movement in your own ratio over four periods will tell you more than the gap to anyone's target.
Because the people who do the work and the people who run the place answer different questions. Direct labour tells you whether the work is priced and delivered efficiently. Management labour tells you whether the layer above it is carrying its weight. A business can be good at one and poor at the other, and a single blended figure hides exactly that.
Because the ratio as it is usually defined counts wages only, and no Australian employer pays only wages. Superannuation, workers compensation and payroll tax sit on top of every one, and the ratio on what a person actually costs is the one that tells you whether the next hire works. Both are shown rather than one being picked quietly.
Then put what it would cost to replace you into whichever wage row fits the work you actually do, and the ratio means something. Leave it out and every figure on the page flatters the business by exactly the amount of your own unpaid time, which is usually the largest single labour cost it has.
At least two, or there is no direction to read. Four is better. Use halves, quarters or years, as long as they are all the same length as each other, because a quarter against a year tells you nothing about efficiency and quite a lot about arithmetic.
Not necessarily, and it is the most common thing to see in a business that is growing. People arrive before the work they were hired for does, so the ratio dips and then recovers. It is worth watching rather than reacting to. A dip that does not recover over several periods is the one worth acting on.
General information only. Indicative, not a credit assessment, and not an offer of finance. Lending decisions rest with the lender and depend on your circumstances and their criteria. No benchmark or industry range is applied to your figures on this page. The published target this ratio is usually quoted against is named and attributed above, along with the reasons it is not drawn here.