Simple Numbers 2.0
4.7 ⭐⭐⭐⭐⭐ 4.7 out of 5 stars (164)
A Play by Play Analysis for Pure Growth
Attribute | Details |
Author | Greg Crabtree |
Publication Date | November 18, 2020 |
Topic | Business Finance, Sustainable Scaling, Profit Optimization for SMEs |
Rating | $\mathbf{4.7/5}$ (Essential Business Guide) |
1. About the Author
Greg Crabtree, CPA, is an author, speaker, and founding partner of CRI Simple Numbers, a specialized CPA firm focused on helping entrepreneurs build the "economic engine" of their businesses.
Financial Philosophy: Crabtree's philosophy is rooted in simplifying complex accounting concepts down to a few key performance indicators (KPIs) that truly drive profitability and growth. He argues that most traditional accounting practices are designed for large, publicly traded companies and often obscure the necessary truths for small business owners. His core belief is that revenue is for show, and profit is for dough, and that proper management of labor efficiency is the ultimate key to sustainable scaling.
Context: This book builds directly upon the foundational principles introduced in his first work, Simple Numbers, Straight Talk, Big Profits!, shifting the focus from establishing financial discipline to strategically scaling a profitable foundation.
See the video summary of this essential business book here: https://youtu.be/iIbIJUfI1p4
2. Key Takeaways and the Rules for Smart Scaling
The book provides a strategic framework for businesses typically generating between $1 million and $5 million in annual revenue—a stage Crabtree often calls the "Black Hole" because it's where companies frequently over-invest in infrastructure or staff before they can truly afford it, killing their profitability.
The Core Rules and Benchmarks
The Owner's Salary Rule: Business owners must pay themselves a market-based wage (what it would cost to hire someone else to do their job) and account for it as an expense before calculating profit. The owner's salary is compensation for working in the business; profit is the return for owning the business. Failing to do this causes financial metrics to lie to the owner.
The Profit Target: A truly healthy small business should aim for a pre-tax profit of 10% to 15% of revenue.
5% or less: Business is on life support.
10%: A good, sustainable business.
15% or more: An excellent business, often signaling it's time to invest profits to scale (see Rule 3).
The Labor Efficiency Rule (The Ultimate Metric): The key to managing costs is the Labor Efficiency Ratio (LER), calculated as:
$$\text{LER} = \frac{\text{Gross Profit}}{\text{Total Labor Dollars}}$$
Crabtree advises that most service or labor-intensive businesses should aim for an LER between $1.80 and $2.20. This means for every $1 spent on labor (including taxes and benefits), the business must generate between $1.80 and $2.20 in Gross Profit.
The Black Hole Strategy (Scaling): When the business reaches 15% pre-tax profit, the owner should reinvest the extra profit by adding a strategic employee or resource that drives the profit percentage back down toward 10%, and then grow revenue again to push it back up to 15%. This creates a cycle of profitable, controlled growth.
The Four Forces of Cash Flow (Prioritization): Cash should always be handled in this strict order:
Pay Your Taxes: Set aside taxes first (it’s not your money).
Repay Debt: Attack short-term debt.
Reach Core Capital Target: Build a cash safety net, typically 2 months of operating expenses in the bank.
Take Profit Distributions: Only distribute profits once the first three forces are satisfied.
Core Concepts
Launch Capital: Spending that is necessary to grow or start a new initiative (e.g., marketing, initial infrastructure investment) that must be funded from existing profit or capital, not from debt.
Forecasting over Budgeting: Focus on 12-month rolling forecasts and update them monthly based on actual results, rather than static annual budgets.
Related: Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, 4th Edition
3. Frequently Asked Questions (FAQs)
Question | Answer |
Q: What is the difference between this book and the first one? | A: The first book, Simple Numbers, Straight Talk, Big Profits!, focuses on the foundations (setting a market salary, understanding the 4 keys to profit). Simple Numbers 2.0 is the playbook for applying those foundations specifically to the challenge of scaling and managing labor complexity. |
Q: Why shouldn't I include labor in Cost of Goods Sold (COGS)? | A: Crabtree suggests that for most small businesses, excluding direct labor from COGS simplifies financial analysis and gives a clearer view of the true economic engine (Gross Profit) that is driving the business, allowing better management of labor efficiency via the LER. |
Q: Should I spend money to lower my tax bill? | A: Absolutely not. Crabtree views a high tax bill as the #1 KPI that indicates a highly profitable business. Spending profit on non-revenue-generating assets (like an expensive vehicle) just to save on taxes means the owner loses the cash, which is a powerful "opportunity magnet." Focus on increasing profit, not minimizing tax. |
Q: What is the "Black Hole" phase of business? | A: The $1 million to $5 million revenue range, where the business is forced to invest in infrastructure and hire management before cash flow can comfortably support it. Managing the LER and profit targets in this phase is critical to survival. |
4. Target Audience
This book is highly beneficial for:
Small Business Owners (SMEs): Especially those in the $1M to $5M revenue range who are struggling with complexity or feeling like they are working harder for less profit.
Service-Based Businesses: Companies where labor is the primary driver of value (e.g., accounting firms, agencies, consultancies) will find the LER metric revolutionary.
Entrepreneurs: Anyone looking to move from a "self-employed" mindset to building a truly scalable, wealth-generating asset.
CEOs and Financial Managers: Who need simple, actionable financial metrics to use for forecasting, compensation planning, and strategic decision-making.
5. Pros and Cons
Pros | Cons |
Actionable KPIs: Introduces LER as a powerful, simple metric that provides immediate, objective feedback on labor decisions. | Potentially Disruptive: The core advice (especially LER and market-based owner salary) requires fundamental changes to how many entrepreneurs currently track and view their financials, which can be a challenging adjustment. |
Focus on Scaling: Provides a clear, practical roadmap for managing the critical $1M–$5M "Black Hole" phase of growth. | Assumes Foundational Knowledge: While the concepts are simple, the book is designed as a sequel, so readers lacking basic financial understanding or who haven't read the first book might need to catch up on terms like "Gross Profit." |
Owner-Minded: Clearly separates the owner's role (salary) from the owner's return (profit), leading to better personal financial health and more accurate business valuation. | Industry Specificity: The LER benchmarks ($1.80-$2.20) are most applicable to service and knowledge-based businesses and may require significant adjustment for high-COGS retail or manufacturing sectors. |
Tax Philosophy: Encourages higher profitability by reframing the tax bill as a positive sign of business health, rather than a cost to be aggressively minimized. | Fixed Price Bias: Crabtree strongly advocates for fixed-price models over hourly billing, which may not be feasible for all professional services firms. |
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6. Final Verdict
Simple Numbers 2.0: Rules for Smart Scaling is an essential operating manual for any entrepreneur determined to grow their small business into a valuable asset.
It excels at translating the often-opaque language of finance into clear, non-negotiable rules for scaling. The emphasis on the Labor Efficiency Ratio (LER) and the strategic 10%–15% profit band gives owners the permission and the method to invest their profits for sustainable growth without risking the business's health.
If you are currently profitable but struggling with how to scale without dissolving those profits into a chaotic "Black Hole" of new costs, this book provides the definitive, data-driven answer.
Rating: 4.7 out of 5 stars. Read this if your business is hitting $1 million in revenue and you need a strategic playbook to grow to $5 million and beyond—profitably.