The Simple Numbers 100 Shows an Uptick. Is It Real?

Overall profits are up, but they’re being earned by a minority of businesses.

By Brandon Gray

The latest update of the Simple Numbers 100, which tracks a diverse set of entrepreneurial businesses, indicates that profits at these owner-operated businesses are up 7 percent since August. This month, we dig into the data to figure out what’s driving the increase and what issues still abound.

Last month, we covered how the economy is divided. Our model showed that companies with more than $10 million in revenue were growing and profitable. But their counterparts—companies with less than $10 million in revenue—were experiencing declines in revenue and profits. This month, we will look into these categories in more detail by industry.

First, the categories with companies making progress, which we refer to as growers: This group includes 32 of the 100 companies in the model. Examples include residential and commercial HVAC, plumbing, electrical, landscaping, repair and remodeling. IT and software development are also part of the group. As for the categories that are struggling, the decliners, this group includes 68 companies. Examples include physical and online retail, commercial wholesale, consulting, marketing, legal, financial, and real estate.

So what separates the growers from the decliners? Gross margin dollar growth is the largest separator. Growers have increased gross margin dollars by 20 percent vs. prior year, and this trend has remained steady. Decliners are down 14 percent, and this trend has been continuing to decline. As the spending mentality of both consumers and businesses has shifted from wants to needs, growers are finding a way to capture more market share.

Demographic trends indicate that the population of the U.S. is not growing (lower immigration combined with declines in birth rates). With fewer consumers, companies must take market share from competitors in order to grow. The companies that succeed at taking market share have products and/or services with a competitive advantage, and they are becoming increasingly creative with their marketing efforts.

Growers are also leveraging labor more effectively than decliners. Growers have increased total labor efficiency by 3 percent. Given their growth, there is little down time, making labor very efficient. Decliners have experienced an 11-percent decline in labor efficiency. As margin dollars decline, companies can cut labor only so far. Many of these companies have reached that point.

Lastly, inflation does not discriminate. Growers are keeping operating expenses as a percentage of sales level versus the previous year. Decliners, meanwhile, have seen operating expenses as a percentage of sales increase 2 percent versus the previous year. This increase is creating a direct reduction in profits. The result: overall profit in the model has increased because of the strength and profit from growers. Keep in mind that this group consists of only 32 of the 100 companies in the model. In other words, some industries are doing great while others are very concerning.

So what should businesses do in this environment? If you are a grower, keep your foot on the gas! Continue to look for adjustments you can make to create additional efficiencies: systems, processes and training for labor efficiency. Dig into marketing returns and look at creative ways to replace the challenges that have come from digital changes.

If you are a decliner, you must focus on gross margin generation. How can you steal market share? Is your competitive advantage valued by the market? Can you replace ineffective marketing spend with strategies that produce a return? For labor, focus on flex staffing – match your labor to your margin generation.

Want to learn more? As a 21 Hats subscriber, you are welcome to set up a call to discuss further. Feel free to reach me at brandon.gray@SimpleNumbersCri.com.

Brandon Gray is a partner at Simple Numbers.