Simple Numbers 2.0

Simple Numbers 2.0 is Greg Crabtree’s follow-up to his 2011 book Simple Numbers, Straight Talk, Big Profits! The first book taught owners to pay themselves a market wage, target pretax profit, keep two months of operating expenses in cash, and measure labor against gross margin. The sequel moves the focus from profitability to return on invested capital. Crabtree credits David Wessels of the Wharton School, whose teaching he heard while chairing the Entrepreneurs’ Organization program there, with shaping how he applies the concept to private companies.

The book has two parts. Part 1 asks the owner to think like an investor, value the business as an investment, and decide when to keep it and when to sell. Part 2 covers the two levers that drive the return: profit and capital. Crabtree introduces four types of capital, the idea of a capital signature for each business model, launch capital as the cost of every growth bet, targets set before forecasts, labor efficiency ratios, segment analysis, and value-based spending in place of budgets.

The argument rests on data from the companies Crabtree’s firm models, not on academic research. He writes from the view of a CPA who wants owners to read their numbers the way an investor would.

A private company is an investment that should earn at least fifty percent pretax return on the capital the owners put in, and every growth decision should be judged against that standard rather than against revenue.

Greg Crabtree is a CPA who founded the accounting firm Crabtree, Rowe and Berger in Huntsville, Alabama, in 1986. He started it after five years at a regional accounting firm and three years as vice president of operations and controller at a bank. After the firm made the Inc. 5000 list in 2019, it merged with Carr, Riggs and Ingram, a top-25 national accounting firm. His first book, Simple Numbers, Straight Talk, Big Profits!, was published in 2011. He wrote the labor efficiency chapter in Verne Harnish’s Scaling Up and chaired the Entrepreneurs’ Organization executive program at the Wharton School.

His credibility here comes from modeling the financials of many owner-led companies and from being an entrepreneur himself. His benchmarks come from his firm’s own data, not from published research. The book does not report the size or makeup of that data, apart from the fifty-company set described in the second chapter.

1) Return on invested capital is the scorecard, and fifty percent pretax is the floor.

Crabtree’s main move is to make the owner judge the business the way an investor would judge any other asset. Profit matters only in relation to the capital needed to produce it. A business that clears fifty percent pretax ROIC can fund its own growth, pay distributions, and survive downturns. A business below that line, at proper capitalization, is fragile however good its revenue looks.

• Invested capital is owner money plus sweat equity. Debt is excluded as a placeholder.
• Seventy-five percent ROIC is the most common result Crabtree sees among skilled operators.
• High ROIC from heavy borrowing is a false signal that fails when credit tightens.

2) Gross margin is the real top line, and revenue is the most slippery number on the P and L.

Cost of goods sold flows through the business without creating value inside it. Measuring labor, sales incentives, and comparisons against revenue rewards volume that may not produce margin. Measuring against gross margin and contribution margin shows what the company actually produces.

• A forty-million-dollar distributor at thirteen percent gross margin is a five-million-dollar company in economic terms.
• Sales incentives tied to contribution margin push salespeople to sell what the delivery team does best.
• Comparisons across industries only make sense on gross margin.

3) Every business has a capital signature that sets how fast it can grow without burning cash.

Two companies with the same margin can have opposite cash outcomes because of how their receivables, inventory, payables, and deferred revenue interact. Comparing trade capital and net income, each as a share of revenue, shows whether growth produces cash or consumes it. That tells the owner whether to grow continuously or in base camp stages.

• Trade capital is working capital with cash and short-term debt removed.
• Corporate payment terms combined with carried inventory is the worst capital signature.
• Deferred revenue can make a services firm cash-free in growth until it disappears.

4) Growth spending is a bet, and unnamed bets are never held to account.

Launch capital covers every expense taken on to move the business beyond its current level: overstaffing ahead of demand, new management, marketing pushes, and consultants. Crabtree argues these bets are where wealth is made or lost. Unlike funding receivables or paying down debt, a failed bet cannot be recovered. Naming the bet and requiring a fifty percent return turns experimentation into discipline.

• Incremental bets over the life of a business matter more than the initial investment.
• In Crabtree’s contractor example, a seven-hundred-forty-one-thousand-dollar bet returned one hundred thirty-five percent.
• Marketing returns decay as the market gets used to the message, so spend levels must be tested again.

5) Labor is measured as an output, and pay chases performance.

The labor efficiency ratios recast payroll from a cost to cut into a production rate to manage. Direct labor is held to gross margin and management labor to contribution margin. A record ratio becomes the standard for future raises and hires. That gives the CEO a defensible answer when the team asks for more pay or more staff.

• Each added dollar of management labor needs six to ten dollars of new revenue to hold profitability.
• The best benchmark is the company’s own record, not industry surveys.
• The career curve makes the replacement zone visible before it turns personal.

6) The black hole between one and five million is a management problem disguised as a growth problem.

Crabtree places the hardest stretch of private company growth at around three million in revenue. At that point the founder’s informal labor structure stops working and the management team is too thin. The only options are to pull back or invest in management labor and absorb the dip. Treating the management upgrade as launch capital lets the owner fund it on purpose and measure the return.

• A profitable company at three million is often running on an unsustainable labor structure.
• The fix is rarely quick and often costs a losing year.
• Past five million, scaling depends on market penetration more than on margin gains.

7) Keep or sell is a replacement return calculation, not a valuation contest.

Owners tend to judge sale offers by the multiple. Crabtree reframes the decision around the yield the after-tax proceeds would need to earn to replace current pretax profit. Because a well-run private company can earn fifty percent or more on its capital, most offers fail this test unless the owner has a better reinvestment ready or a personal reason to exit.

• Expected real estate yields of eight to fifteen percent set the realistic alternative for most owners.
• An economic green light comes only when the required replacement return is below fifteen percent.
• The formula-based economic value gives partners a usable price for buy-sell agreements without an appraisal.

The book’s strength is that it turns corporate finance ideas into tools a private company owner can run on a spreadsheet. The four types of capital, the comparison of trade capital and net income as shares of revenue, and the labor efficiency ratios each change a decision the owner actually faces. The launch capital framework adds something most financial literature for small companies lacks: a way to make growth spending accountable without a budget. Crabtree’s examples, including the auto service store owner Bob, the contractor’s launch bet, the Aspire to Serve recovery, and the retail and service segments, show the math rather than only stating the rule.

The limits come from the evidence and the definitions. Benchmarks such as the fifty percent ROIC floor, the two-month cash standard, and the six-to-ten-dollar management labor rule come from the firm’s own data, and the book does not describe its size or method. Excluding debt from invested capital differs from standard corporate finance and pushes ROIC above figures in public company literature, so the fifty percent standard cannot be compared with outside benchmarks. Many examples are reconstructions from Crabtree’s practice that depend on tables summarized in the text. The predictable failure is that a leadership team adopts the ratios as targets without the clean data, consistent labor classification, and rolling reports the ratios require. The numbers then turn into a new budget to negotiate rather than a measure of reality.

The diagnosis holds. Founder-CEOs in the five-to-fifty-million range still run on revenue and the P and L, and rarely look at the balance sheet. Crabtree’s reframing around capital and labor output is the most usable finance lens I know for this stage. The black hole description matches what happens at the three-to-five-million transition. It also matches the repeat version that hits again when a company outgrows its first layer of managers.

The book plays differently by model. In a services firm, labor efficiency is close to the whole story, and the segment work on hourly versus fixed-price teams is worth the price of the book. In a distribution or manufacturing company, the capital signature chapter matters more, because trade capital is where the cash goes. In venture-backed SaaS, the fifty percent ROIC floor and the self-funding bias collide with a deliberate strategy of spending outside capital ahead of revenue. The launch capital logic still applies, but the hurdle does not.

The most credible outside objection comes from the corporate finance tradition represented by Tim Koller and his McKinsey colleagues in Valuation. They define invested capital as the operating capital funded by debt and equity together. On that definition, Crabtree’s ROIC figures are inflated by leaving out debt and cannot be compared with a cost of capital. I think the objection is right on method and less important in practice. Crabtree is not trying to price a company. He is trying to keep founders from growing into a cash crisis, and his cash standard does that.

The book leaves the CEO with good numbers and a thin plan for the leadership team. Labor efficiency and segment data only change behavior when managers understand them and have a stake in moving them. Jack Stack’s The Great Game of Business completes that side, with critical numbers, open-book huddles, and a bonus plan tied to the same economics. Read Crabtree to choose the numbers and Stack to get the team playing to them.

For CEOs

• What was our pretax return on invested capital over the last rolling twelve months, using Crabtree’s definition of owner money plus sweat equity?
• Is our trade capital as a percentage of revenue above or below our net income as a percentage of revenue, and does that match how we plan growth?
• Do we hold two months of operating expenses in cash with nothing drawn on the line, and if not, what is the shortfall in dollars?
• Which of the three value plays describes our business today, and which one are we actually building toward?
• What growth bets did we make in the last year that were never named as launch capital, and what did each return?
• If an offer arrived next month at seven times net income, what replacement return would the proceeds need, and could we actually earn it?
• Am I paying myself a market wage for the role I really perform, and how does that change our true profit?
• Which management hires in the last two years have earned their keep at six to ten dollars of new revenue per dollar of pay?

For Teams

• Who on our team is direct labor and who is management labor under Crabtree’s whole-person rule, and do we all agree on the list?
• What is our record direct labor efficiency ratio on a rolling twelve-month basis, and what would it take to match it this year?
• Which customers, services, or locations produce the lowest contribution margin, and what would we change if we saw that data monthly?
• Are our sales incentives tied to revenue, gross margin, or contribution margin, and what behavior does that create?
• Which recurring expenses would no one miss if we stopped them for ninety days?
• Where are we billing by the hour in work we could package at a fixed price?
• What is the next profit target we would have to hit to justify the hires we are asking for?
• Which team members are in the training, chasing, or replacement zone, and what conversation does each zone call for?

1. Owner ROIC Calculation

Crabtree’s third rule says every business must earn at least fifty percent pretax return on the capital its owners put in. Most founders have never calculated the number because standard financial statements do not present it. Run this calculation once on the last three fiscal years to establish a baseline, then each quarter on a rolling twelve-month basis. It also belongs at the start of any planning cycle in which the company expects to reinvest profits.

How it works:

• Total the capital the owners have put in since founding, plus any years an owner worked below a market wage for the role, valued at the difference.
• Add retained after-tax earnings to arrive at invested capital at the start of each year.
• Restate pretax profit after charging every working owner a market wage for the role they perform.
• Divide restated pretax profit by beginning invested capital for each year.
• Compare the result to fifty percent. Note separately how much debt and how much cash above two months of operating expenses sit on the balance sheet, since both distort the number.

The leadership team can say what return the business earns on its owners’ money and whether that return is rising or falling. The next reinvestment discussion starts from that figure instead of from revenue growth.

2. Capital Signature Check

Crabtree shows that the interaction of receivables, inventory, payables, and deferred revenue decides whether growth produces or consumes cash. This check tells the CEO whether the company can grow continuously or must grow in base camp stages. Run it before setting an annual growth target, before changing customer payment terms, and whenever cash falls while profit rises.

How it works:

• Compute trade capital: receivables plus inventory plus work in progress, minus payables, accrued expenses, and deferred revenue.
• Express trade capital as a percentage of rolling twelve-month revenue.
• Express pretax net income as a percentage of the same revenue.
• If trade capital percentage is lower, the company is in the cash-free growth zone. If higher, estimate how far current cash and credit will carry growth before a pause is needed.
• Model the effect of one terms change, such as ten fewer receivable days or ten more payable days, on the gap between the two percentages.

Growth targets are set with a known cash consequence. The CFO and CEO stop being surprised when a strong sales quarter drains the bank account.

3. Launch Capital Ledger

Crabtree argues that growth bets fail quietly because they are never separated from ongoing costs. The ledger makes each bet visible and sets the profit increase it must deliver. Start it whenever the company adds people ahead of demand, launches a marketing push, opens a location, or hires consultants for a transition.

How it works:

• List every spend in the current year that was not needed to sustain the business at its prior level, including staff kept or added ahead of demand.
• Total the list as the year’s launch capital.
• Set the required increase in annual pretax profit at fifty percent of that total, and name the year by which it must show up.
• Review rolling three-month contribution margin each month to see whether the bet is pacing toward the target.
• At the deadline, compute the actual return and decide whether to continue, resize, or stop each bet.

Each growth initiative has a dollar target and a date. Leaders talk about whether a bet is paying back rather than whether a cost overran a budget line.

4. Labor Efficiency Baseline

The labor efficiency ratios are the book’s main management tool and the basis for hiring caps and raise ceilings. They only work if labor is classified consistently and measured on rolling data. Set the baseline before the next compensation cycle or the next request for headcount.

How it works:

• Classify every employee as direct labor or management labor using the whole-person rule. Anyone spending half or more of their time on what the company sells is direct labor.
• Strip payroll tax and benefits out of wages and track them as a separate pool.
• Calculate direct labor efficiency as gross margin divided by direct labor, and management labor efficiency as contribution margin divided by management labor, on rolling twelve months.
• Find the record value of each ratio in the company’s own history.
• Adopt the records as the standard. No new hire or raise in a group until that group’s ratio meets the standard for the quarter.

Headcount and pay conversations reference a shared number. Managers arrive with the ratio already calculated when they ask for a new hire.

5. Segment Return Review

Crabtree shows that the largest segment by revenue is often not the best investment. Reporting each product, location, or team at gross margin and contribution margin, then adding the capital each consumes, shows where to scale. Run the review annually and before any decision to expand a location, product line, or service team.

How it works:

• Choose the segments that match how the company sells: locations, divisions, service models, or major customers.
• Report each segment to contribution margin without allocating overhead.
• Add the trade capital and buildout or equipment capital each segment ties up.
• Calculate return on that capital for each segment and rank them.
• Name one segment to expand, one to fix, and one to reprice or exit.

Expansion debates move from which leader is most persuasive to which segment earns the most on its capital. Segment leaders see the numbers they control without opening every cost to discussion.

6. Replacement Return Test

Crabtree’s keep-or-sell test asks what yield the after-tax sale proceeds would need to earn to replace the profit the owner gives up. It keeps an attractive multiple from driving a decision the economics do not support. Run it when an unsolicited offer arrives, when partners discuss a buyout, or as part of annual exit planning.

How it works:

• Estimate the after-tax proceeds at the offered price, net of transaction costs and any earnout risk.
• Take the business’s current annual pretax profit after a market wage for the owner.
• Divide the profit by the after-tax proceeds to get the required replacement return.
• Compare that return to what the owner can realistically earn elsewhere. Crabtree uses eight to fifteen percent for real estate.
• If the required return is above fifteen percent, write down the noneconomic reasons for selling and decide whether they justify the gap.

Sale conversations separate economics from emotion. The owner can explain why an offer is or is not enough in terms a spouse, partner, or buyer can follow.

• Greg Crabtree’s Simple Numbers site, with current tools and the labor efficiency approach as his team now teaches it.
• Greg Crabtree on the four Simple Numbers measures, from his own blog.
• McKinsey on choosing between growth and ROIC, the public company research behind the growth versus returns tradeoff.
• John Mullins, The Customer-Funded Business, which Crabtree cites on growing from customer cash instead of investor cash.
• Greg Crabtree interviewed by Monkhouse and Company on labor efficiency ratio and launch capital.

• Simple Numbers, Straight Talk, Big Profits!, Greg Crabtree with Beverly Blair Harzog. The original book, which sets out the market wage, profit target, cash standard, and labor efficiency ideas this sequel builds on.
• Scaling Up, Verne Harnish. Includes Crabtree’s labor efficiency chapter and places it inside a full operating system for growth companies.
• The Great Game of Business, Jack Stack and Bo Burlingham. The open-book approach Crabtree cites as the alternative to budgeting, and the method for getting a team to play to the numbers.
• Financial Intelligence for Entrepreneurs, Karen Berman and Joe Knight. The statement-reading foundation a leadership team needs before Crabtree’s restated views make sense.
• Value: The Four Cornerstones of Corporate Finance, Tim Koller, Richard Dobbs, and Bill Huyett. The corporate finance version of the ROIC and growth argument, with the standard definition of invested capital.
• Beyond Budgeting, Jeremy Hope and Robin Fraser. The large company case against fixed annual budgets that parallels Crabtree’s target-first, value-based spending approach.
• Profit First, Mike Michalowicz. A cash-allocation discipline for smaller owners that pairs with Crabtree’s pay-yourself-a-market-wage and target-profit rules.