When your newest facility costs $35 million to build and wins a ProSales Excellence Award for best new store, it’s obvious that Ganahl Lumber doesn’t mind opening up the checkbook to achieve certain objectives. But if you talk to Peter Ganahl about spending, it quickly becomes clear that when and whether the money flows depends on a key issue: Profitability. It’s a philosophy that’s particularly valuable when you want to help your business survive a downturn.
For instance, while other dealers focus on labor costs as a percentage of revenue, Ganahl watches labor dollars as a percentage of gross profit. In this Southern California company’s case, the labor-to-GP percentage typically is at 30% to 32% at the high end of an economic cycle and 36% to 38% at the low end. For this measure, Ganahl excludes the cost of benefits.
“But the numbers we use as a guide to having the appropriate head count are the labor/GP% inside each of the yards,” Peter wrote in a recent email. (The company has 10 locations.) “These numbers are little more than 2% less than the company-wide numbers.” That’s because labor costs for centralized services like HR, accounting, IT, and purchasing amount to about 2.2% of gross profit.
Crossing the upper or lower limits doesn’t automatically trigger a response to add or cut personnel, but “it is a much-honored guide,” Peter said.
“We set high profit standards for all the yards, and the management teams running those yards know how important the labor component into hitting those numbers,” Peter added. “So they are always looking at their labor/GP% as a confirmation or a warning—wherever we are in the cycle.”
Labor/GP% isn’t the only metric Ganahl uses, but it’s interesting to note that, of the ones Peter mentioned when prompted, five out of the first six tracked profit: Operating profit, gross profit percentage on various types of sales, gross profit per various type of salesperson, and sales and gross profit for each product category. Only footage shipped broke the pattern.