Measuring Productivity Can Lead To Bigger Profits

By September 17, 2015Productivity

Measuring Productivity

Productivity MeasurementI won’t mince words here. You need to monitor and measure your productivity both personal, and employee, as it has a huge impact on how your business performs. Whether you’re a one-person business or have 100 employees, understanding productivity and its impact on the bottom line is critical.

Of course the difference between a 10% improvement on a one-person business as opposed to a 100 person business is huge. Some businesses believe that measuring productivity is too difficult and therefore avoid doing so. They instead focus on generating more business and tinkering with various aspects of the business such as the cost of materials, wages and overheads. Of course these activities will generate benefits in various areas.

What is missed by ignoring productivity measurement is that by increasing throughput of goods and services may incrementally increase the cost of producing those goods and services, impacting the bottom line.

When I talk about productivity I mean effective use of time and resources, not necessarily efficiency. The key to improving productivity is to firstly set up the structures you need to measure it. Monitoring and measuring productivity then enables you to actually improve it by systematically analysing the various inputs and outputs of your processes.

Take for instance a business that installs air-conditioning units, employing 10 staff. A simple way to begin measuring productivity in this business would be to firstly workout available billable hours. If each employee works 40 hours a week that gives us 400 hours per week.

Next we would collect data from time sheets they fill out in the field on how many hours it took them to complete their work. We would take all the time sheets and add them up at the end of the week and then divide this figure by the available billable hours. This would give us a rough idea of percentage utilisation. Let’s assume that each of the staff are charged out at $80 per hour  giving us a potential revenue of $32,000 per week.

Now course no one is 100% productive. We must factor in administrative time and down times of say 20 to 30% for this to be realistic.So let’s say that targeted productivity is 70%. This now gives us a weekly target of 280 hours billable time at $80 per hour, or $22,400 per week.

If we found that actual billed time for the week was 210 hours, this would mean our productivity is 75% out of a possible 100%. This knowledge would then drive us to look at improvements in our pricing model, operational processes, training and marketing. By breaking down and measuring each component of your operational processes you can make small step improvements that can lead to big results.

There are many other areas within a business where productivity can be improved. I have chosen to show an example of employee productivity improvement as wages, in most businesses, feature as one of the largest expenses. Another area to look at in your business is your customer database.

By analysing your database and segmenting your customers into A, B and C types, based on revenue, profit and overall ease of servicing, you will see where to put most effort to be the most productive.
Switching your focus from going after lots of C-type clients to going after a few A type clients is a more effective use of your time and resources.

This approach will also reward you with higher revenues and profits for less effort. As I said, measuring productivity is important even if you’re a one-man/woman business. The bottom line effects of small productivity improvements are magnified as your employee numbers rise!

By all means raise your prices and chase more business, but don’t forget to measure just our productive you are with your employees and resources.

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