What is Efficiency and Productivity Analysis?
Efficiency analysis is used to measure a company’ productivity. It involves measuring a company’s efficiency in using its own resources to generate revenue. There are key efficiency ratios companies can use to analyze their own level of efficiency and its impact on their revenue and profit growth.
Examples of some efficiency ratios and analytics are:
Asset turnover ratio – indicates how many dollars of revenue your company generates for every dollar of assets used to generate that revenue. It is calculated by dividing your company’s revenue by its total assets. Generally speaking, asset turnover ratios in the 0.5 to 2.0 range are considered typical for most businesses.
Employer and employee productivity – Profits are not cash. You need profitable sales to generate positive cash flow to keep your business growing.
How do you know if you are as productive as you can be?
How much profit are you generating per hour from the work you are doing on a daily basis?
Are you productive enough?
Are you paying yourself more than you are generating in profit?
One way to answer the above questions is to look at the following analysis:
Operating Profit/Hours Worked = Net Profit per Hour
$50,000/2,016 = $24.80/hour in profit generated
Key to note in this example, is that the $50,000 annual operating profit was generated by working a total of 2,016 hours annually – which is just 40 hours/week (most business owners work more than that). The current working environment for this business owner is producing just $24-$25.00/hour in profit for the company – if he is paying another employee or paying himself more than $24-$25/hour in salary, he is not going to be profitable over the short or long term.
This is the highlight of financial analysis – even though this example has a potentially negative outcome, if you, as the business owner is aware of this, you can then strategize to make the changes required to turn this around. See the example of an efficiency analysis we did for one of our clients several years ago.
Productivity and Efficiency Review & Analysis
A small graphics design company was having trouble turning their revenue into profit, which kept them from investing in the company’s future. The staff was small, so the owner was wearing many hats (too many hats!). The company had great clients, a strong reputation and robust revenue – but the owner could not figure out how to monetize enough of these strengths to realize and maintain a strong, consistent profit.
We gave the owner the task of monitoring each of his workdays for one month, detailing each task he performed and the time he spent to perform that task. As we had suspected, the results of this analysis were eye-opening to him as he realized he spent 50% of his working day on administrative, non-revenue generating tasks. He was the highest revenue generator in the company but was working the least number of hours on revenue generating work! He had a small staff – 1 full time and 1 part time graphics designer. He realized that his employee make-up and his need to “run his business” was killing his profitability. The analytical chart below shows the results of our analysis and recommendations for change:
Three months after completing this analysis, revenues grew between 10-15% because the Owner increased his daily billable work time from 36% to 65%. Profits were then able to increase substantially – from 29% of total revenue to 35% of revenue during the same time period – even with the hiring of an administrative employee!