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Measure Productivity And Improve Profitability

Guest post by: brian bijdeveldt

Article Overview: It is said that you cannot improve that which you do not measure. A high percentage of business owners have no idea of the real productivity of their employees (or themselves for that matter). This article discusses some steps to remedying this situation!

Measure Productivity And Improve Profitability

Lack of productivity can be a killer for small to medium sized businesses. After all, if employees are not working hard, they are not making the most money for the business. They are collecting a wage, but they are not contributing in the way you would like.

Businesses that fail to measure and track employee productivity end up having employees that do not put in the effort they should in their job. That means sales are low but wages are high. You do not want to pay employees for work they are not doing, so you need to address productivity (read profitability).

First, you need to have a system in place that will measure your employees' productivity. You need to be able to look at the employees in an objective way and find out if they are being as productive as they could be. The key to understanding your business' productivity is metrics.

To evaluate employee productivity, you look at:

• How many employees are in the business
• How many full time and part time positions exist
• Your yearly turnover
• Your Gross Profit
• Your net profit
• How many hours in total are available for all your employees to work

This basic information is enough to start with.

• Divide your turnover by the number of F.T.E. (full time equivalent) employees to arrive at how much revenue is generated by each employee in your business.

• Calculate the total hours that are available to work for "production" employees. By this I mean only calculate the hours for employees that produce goods,services or sales, administrative and management staff are not included. Divide this value into your Gross Profit figure giving an hourly Gross Profit Contribution figure. Include your own hours if you are actively producing goods or services in the business. This will give you an indication of how much each employee contributes to the business in Gross Profit.

• Calculate how many hours per year the revenue earning employees are available to work. This is after taking into consideration annual leave, sick days, public holidays etc. Most businesses come up with around 45 weeks a year and 38 hours per week.

• Multiply 45 x 38 giving say 1,710 hours per employee. You need to now define how many of those hours are spent producing revenue for the business. So if an employee actually spent 1,200 hours per year in revenue generating activities you would divide their 1,710 by 1200 giving approximately 70% productivity.

Say you had 15 staff - 5 management and administrative and 10 production workers. You would add up the 10 production workers total available hours per year (10 x 1,710 = 17,100). Let's assume your Gross Profit for the year is $600,000. At 70% productivity this would mean the average H.G.P.C. (Hourly Gross Profit Contribution) would be $600,000 divided by 12,000 or $50 per hour for each employee.

You now have a reasonably sensitive Key Performance Indicator to monitor and improve. This can be measured as an average overall and for each individual employee. The focus would then be on reducing wasted time in rework or poor process and increasing the amount of time employees spend on revenue generating activities.

Of course this is a very simplified example; there are quite a few variables that need to be taken into account to provide figures that you can base decisions on.

After you know what the productivity for your employees is, you can then start making long term goals. It is likely that you are not getting the productivity out of your employees that you would like. At that point, what do you do? You could fire the entire staff. In reality, that is not a great idea. It will take you more time to rehire and retrain staff, and also, if you do not fix the productivity problem with your current staff, you will only have the problem once again. Your productivity issues are cultural and guess who creates the culture in a business?

Setting goals and tying performance to well thought out rewards or incentives will get productivity on track. You can do this by following a simple process.

1. Define / document critical processes and systems in your business

2. Draft a rewards program and have a meeting with your staff.

3. Set productivity improvement goals in that meeting, and time lines to meet the goals.

4. Communicate the incentives for meeting the goals.

5. Implement and have a tracking/review process in place to measure results.

Now that you have your plan in place, you need to know how to monitor it and how to keep it running smoothly. The first thing you want to do is motivate your employees. Offer them an incentive for doing well with the plan. It does not have to be purely financial rewards that are offered - time off and training opportunities rate very highly with employees as incentives.

Also, make sure you are available for them. If they have a question, have an open line of communication in place. Your praise and positive reinforcement is essential when employees are reaching targets and contributing. By the same token, if you are not pleased with what they are doing, be sure to communicate to them what needs to be adjusted.

The more employees you have the more potential there is for improving your bottom line by leveraging productivity gains.

Knowing your employees (and therefore your business') productivity levels is the key to running a successful business. Most companies do not get the most out of their employees. Remember. "What gets measured gets done".

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Article Tags: employee productivity, measure productivity, measure productivity, profitability



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