Assess Organization-Wide Productivity to Maximize Profit

The basics of business are not very complex. Institutions, organizations and individuals have a virtually insatiable need for “stuff.” The concept of business is simply to “make the stuff” and sell it to them for more than the costs you incur. Similarly, the basics of business management are pretty simple. Find ways to continually sell more at a profitable price and cost structure.

Oversimplified? I don’t think so. There’s value in keeping a focus on the big picture. Organization-wide productivity analysis is a “big picture” analysis of the overall productivity and profitability of a business. It’s easily performed using information that’s readily available. Just gather the following:

Annual Revenue

Annual Gross Profit

Annual Operating Profit

Number of Employees

Total Annual Payroll Expense

Total Annual Non-Payroll Operating Expense

Once you have these data, just make seven calculations:

Revenue per Employee

Revenue per Payroll Dollar Spent

Revenue per Non-Payroll Operating Expense Dollar Spent

Gross Profit per Employee

Gross Profit per Payroll Dollar Spent

Gross Profit per Non-Payroll Operating Expense Dollar Spent

Operating Profit per employee

Here’s an example. Stunner Rumblers, LLC manufactures noise machines. They’re like Harley-Davidson motorcycles without the wheels. Just put your Stunner in the back of your pickup or park it in any pedestrian area of your choosing and for one-fourth the cost of a Harley you can disturb the peace just the same. Stunner’s owner, Curtis Stunner, gathered the following data on his business:

At our suggestion, he then made the seven calculations:

Now these calculations by themselves don’t reveal a lot, but put in context they’re immensely revealing. Two contexts, really — historical/trend and peer comparison. So we sent Mr. Stunner back to gather prior-year data. We then loaded it into a spreadsheet, made the calculations and created charts to provide a graphical depiction. See the results at the bottom of the article

The table and graphs clearly show the progress Stunner has made the past five years. The business is really hitting its stride. And by maintaining these data in future quarters and years, Curtis will be able to keep a close watch on the productivity of his business. Stunner should share these data regularly with his employees and post the table and graphs on the wall. Make improvement a game that everyone plays.

Peer data are essential

Just knowing your own performance can become immensely valuable. That is, if you put it to use in an effort to improve performance. But a critical question is, what are other companies similar to yours achieving? Maybe if you know that other firms were operating more productively, you’d be even more focused on improvement? Maybe it’d give you more confidence that you could improve? Maybe even vastly improve?

To be sure, Stunner would not be able to find another company that makes the same products, but virtually any specialty manufacturer of gas-powered consumer recreational equipment would provide a meaningful comparison. And Stunner would want to compare itself to others of similar size. The best place to look for these types of data is your trade association.

Yes, there are other ways to assess organization-wide productivity, but the revenue and profit-based methods are the easiest. This is because we all already track revenue, profit, employee counts, labor and operating expense. Furthermore, revenue and profit get us close to that king of kings — cash.

Productivity can also be assessed using non-financial means, such as the number of units produced per employee per hour. We’ve chosen to use this article to focus elsewhere.

One could also assess productivity directly by simply observing and recording the percentage of time that employees actually work as opposed to sitting idle, fixing a problem, taking breaks and handling personal matters. The next issue of The Business Owner will address this topic — work sampling.

Click Here for Full size of Chart

Click here for Full size Graph