How to Keep Your Business Efficient
In business management, efficiency is a term typically used to describe the relationship between a company’s required production resources, or “inputs,” and its output. Efficiently-run businesses are able to produce higher rates of output relative to input; conversely, inefficient businesses produce fewer outputs relative to inputs.
While straightforward from a conceptual perspective, the actual practice of measuring and improving a company’s efficiency can be quite a challenge for business managers. If consumer demand is high, inefficiency can go unnoticed, masked by variables such as a product or service’s marginal benefit (defined by the consumer) or supply and demand (defined by the market). In these cases, market conditions create what looks like success – strong revenue performance — but actual operating performance may be a different story.
A company may not recognize operational inefficiencies until the business’s financial performance begins to decline for other reasons, such as decreased consumer demand or currency fluctuation. At this point, the company may be inhibited by workers’ complacency to change their processes to new ones, even though they improve the overall workflow. This is why managers should exercise the practice of measuring and managing company processes regardless of existing financial performance.
5 steps to improve company efficiency
Companies should begin addressing opportunities that could improve efficiency before problems become evident, to protect themselves during turbulent economic conditions. Like any management initiative, finding an appropriate starting point for diagnosing and improving business processes is crucial.
If you have read our prior blog posts, you’ve probably noticed our affinity for visually diagramming current state conditions, so we can model and implement improved future state conditions. Here’s how we look at business efficiency.
- Diagram: Because company departments are interdependent, it’s generally helpful to diagram the movement of production resources and activities across various touch points, which we collectively refer to as a company’s “value chain.” For simplicity, we have broadly categorized the individual touch points as where one department hands-off to another (e.g, Logistics, Operations, Marketing and Sales and Customer Service).
- It is also beneficial to diagram the key processes within a company in order to easily identify areas where inefficiencies are more common. As the “current state” diagrams are constructed, you can identify and remove any repetitive or non-value added current steps currently performed while creating the “future state” diagram.
- Segment: Next, by using historical financial data that can be found in a company’s current and/or prior income statements, we recommend segmenting costs by touch point as a means for comparison.
- Measure: Using these data points, compare costs as a percentage of revenue across periods and try to understand any fluctuations from the norm. Supplemental information such as payroll, inventory and other management reports should also be used to help explain why expenses might reasonably vary between periods.
- Benchmark: To better understand the source and degree of inefficiencies, it’s best to compare to industry benchmarks. These analyses provide detailed cost comparisons versus peers, as well as industry trends that could help improve operations and potentially create a competitive advantage within the marketplace.
- Forecast and Track: Using the company’s past performance and industry benchmarks, you can design realistic “future state” performance metrics and track actual performance on a consistent basis. This will help you measure the impact of improved productivity standards on the overall efficiency and financial performance of the business. We recommend weekly meetings for various segments to ensure ongoing compliance, and monthly management meetings to help ensure accountability.
The key is knowing what’s happening and why.
Inefficiency is not always intolerable. Various factors, such as a product’s lifecycle (i.e., pre-launch, growth maturity or decline), might affect a company or business unit’s efficiency, and in some cases, justify inefficiency. For example, while manufacturing a product in a beta-stage, a company may test many different production techniques in order to identify best practices. During this stage, with limited labor resources, other processes may become less efficient for a specified amount of time. In this case, extra-ordinary productivity standards should be developed and annotated so that management (or other audiences) understands these acceptable discrepancies.
Contact us to learn more about how you can assess and improve your company’s efficiency.
Ian Goldberger, CPA, is a Business Consulting Services Principal, Transaction Advisory Services at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.
James Wolcott is a Business Consulting Services Principal at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.