The Powerful Financial Case For Increasing Business Productivity Levels

Before you start your improvement program, find out your current levels of productivity. This may sound obvious but this is not always done at the beginning of a productivity improvement process. Productivity can be measured by individual machines or groups. The process of measurement remains the same.Make sure that your measurement period is over a reasonable time frame without any abnormal highs because of large continuous production runs or lows because of down time or an unusual run of rejects. If there are seasonal variations in workload, make sure that your measurement is not in a peak or a trough.This initial measurement is your starting place. It is the point from where your business is moving. This starting point enables your business to progress and represents where you have reached.At the time of measuring your current levels of productivity, it is wise to firmly establish exactly the levels of your fixed and variable operating costs. This may create some surprises as well.At this stage, you will have established your current levels of productivity and the level of your fixed and variable costs. You are now in a position to consider the potential difference to your net profit with a change in productivity. Let’s use the following simple example and you can see how changes in your business productivity can dramatically affect your profit.Revenue = 100Variable costs = 40Fixed costs = 50Profit = 10Now Increase Productivity by 10%Put in the new figures and see how the profit climbs.Revenue =Variable costs =Fixed costs =Profit =When you raise productivity by 10%, you effectively produce 10% more with the same fixed costs. Variable costs may rise a little bit but they only seem to rise as a proportion of the increased productivity. Yes, you got it right! If you increase productivity by 10% your revenue will rise by 10%. Your variable costs may rise by 10% taking them up to 44. Your fixed costs and your overheads will generally remain the same. This means that your profit will rise to 16, an increase of 60%!Most businesses would really appreciate a 60% increase in profit. This is a very simplistic view of the whole business equation, but at the least, it gives you some idea of the value of increasing productivity and the scope for increasing profits. Now you can see that increasing the productivity of your business by 10% produces great financial benefits and there may be scope to increase the productivity by much more.Put your own figures in the equation and see the effect on your bottom line. This may provide powerful motivating forces for you to embark on a program to increase your productivity.ExampleLet us use an example from a very small business. You have a one chair men’s barbershop and there always seem to be people waiting for a haircut. Your net profit is 15% of revenue. Over the year you average twenty haircuts every working day. Your shop is open 235 days every year. You make a conscious decision to use electric clippers more than scissors.After some experimentation you find that instead of twenty haircuts a day you start to average twenty-one haircuts a day. (An increase of 5%)Using this simple example, here is the result.Before Revenue = 100Variable costs = 55Fixed costs = 30Profit = 15After Revenue = 105Variable costs = 55Fixed costs = 30Profit = 20As you can see, the revenue has increased from 100 to 105 (5%). The costs have remained the same although there may be some tiny increase in variable costs because of maintenance on the clippers and some very small increases in power charges. However, the big change has come in profit. It has risen from 15 to 20, an increase of 33%.I don’t think the barber would have worked very much harder but his bank balance would have certainly improved. Using this example, you can see that for a small increase in productivity (5%) there is a substantial increase in net profit (33%). This is an example of the leverage power of productivity to positively affect your bottom line.Any business that is serious about making more profit should consider how to improve their “people productivity.”