How Do You Measure Efficiency
in Your Business?
Take a Closer Look at Different Options
AMY ROSS, MANAGER — BRAND AND PRODUCT MARKETING
You’re probably familiar with the quote, “If you can’t measure it, you can’t improve it.” Did you know that this concept, attributed to Peter Drucker, was actually taken out of context from another quote? In his book, The New Economics, American statistician W. Edwards Deming wrote, “It is wrong to suppose that if you can’t measure it, you can’t manage it — a costly myth.” Those few extra words make quite a difference in meaning, don’t they? Continue reading to take a closer look at different ways to measure business efficiency. Of course data and metrics are important when you’re trying to improve the management of your company. Dr. Deming realized that although not everything can be measured, it still must be managed, and businesses need to make decisions about those things too.
Efficiency matters: “Getting more — more units produced, more sales, more revenue — for less — less waste, less labor, less cost — is every business leader’s dream.” — Billie Nordmeyer
In this blog post, we’ll take a closer look at eight different ways to measure efficiency. Companies often use multiples methods and metrics, depending on what is being measured and the type of data available. Feel free to use the comments section to let us know your experiences (good or not-so-good) with the approaches you’ve taken.
Process: Repetitive business activities that could be optimized using automation, increasing operational efficiencies.
Production line: The efficiency of a production line might be measured by the total number of units produced per hour, which is sometimes referred to as “throughput.”
Marketing: Marketing activities might be measured by customer acquisition cost or return on investment (ROI) for a campaign.
Revenue per employee: The productivity of labor can be measured by dividing total revenue by the number of employees. A company with a higher revenue-per-employee rate is generally a more operationally efficient business.
Net profit margin: All businesses should know this key metric for their business: net profit, after taxes, divided by total sales. High net profit margins indicate good business efficiency.
Accounts receivable turnover: This refers to how quickly you are paid by those who owe your company money. It can be measured by dividing total net sales by accounts receivable, which is the number of receivables paid during a fixed period. An efficient business has a high turnover, meaning sales are quickly converted to cash.
Accounts payable turnover: Conversely, accounts payable addresses how quickly you pay suppliers. This is measured by the cost of goods sold divided by accounts payable (the number of accounts). The higher the number, the more you’re unable to pay suppliers on time or choose not to. Paying suppliers on time leads to business efficiency and fosters strong supplier relationships.
Inventory turnover: Product-based businesses often use a ratio that shows how fast it takes for inventory to be sold. Divide the cost of goods sold by the total inventory in one accounting period.