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Business Productivity – Why It Is Important and The Best Practices to Increase It

The difference between a great business idea and a great business is in productivity. You can have the best idea for a business in the world and it will still fail because you or your team were not productive or efficient enough. This is one of the reasons so many startups fail – they have a great idea but lack either the skill or the organizational capability to execute this idea well. After their eventual downfall, a less creative but more industrious company may make a fortune on that business idea.

If you don’t want that to be the scenario for your business, you need to find ways to improve productivity – either your own productivity or the output of your company as a whole. Join us on this 10 minute read to explore what productivity is and how to improve it to achieve success.

Business Productivity: definition

Business productivity is defined as the ratio between the volume of inputs and outputs. While the output is typically a measure of how much money a business or an economy generates, the inputs can differ depending on what type of productivity you want to measure.

The most useful ways of defining productivity for this article are the ratio between gross sales and labor or your firm’s capital.

What is productivity in business?

For businesses that are involved in manufacturing, productivity can be defined as a ratio between the input and the output volumes. But since only 10% of the US economy is manufacturing, most people reading this article are probably not running a production facility, it’s not the best way of defining it.

For a company in the service sector, business productivity can be defined as the ratio of sales and the hours of work billed. Say your company made $50,000 this month and you paid your employees for 1600 hours of work. This puts your productivity at $31 per hour billed.

This way of defining productivity is useful but is sort of limited as it heavily depends on the productivity of your marketing and sales departments, not just the employees who provide the services.

Another way to define productivity in business is by how many tasks are getting done per day and how much time projects are taking to get finished. This, however, is a rather subjective definition of productivity as different organizations would have different criteria of productivity.

Why is productivity important to business?

Often, entrepreneurs tend to focus on implementing new business ideas or signing new clients instead of fixing the productivity issues in their business. This is a valid way to increase the bottom line of a company, but ultimately, you’re shooting yourself in the leg by underestimating productivity’s importance in business.

If the company does grow and the productivity issues do not go away, you can be looking at tens of thousands of dollars in overhead and unnecessary expenses. Improve the productivity first, and you will see an increase in profits and employees’ work hours without even bringing in new business.

Factors affecting business productivity

The definition of productivity differs slightly depending on what you’re trying to measure because there are several factors influencing productivity. Most academic sources list these eight factors as the main components of productivity:

  • Labor
  • Organization
  • Tools
  • Materials
  • Time
  • Capital
  • Location
  • Logistics

However, not all of these affect every business in the same way. This is why it’s generally accepted that there are different types of productivity. Understanding each of them may help you improve productivity at your company better as each type has a slightly different set of factors influencing it.

Types of productivity in a business

  • Labor productivity 

Labor productivity of a country is a ratio between the country’s GDP and the total number of hours worked. You can calculate the labor productivity of your business by dividing the sales numbers by the hours billed.

  • Capital productivity

Capital productivity is a measure of how well your financial investments are turning into profit. The most common way of calculating it for a company is by dividing the sales numbers for the month by the working capital.

  • Material productivity

The third type, material productivity, is a ratio between the material inputs and outputs taken in their price in the local currency. However, this type of productivity is probably not going to be that useful for most readers as their business probably involves providing services or sales of digital goods.

Total factor productivity is a slightly difficult measure, but one that tries to describe relationships between the total economic output and multiple factors that may influence it. 

How to measure productivity in a business

Measuring productivity can be hard at times, even governmental statistics bureaus admit it. If you want to go the traditional way, use the formulas that calculate how capital and labor inputs measure up with the sales numbers.

To measure labor productivity, track the number of hours across your organization and divide the sales figure by it. To measure capital productivity, you’ll need to divide the sales figures by the working capital.

Working capital is the difference between your business’s liabilities and assets. Apart from debt obligations and capital investment, the assets and liabilities include accounts payable and accounts receivable.

Let’s say your business’ monthly liabilities add up to $20,000 and the assets to $30,000. This puts the working capital at $10,000. If the monthly sales numbers were at $50,000, this would mean the productivity is 5%, which isn’t that bad, but certainly could use some work.

With this approach, you can see that increasing sales isn’t the only way to increase productivity. You can also work on improving the working capital by minimizing liabilities and maximizing assets.

To measure your own productivity or the productivity of your employees, you’ll need to rely on more subjective measures. The first way of measuring it is by dividing the total amount of hours worked by the number of hours you’ve spent on actually productive tasks. That, however, requires a great deal of honesty and willingness to track every hour of your time for a week.

That may not be entirely possible if your employees don’t trust you that much. To track employees’ productivity, use a task management system like Trello to see what employees tend to underdeliver on their tasks.

What can a business do to improve its productivity?

The problem with increasing productivity in a business is that every business is different. The strategies that work for one business may not work as well for another, especially if there’s a significant difference in size and line of work.

The best thing you can do for your business is to analyze its faults. No solution will be effective until you get the diagnosis right. This may take a while and require you to implement new processes that are going to take a lot of your time or hiring a third-party auditor.

That said, there are some areas where many businesses underperform and some commonly accepted solutions. Here are the nine ways you can improve your business, for both large and small companies.

Ways of improving productivity in a large business

The strategies to increase business productivity for a large organization will be quite different from strategies that would work for a small company. If you’re trying to improve the productivity of a team of people, here’s what you should focus on.

Find workflow flaws

The biggest killer of productivity in a team is miscommunication and poorly planned workflows. You may have to do a lot of research and planning to fix a seemingly small issue but in the end, it will be saving you hours of labor.

The first thing you need to do to fix a workflow flaw is to find a workflow that needs fixing. If you or your employees have noticed that a particular department or type of task is constantly causing trouble, you know what to focus on. When you haven’t got a clue for the starting point, try asking employees what types of workflows they struggle with.

With that done, start mapping the workflow. Create a chart that has all the processes and the people that make this business process happen. Make sure to map out connections between people, e.g. one person has to transfer the materials to another to make the process flow smoothly.

It’s very important to draw that chart according to how it happens in your team, not how you want it to happen ideally. To do that, conduct interviews with your team members, but make sure to emphasize the fact there would be no punishments for disclosing failures.

When you have found bottlenecks in the business process, create a solution — this may include automatization, employee training, or structural changes to the workflow.

Invest in employee training

Employee training is another big factor in improving productivity. If investing in a paid course or hiring a consultant to train your team means they will have an easier time doing productive tasks, it’s worth it.

Hiring accomplished, self-motivated experts is a great solution as well, but in many cases, training the people you already employ may be cheaper. On top of that, you’ll build loyalty with the team.

Improve employee comfort

A 2016 study found that improving the comfort of your office may result in up to a 14% increase in business productivity. How do you go about that is up to you and largely depends on the type of office space you have. Some suggestions are investing in standing desks, a comfy kitchen, and space for the employees to relax.

Give power to employees

Employees, especially those from the younger generations, increasingly want to have some say in the office environment. To share power with them, you can delegate a budget or office improvement and let the employees vote on how it gets spent.

Another major thing you could implement is to let them work from home a couple of days a week. Switching to remote work completely may prove to be unproductive for most companies, but this Stanford study shows working from home may improve productivity by up to 13%. Giving your employees a bit of wiggle room on whether to work from home or from the office may be a good measure for both productivity and loyalty.

Business productivity tips for small businesses

Small businesses and solopreneurs often face quite a different set of problems. Improving productivity in a small business, therefore, involves a more personal approach.

Goal setting

The first thing you need to do to be satisfied with your personal productivity is to set the expectations correctly. When you’re fired up about your business, it may seem that finishing three projects in a month and signing four new clients with a team of ten people is within the realm of possibility. For most people, it’s probably not.

Analyze your team’s performance and set goals they can accomplish. Then, you won’t feel bad about the productivity and won’t lead yourself and your team to burnout.

Planning

Entrepreneurs who work with a small team and handle some operations of the business themselves often think that they should be the most productive person in the company. This leads them to burden their day with tasks that are impossible to complete even in 12 hours, let alone an 8-hour workday.

This kind of unrealistic expectation isn’t productive in the slightest. Instead of stuffing your day full of work, pick a couple of tasks that are absolutely crucial for your success. Make them the priority and add a couple of other important tasks to complete afterward.

If you’re the type of person who will work themselves to the point of burnout when they’re passionate about something, it may be wise to add some downtime to the daily to-do list as well.

Delegation

Fearing delegation is what kills a lot of small businesses. You as a business owner may feel like a particular task on the project requires so much perfection only you can do it. It may be true in some cases, but in most, it’s not.

Learn to trust your team and delegate some duties to them, this will free up your day for the most crucial tasks your business needs to succeed.

Tech productivity solutions for business

Not all productivity problems can be solved by delegating your responsibilities to employees or purchasing a comfy chair for the office. Some require implementing a new technical solution that will help you and your employees focus on the tasks that really matter.

Automation

Automation is a great solution for most businesses. You can automate support with chatbots to let your employees handle only the toughest problems of your clients. You can also automate the majority of the sales process: creating new leads, assigning them to available sales reps, and automatic replies can save you tens of hours each month.

There’s no single answer to what’s the best productivity software for small businesses, you’ll probably need more than one tool to automate your processes. If you’re going to be serious about automation, give these business productivity tools a try:

  • HubSpot for lead management
  • MailChimp for email marketing
  • QuickBooks for billing
  • Zendesk for support
  • Coupler.io for analytics integration

Analytics

Automation is a great way to save your employees’ time, which will increase their labor productivity quite a lot. But if you really want to bring structural changes to your organization that will improve business productivity even more, you need to get serious about analytics.

There’s no limit to what you can analyze, from sales and conversion numbers on Google Analytics to labor productivity on Trello. To bring this all together, use an importing solution like Coupler.io and import all the data from different sources to Excel, Google Sheets, or BigQuery.

For instance, you can export Trello to Google Sheets, Trello to BigQuery, HubSpot to BigQuery, and so on.

From then on, you’ll be able to run any type of analytics to find trends and correlations in the data. Use the findings to improve important business processes and make workflows more efficient.

Improving business productivity is a long effort

The most important advice you can get about improving productivity in your business is not to treat it as a one-off thing. You probably won’t be able to fix every issue in your business the first time you try. Treat improving business productivity as an ongoing process.

Dedicate some of your time each month to find inefficiencies in your business and improve them. When you introduce change that’s going to increase business productivity, use analytics to track how well it’s performing.

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