How Efficiency in Your Small Business Increases Profitability

Small business owners have a lot on their plate from before they even start trading, and the pace of things won’t slow down anytime soon. Amongst all the hundreds of decisions to be made each day, plus planning, networking and working on your business strategy, it can be a challenge to maintain your grip on every aspect of your business and be putting the most into it. To determine what you need to prioritize, you should ask yourself how what you’re doing will affect your profits. That is the driving force and ultimate goal of business, to make money, so it makes sense to be prioritizing all those activities which will increase profitability. One of the most important foundations of profitability is efficiency.

What is efficiency?

It’s a word that gets thrown out a lot, not just in business but by other organizations, and governments too. In simple terms, it means getting the maximum output for the minimum input; or achieving the best results possible by the quickest and most straightforward method. It is equated with saving money, so if a manufacturing process is made more efficient by the use of different settings on the machinery, the business will be able to make more products, or reduce the number of below standard products coming through, and therefore save money. But savings are not the only important facet of efficiency; it’s also about finding the balance between saving money and accomplishing tasks effectively. It wouldn’t be efficient, for example, to try and run your business with too few staff. This is because although you would be saving one person’s salary, the mistakes, incomplete work and the effect of stress on your remaining staff as a result of having to take on extra work will cost you more in the long run than the expense of retaining a team member.

Understanding efficiency

It’s a concept that some business owners and managers understand implicitly, while others struggle to see where that all-important balancing point is. One reason is that you might have a fixed idea of how things should be done is having a resistance to change that is holding you back from making sensible efficiencies. For instance, say you invested in an IT system a couple of years ago when you first started, and this system was budgeted to last for three years before requiring a complete upgrade. It’s only been two years, but the system is struggling to cope with advancements in technology such as your supplier’s IT systems. Maybe the staff, or your IT support team, have suggested replacing the system earlier to enable the business to take advantage of all the new functionalities which have been developed in those two years. When you hear this suggestion, you think back to how much time and money was invested originally, and maintain your position that the IT will do another year.

Another reason is that you might not be able to see the benefits offered by changing certain functions in your business. If you run a business providing tax advice, you may have been using the same software for some years, and as it is still functioning perfectly adequately, you can’t see any reason to change. However, if you invested in a new system such as one from ultimatetax.com, you could save so much time on each client’s account that you would quickly recoup your investment, and be able to market yourself as one of the most efficient tax services around. What is holding you back here is vision, and to be a genuinely successful business owner this is a skill you will need to develop.

How vision enables efficiency

Efficiency equals change; sometimes small, e.g. rearranging the desks in the office after a time and motion study; or large, like installing new IT systems or undergoing staffing changes. The most vital factor in managing efficiency measures is having the vision to recognize when they may be necessary, and to evaluate the benefits accurately. Every proposed efficiency should be considered, but you need evidence to back up the claimed benefits and not just take what someone says at face value – especially if they’re trying to sell you something!

If you are a visionary manager, you will know that change is an inevitable and necessary part of running a business, and you’ll not only be open to suggested efficiency measures, but be actively seeking them out. To have vision, you need to be open-minded, but recognize the importance of evaluating the evidence for any change. By adopting this approach, you will be best placed to take advantage of effective measures to increase efficiency, while avoiding falling victim to schemes that sound reasonable but turn out to be costly and ineffective.

How efficiency increases productivity

Productivity is another term that is mentioned on a constant basis in business literature. To achieve optimum productivity, you need the most efficient systems and the most effective strategies. In combination, this will enable your business to maximize its output and achieve the best results for its efforts, i.e. be productive. Efficiency is clearly a key component of the productivity model, and therefore needs to be considered as an essential and ongoing part of your own appraisal of the business. If your salespeople are doing a sterling job creating leads and making conversions, then they are performing effectively; but if they could be doing more and are being hampered by onerous amounts of paperwork, for instance, then their work patterns are not efficient, and your productivity will be below where it could be.

When you’re considering the importance of efficiency, look beyond the immediate effects of saving ten minutes a day by changing how you process invoices, or installing a networked printer. Analyze what that time saving represents in terms of what your staff or yourself are then free to do instead. If the time saved enables your staff to secure two more sales per day, then you can calculate how much extra profit you will have made. Compare this to the cost of the investment, and you will have evidence to support the efficiency measure, simple as that.

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