What is your labour efficiency rate?
Running a business comes with many different aspects to consider and one of the most important is knowing the numbers. A business that is making money is able to stay afloat. There is more to running a profitable business than simply setting a price for the product or service that is being provided. There are a number of factors to ensure your bottom line is one that works for you and your business. If you employ staff to assist within your business then one of the factors you need to consider is your labour efficiency.
Monitoring your efficiency rate and calculating your bottom line means that you are able to implement changes within your business that will help it to grow and succeed. By having a full understanding of the position of your business; as a business owner, you will be able to make educated and knowledgeable decisions to improve your overall financial position.
What is labour efficiency and how do you measure it?
The bottom line of any business that employs people to make things or provide services will be heavily influenced by their labour efficiency. Simply put, labour efficiency is measured by the number of productive hours divided by total hours worked.
It is unrealistic to think that because someone is employed for a set number of hours that they will be able to use every one of these hours being productive. That is why working out your labour efficiency comes in handy.
Why is it important to calculate?
By knowing the labour efficiency for your employees it can help you to;
- Calculate your prices; you can use the efficiency formula to help you calculate the true cost of the labour required to make the product and to set the selling price that you are charging for your products or services.
- Monitor staff; if you are seeing a very low efficiency rate it can help you have the conversation with your staff to determine why they may not be performing as you would like.
- Change processes; if the efficiency rate is low it could be because the processes in place are not ideal. This can help you to change processes and make it work better for you, your employees and your business.
- See your bottom line; by working out the efficiency rate, it can help you to calculate what your bottom line is and whether you are making an acceptable profit or not.
How do I use the efficiency rate?
The first step is to determine the number of hours that your employee is working efficiently for. Once this is done, you can then use the below formula to calculate your bottom line.
We have included a case study below to show the calculations and to make it easier for you to use and implement for yourself:
Geraldine works as an engineer and her normal hours are 38 hours per week. During the week she produces work for clients “productive work” over 23 hours. Therefore, her labour efficiency is 60%.
23 divided by 38 = 60%
Now assume that Geraldine is paid $60.00 per hour and is billed to clients at $180 per hour. Using raw numbers (excluding wage on costs) Geraldine has cost $2,280 in wages to produce $4,140 in revenue for the firm.
If ways were found to increase Geraldine’s efficiency to 80%, the revenue would become $5,472. This is an extra $1,332 per week or $69,264 per year!
Sadly; many smaller businesses do not measure their labour efficiency although it is not hard to do. Allocating time to productive hours and non-productive hours when entering timesheets will help you to measure this important KPI. You can then use this information to make changes within the business that may help increase productivity and efficiency.
Once you start measuring this KPI you can compare the productivity (or efficiency) of each employee. Where the percentages vary significantly between employees, you are then able to review performance and identify causes and solutions for those employees performing poorly. You can also then determine whether the efficiency problem is due to processes and alter these to make it a better performing environment.
By monitoring and reviewing your staff performance you are not only helping them to become more productive you are also providing them with skills, knowledge and your understanding. An employee who can see the employer cares and wants to help them do better at their job is more likely to want to perform well. It then in turn, helps your business to grow and increase at the bottom line.
The bottom line is – monitoring labour efficiency will improve your bottom line.
Need assistance monitoring your business’s Key Performance Indicators? Reach out for a FREE 15 minute consultation to find out how we can help you make informed decisions within your business.