15.03 – Optimising Productivity
Improving productivity is essential for any growth-oriented business. It’s not just something to focus on during economic downturns, but a constant endeavor to ensure efficiency and profitability. This lesson explores strategies to boost productivity by acting on both costs and margins.
Cutting Costs
Cost-cutting isn’t just a budgeting exercise or a crisis response; it should be an ongoing management process. Effective cost control ensures competitiveness and prepares your business to weather economic challenges without resorting to drastic measures.
Reducing Variable And Fixed costs
Variable cost cutting, like reducing wages and materials tied to sales volume, is common during recessions. However, fixed costs, such as investments in technology and equipment, also need scrutiny. Cutting essential investments that enhance efficiency and flexibility can be counterproductive.
Alliances between firms can also help reduce fixed costs. For example, distribution partnerships in the soft drinks industry allow companies to share resources and avoid additional investments.
Focusing on the 20% of items that constitute 80% of your costs can yield significant savings.
Adopting A Frugal Culture
Successful business owners often share three key traits: honesty, preparedness, and frugality. Frugality means fostering a culture where everyone recognizes the importance of controlling costs. Even small waste, like £1,000 through poor stock management, means having to sell much more to break even.
Prioritize cost-cutting tasks based on ease of implementation and potential savings. Quick wins can boost morale and demonstrate progress, while larger, more complex savings require longer-term planning.
Increasing Margins
To increase profit margins, review your sales with accurate costs and gross margins for each product or service. Focus on selling the most profitable products and services that customers value the most.
Pricing Strategies
Pricing is a critical decision that significantly impacts profitability. Comparing the impact of a 5% increase in overheads, sales volume, material costs, and prices typically shows that raising prices has the most substantial effect on profits.
Tools like the Profit Plus Solutions calculator can help estimate the impact of price changes and ensure you don’t offer discounts that harm your bottom line.
Working Smarter
Increasing productivity doesn’t always mean working longer hours; it can also mean working smarter. Encourage creative problem-solving through “smart circles,” where employees from different areas of the business collaborate on efficiency improvements.
Rewarding Results
Effective reward systems can motivate employees to increase their output. Objectives should be challenging yet achievable, encouraging breakthrough performance. Performance bands can balance the need for high goals with achievable targets, rewarding incremental successes while still aiming for significant improvements.
Rewarding employees for exceptional performance with substantial incentives can inspire teams to set and achieve higher goals, leading to impressive year-on-year improvements.
Summary
Optimizing productivity involves a blend of strategic cost-cutting, effective pricing, smarter working methods, and rewarding results. By focusing on these areas, you can enhance efficiency, boost profitability, and ensure sustained business growth.
