What is productivity?
Productivity measures how efficiently a business turns inputs into outputs. The more productive you are, the better you are at turning resources like labour, capital or materials into products (or services) you can sell.
Types of productivity
Shows how much work it takes to deliver products or services to customers. It’s commonly expressed as hours worked/dollars earned.
Shows how good a business is at monetising its investments in assets such as machinery. It will often be measured as the return on capital invested (which is also a profitability ratio).
Shows how much a business spends on materials in order to generate sales. Materials can include things like inventory or energy.
Why productivity matters
Businesses with increased productivity get more from less. As a result, they have more wiggle room to turn a profit, deal with inflation or slowdowns, and absorb price competition. After decades of continuous improvements, productivity gains are getting harder to come by according to OECD data. And small businesses typically lag behind big businesses for a number of reasons.
How to increase productivity
There are four commonly accepted ways for a business to power up its productivity:
- Better work tools
- Smarter methods
- Skilled workers
1. Better work tools (capital)
Tools are made specifically to amplify the efforts of their users. A carpenter can do a lot more with an electric drill than they can with a hand drill. So find the tools that’ll amplify your work. Sometimes it might be as simple as a piece of software that cuts down the double-handling of information, like a booking system that schedules a job straight into your calendar or accounting software that integrates with important business systems like payments or point of sale.
Why you haven’t got better work tools yet
Of course it costs money to upgrade work tools. Professor Marc Cowling of Oxford Brookes University has investigated why small business owners don’t (or can’t) make that investment. Here are his top five reasons:
- Businesses aren’t sure how to prioritise: Small businesses have about six capital investment opportunities in mind at any one time, but they can’t back them all and don’t know how to choose.
- It’s hard for them to see the value: Relatively few small businesses run a financial analysis to estimate the return on investment, so they struggle to justify making moves.
- They’re risk averse: Most small businesses will only consider a capital investment if they guesstimate it’ll pay for itself within a couple of years. As a result, they tend to shy away from bigger projects that might have bigger impacts.
- They can’t get loans: Cowling found that roughly a quarter of businesses have been denied a loan application. After receiving a knockback, it takes them up to four years to bother applying again. They need help building confident financial cases for investments.
- Technology feels hard: Many business owners assume new equipment will be hard to learn, will chew up training budgets, and will clash with existing systems. They don’t have a solid ROI number in their head to counter these perceived hurdles.
How to make a move
- List your top capital investment ideas
- Calculate what they would actually cost to implement
- Work out the return you’d expect on each investments
- Rank them in terms of ROI
- Work with your numbers people to go down the list and find the opportunity that makes the most sense
2. Smarter methods (innovation)
Lots of businesses develop a certain way of doing things then never really think about it again. In the meantime, plenty of other things change and the original processes and procedures become less and less effective (if they were effective in the first place). It’s a good idea to review and revamp the way you work. Here’s how:
Write down your processes
Record the steps you follow to complete jobs. Put a little time aside each week and get staff to help as their perspective will be hugely valuable.
Use templated documents to ensure you’re capturing the same information for all the jobs. This will help everyone understand what to do, when to do it, and how. Plus the simple act of writing it down will begin to highlight inefficiencies and missing information.
Look for blockers
Run through your freshly documented process looking for bottlenecks and roadblocks. Again, your employees will have great insights on this so empower them to be honest with you. It may help to map your workflows visually as that can be a more intuitive way to see it.
You might find a few of these common inefficiencies in your audit:
- Double handling: jobs being handed back and forth a lot, or repeated
- Momentum loss: jobs getting parked at a certain point every time
- Sequence: things getting done in a weird order
- Quality control: the same mistakes or customer complaints keep happening
- Distraction: skilled workers are being distracted by low-value tasks
Redesign your workflow
Step through your list of inefficiencies and work out the kinks. You can often make big steps simply by clearing up roles and responsibilities, resequencing jobs, and improving communication between certain functions. Make sure people know where to find the information they need to perform tasks or deal with customers.
Look for opportunities to outsource jobs that you’re just not very good at, or excited by. An external will charge fees, of course, but it may be money well spent if it makes your business more focused, efficient, and happy.
Consider digital adoption
Software can be a massive boost to business efficiency. It can be used to request and track jobs, centralise information, speed up communication, and automate unloved tasks. Yes, you have to go through a learning curve but on the other side of it you’re free to focus on the things you do best. There’s software for all sorts of things from invoicing to paying bills, managing inventory to managing staff, and bookkeeping to reporting.
Check your work actually matters
Check you’re focusing effort on things that customers actually care about. You don’t want to invest heaps of time and energy into things that simply don’t move the dial for your business. Try out some surveys or even just some good old fashioned conversations with your customers. If aspects of your offerings aren’t resonating, consider investing less into them.
3. Skilled workers (capabilities)
Big business can afford to hire specialists who are super-efficient at specific jobs. Small businesses tend to hire generalists and give them multiple hats to wear. But you can still set them up to succeed.
Onboarding and training
Properly training and resourcing your people is a critical step to increasing productivity. Make sure each employee has a job description with clear roles and responsibilities. Explain how the job should be done and provide supporting documents that reinforce the in-person instruction.
Give your employees careful training so they know how to use all the tools (including software) they need to. If they can’t use those tools, then the capital investment is wasted. And regularly share the values and priorities of the business. When people understand the big picture, they’re better equipped to make the right decisions for the business.
Giving and receiving feedback
Feedback is vitally important to productivity, and it’s a two-way street. When something’s not done quite right, take the time to explain the problem and the solution. Otherwise you’ll get stuck in a habit of redoing work and you don’t want that. You want to delegate with confidence. Similarly, listen to what your employees say. They’ll have a different perspective and expertise that can really help you optimise the way work gets done.
Use these steps for getting and giving feedback:
- Ask employees what they did well, how, and why
- Add to the positives by telling them what went well, with examples
- Ask for their ideas on how to speed up or refine the work
- Workshop those ideas with them and, if appropriate, set new goals
Entrepreneurship is not just the act of launching a successful business, it’s the process of optimising it. Entrepreneurs unlock productivity by better combining the resources at hand. It generally involves a bit of risk-taking but the rewards can be great.
Harness your inner entrepreneur to boost productivity
- Scale up: Increasing output often lowers the marginal cost of each product or service you produce.
- Acquire another business: Buying or merging with another business can deliver scale or efficiencies, such as complementary workflows, consolidated operations, or logistics.
- Specialisation: Doubling down on a narrower niche can drive speed, expertise and quality to improve productivity. So think about cutting out services that don’t earn much money.
- Rethink supply chains: You could increase productivity by switching to suppliers that supply superior goods, or provide complementary services.
- Hire and empower entrepreneurial people: Foster a culture of innovation in your business.
Increase productivity checklist
To recap, here are some productivity-boosting steps to take in your business:
Better work tools
- List investments that would improve productivity
- Price each solution
- Calculate the expected return on each investment
- Make the move that offers the best mix of affordability and impact (consult with your accountant or bookkeeper for greater certainty)
- Write down (and map out) your work processes
- Circle all the friction points (eg, double handling, stall-outs, do-overs)
- Brainstorm solutions and focus on clarifying roles and responsibilities, resequencing workflow, fixing communication breakdowns
- Consider software for niggly admin tasks that distract you and your people from high-value work (consider outsourcing, too)
- Audit your process against customer preferences to ensure you’re investing time and effort wisely
- Ensure there’s an accurate job description for each role
- Explain how each part of the job gets done (in person and writing)
- Provide comprehensive training on the tools
- Give them the big vision of what the business stands for
- Meet regularly to give and receive feedback
- Look for opportunities to scale up aspects of your work
- Stay alert to acquisition opportunities
- Consider going harder on a niche opportunity
- Keep interrogating your supply chain
- Surround yourself with entrepreneurial people
Boosting productivity is a mindset
Small businesses have huge potential to improve productivity. Make it part of your mindset by continually examining and refining your processes, improving your work tools, and watching for inefficiencies that creep in. You’ll need to invest in your team and technologies but when done smartly, the benefits add up.
As a bonus, efficient businesses are less likely to suffer delays, confusion, breakdowns in communication, distractions and waste. And that means there’s a good chance increased productivity will go hand in hand with increased satisfaction.
OECD. (2023). Compendium of Productivity Indicators.
Prof Marc Cowling. (2024). Understanding small firms investment appraisal.
Profs Marc Cowling & Nick Wilson. (2024). The puzzle of underinvestment.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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