Is your business putting in the right kind of effort?
While talent and luck may play a part in business success, we cannot disregard effort as a key contributing factor. As employees strive to meet or exceed KPIs, be it for their own progression or as a genuine desire to see the business succeed, the effort your team puts in will have one of the greatest impacts on business performance.
Every company wants engaged employees but as a business owner or leader, another area of importance is knowing how effective your team is. People, if they are not your biggest expense, they will be your second biggest expenses…so ask yourself this: have you got them focusing their efforts on the right things or am I burning money?
I believe team members can be separated into four key groups:
- Doers – those who implement the work of the business, which should be 90 per cent of their time as a minimum! (for example – a service business, it is employees delivering the service, or for those in the manufacturing business, it is the people who do the manufacturing). Think of it this way, if you were to take them away you could not delivery to your clients.
- Sales and Marketing – those who focus on generating leads and conversion to sales.
- Strategy Development – usually the owner or senior leadership looking at strategic direction of the business.
- Lightening the Load – to eliminate tasks from the other three groups so they can do their work; these include people who work in finance (bookkeeping), HR and admin.
The challenge for some businesses is knowing if you have the right people in the right categories to ensure maximum return with minimal costs. The objective for Lightening the Load employees is to minimise their cost while maximising the return on investment for the doers, sales and marketing, and strategy development. However, if an employee’s skillset is not being used efficiently, there can be a lot of waste that goes into doing business.
With considerations like JobKeeper discontinuing from the end of March and an increasing number of business functions capable of being taken off-shore, the time and work delivered by every employee must add value. So, it may be time to take a step back and consider if you are getting the most out of your team.
This begs the questions – is your team focused on the right things? And how do you make every person accountable?
There are three key metrics I like to use when reviewing effort in the workplace. Note: not all of these metrics are appropriate for every business, so choose the ones that are relevant for you and your industry.
- Productivity factor: The purpose of this is to understand if we’ve got the right amount of people relative to our output – or in other words, is our team producing at a rate that makes sense for their size?
- To calculate this, divide gross profit by overhead labour – the higher the number the better.
- For those running a manufacturing business, a result of 4 or above means you are performing extremely well, while other industries should aim for 3.5 and above.
- What is my revenue to direct labour cost?
- This is a two-fold approach
- Firstly, you can review your direct wages (doers) divided by revenue to find a percentage – the lower the better.
- In a non-service business, you want this at 20% or below.
- Secondly what is your actual hourly rate? Look at your revenue divided by doers’ hours worked. Once you know this, it’s time to look into the different products / solutions you offer to prioritise the ones with a higher rate. You can also consider increasing the prices for those with lower hourly rates, or potentially even eliminating them.
- For the manufacturing industry, your average hourly rate should be an average of $200 – $220 an hour at least.
- This is a two-fold approach
- Understand how your business has gone historically on this
- It’s important to look back at your history (as far back as you can) and create a benchmark to decide where you want to go.
- Take a look at the trends, what you can do and naturally you want to see this at an upward trend
If these metrics have got you overwhelmed, reach out to CFO Dynamics today and we can assist in reviewing and refocusing efforts in the right areas.
For now, I would like to challenge every business owner to track your employees’ time and make them accountable by tracking their own time too. Most employees are not used to tracking their time so you may experience backlash however this will help you understand if employees are performing tasks that aren’t within their own category, and whether it’s time to eliminate it. As owners it’s important to know how you are investing the time you have each and every day for the business to go forward and to maximise your return on that time.