How To Improve Business Efficiency and Grow Your Company
Lectura de 6 minutos
Last Updated: 03/16/2023
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Looking to maximize resources and execute business functions more efficiently? While it can be challenging, this article offers some starting points.
Knowing how to improve efficiency in your business is a key factor in any company's strategy for growth. When inefficiencies exist, productivity can suffer, creating a ripple effect throughout the organization that can impact leadership, employees, and customers alike.
Definition of Business Efficiency
What is efficiency in business? It's how well a business can convert the required time, effort, materials, and capital in relation to its output. Output can be products, services, revenue, or however the business measures its parameters of success.
Instead of having valuable resources disappear into its systems, an efficient business can maximize its output with the smartest possible use of those resources. A simplified example of efficiency in business is when one business generates $5 million in revenue with the same amount of energy and labor costs as its similarly sized competitor, which only produces $3 million.
Efficiency vs. Effectiveness in Business
Efficiency is not the same as effectiveness and the two terms often cause confusion. A common way to think of effectiveness vs. efficiency is the difference between doing the right things vs. doing things right. It's possible to have an inefficient process with an effective result or an efficient process that is less effective.
For an example of the latter, consider two salespeople. Using scripts and time limits, salesperson A has developed a streamlined system that lets them make 100 calls each day. Salesperson B invests their time in developing a hyper-qualified list of prospects and then spends more time researching each contact. Salesperson B makes only 20 calls each day. However, 3% of salesperson A's calls result in a closed sale, while salesperson B enjoys a 25% closing rate. Salesperson B has developed stronger relationships with those customers, which is likely to lead them to a more positive overall experience and favorable impression of the business.
Efficiency and effectiveness are not mutually exclusive. In the salesperson example above, salesperson A has a system that is vastly more efficient at making phone calls. Salesperson B is effective at closing sales. Ideally, a business figures out how to accomplish both.
Types of Efficiency in Business
Business efficiency can be measured in many ways. Here are some different metrics that you can use to measure business outputs against the resources required to reach your goals. Doing so can help you make improvements in your systems and the use of your overall resources — time, money, labor, effort, materials, and capital.
Labor productivity: How much are your workers able to produce or accomplish during a measured period of time? Equipment, technology, automation, training, physical and mental health, and engagement can all influence an employee's overall productivity.
Eco-efficiency: Eco-efficiency is a measurement of the impact your business operations have on the environment. Ultimately, an eco-efficient business is excellent at reducing all forms of waste. This includes waste in materials, operations, and administration along with minimizing the environmental impacts of your product and packaging. These calculations can be tricky. For instance, calculating the cost of using post-consumer recycled plastics for packaging or materials, which increases eco-efficiency, may come with more upfront costs, but the practice may net you more customers because they seek businesses that prioritize a low environmental impact.
Energy efficiency: Reducing the amount of energy consumed to create products or services is an important sustainable practice that can increase your bottom line. Your energy footprint is the amount of energy needed to operate all aspects of a business — bathroom, office, and warehouse lights, equipment, and even shipping costs, when you recognize fuel consumption as a form of energy usage. You can evaluate business energy efficiency by calculating how much is used to run different areas of your business. Reducing these numbers can save you money. Business energy efficiency is a specific subset of eco-efficiency.
Operations efficiency: Operations are critical to a business model and efficiencies in these core processes can help reduce overall costs. Business operations efficiency can be found in a variety of strategies such as the appropriate use of technology, outsourcing, or bringing tasks in-house for more control.
Process efficiency: Processes are used in every area of a business — internal communications, HR, operations, shipping, and even how meetings are conducted are typically subject to specific procedures. See what is working and what isn't. Make changes when needed. Look for ways to make modifications that can also increase efficiencies in other areas. For instance, packaging products with less material can lower energy consumption and environmental impact, and allow you to fit more product in trucks, thus reducing shipping costs.
Return on investment (ROI): An investment is typically a current cost that is used for future gain. This gain can be any metric — an increased pool of qualified applicants, reduced waste footprint, and generated income are all examples. Measuring the ROI, e.g., lower energy bills due to a new rooftop solar array, is one way to assess efficiency.
Benefits of Efficiency in Business
No one enjoys wasting time or money and your business is no different. Aside from the general satisfaction that comes with running a thriving business, there are many benefits that come with getting the most out of your resources. Here are some of the benefits of efficiency:
- Efficiency may reduce costs. Whatever your metric for calculating efficiency, improving it will likely yield cost savings. Streamlining time-consuming HR tasks, improving worker productivity, and using less to do more all improve your bottom line.
- Efficiency can increase profits. The flip side of reducing costs is increasing profits. Figuring out how to get more products in the hands of your customers for less overhead costs or spending less on operations translate into a more profitable business.
- Efficiency can grow your business. Less time spent on mundane administrative tasks can free staff up to develop strategies for growth and expansion. Improving eco-efficiencies can give staff a sense of purpose and dedication, unleashing the engagement and creativity you need to move into new markets. Developing new ways of packaging or operating can even set your business apart as an industry leader. These are but a few ways that efficiency can grow your business into exciting new directions and create new opportunities.
- Efficiency can improve employee morale. Finding ways to run your operations more efficiently can save employees' time and energy. Done well, this can be seen as a form of respect. Actions such as reducing the number of mandatory meetings or giving staff convenient, on-demand access to their benefits accounts can strengthen their sense of loyalty to your business, thus improving engagement and reducing attrition.
Ways To Improve Business Efficiency
Efficient business practices are less about what you do and more about how you do it. Here are some big-picture ways to help maximize your resources and execute business functions more efficiently.
Use free resources. There are many valuable free resources for businesses that you can turn to when you need them. National organizations such as the U.S. Small Business Administration and SCORE provide advice and resources that offer guidance on startup issues, tax concerns, and in some cases even legal matters.
Invest in quality branding. Having a cohesive brand is invaluable in presenting a clear message to your customers, vendors, key stakeholders, and the public. All aspects of your branding — from your company logo to your website layout and product offerings — must be consistent with the message you want to send to your target audiences.
Think from your customers' perspectives. If you asked customers, "How can we improve our business?" How would they answer? Details about your business might seem obvious to you, and therefore unnecessary to mention in your sales and marketing materials. But if you approach this from your customers' point of view, you may think differently. Productivity improvements start by looking at your business from a potential customer's perspective. Ask for outside opinions to avoid making business decisions based solely on personal bias.
Outsource key business tasks. Business owners and employees often wear many hats, from leader and recruiter to designer and payroll administrator. Often, knowing how to improve business performance starts by recognizing that no one person can do everything on their own.
Consider outsourcing complex tasks that are integral to your business but aren't necessarily within your realm of expertise. Bookkeeping and accounting, for example, don't often fall within a typical business owner's area of expertise. Still, it's an essential part of business efficiency. A skilled outsourcing firm can balance your books much quicker and keep you up to date on financial data that helps you plan for the short- and long-term growth of the business.
Improving Efficiency on a Personal Level Can Help Improve Efficiency on a Business Level
It's not just your business that stands to benefit from greater efficiency. Every business owner and leader can improve productivity with "efficiency hacks" that can include:
- Setting the right goals. Big goals usually have too many moving parts to handle at any one given time. Envision goals you can reach in a manageable way.
- Completing one task at a time. Productivity can easily be wasted when you jump between tasks and try to figure out where you left off.
- Prioritizing. Create your daily task list in order of importance. Get important tasks done first before interruptions take your focus away. And avoid putting anything off. Do it right then and there, if you can.
- Managing your time well. What times of day are you most productive? Tackle difficult tasks during the time when you have the most focus and dedicate other times for less demanding tasks. Consider working in 50-minute blocks with short breaks in between.
- Reducing distractions. Email can be a huge time drain. Consider limiting your email activity by scheduling time every couple of hours to check it and stick to it. Similarly, schedule phone time to make or return calls, and place your phone on silent during your planned work blocks.
Knowing how to improve business efficiency helps everyone in the organization. As part of the process, learn more about how you can help your employees increase efficiency by more effective-goal setting to increase productivity and engagement.
How Do You Measure Efficiency in a Business?
Just as there are different types of efficiency in business, there are many ways to measure them. Some measurements are applicable across the board. Benchmarking your metrics is critical so you can evaluate your progress over time. Comparing your type of business efficiency with similar businesses or industries is another important way to assess whether your business is on target.
There are different strategies to measure business efficiency. For a company selling products, inventory turnover, or the lag time between moving inventory through the warehouse and to customers, can indicate if a product is moving and responding to customer demand. Efficiency ratios are used as an indicator of a business's overall short-term performance and can tell a business owner the lag time between turning inventory into cash. Measuring eco-efficiency can get trickier and involves measuring net sales and quantity of goods produced and sold against energy, materials, and water consumption, along with greenhouse gas and ozone-depleting emissions. The World Business Council for Sustainable Development issued a guide to help businesses measure eco-efficiency and company performance.
The Role of Analytics in Improving Business Strategy
HR is another business operation where efficiency is imperative. Specifically, the process of employee recruitment and retention is simply too important to leave to chance.
HR analytics can provide human resources departments with better data collection, reporting, and the information needed to make data-driven business decisions. Whether a business unit manager needs the latest information on time and attendance to streamline their scheduling process, or a quick payroll audit by the HR manager to address a problem, analytics help makes data accessible to business leaders.
Here are some ways to leverage HR analytics and improve the way you run your business and increase efficiency:
- Recruiting. When a job candidate is brought on board but ends up not being right for the position, turnover can happen, and filling open positions becomes expensive and time-consuming. Recruiting analytics lets you see where your best candidates come from and which profiles tend to succeed more often over the long term. In addition, analytics can help clarify how your recruiting process is working and where there might be room for improvement. For example, if analytics show delays in candidate communication or long review times at the hiring manager level, this can provide actionable insights for making process improvements.
- Time and attendance analytics. With time and attendance analytics, companies can determine the most efficient patterns in employee scheduling to strategically manage the scheduling process, stay in compliance with company and legal requirements, and even identify patterns of absenteeism that could signal trouble at the individual or department level.
- Benefits and other services. HR data analytics can streamline the management of benefits and other services within human resources. Consider the reporting needed during open enrollment. An analytics-driven reporting system makes it easy to see who is enrolled and where decisions are pending. Analytics can also help HR managers understand which benefits are being used and which ones are being overlooked.
Common Payroll Mistakes That Can Lead to Errors and Business Inefficiencies
Payroll processing is a particular company operation where accuracy and efficiency matter. As just one example, businesses must submit taxes to federal, state, and local authorities, at specified times and in designated forms. Such demands require time-consuming administrative efforts which, if mishandled, can lead to costly penalties. Some of the most common payroll errors include:
- Filing late with the IRS. The IRS stipulates specific due dates for depositing taxes and filing returns. Late deposits and late filing of payroll tax returns can result in penalties and interest charges.
- Errors on tax forms. Errors made on tax forms may make it appear that you have remitted too much or too little in payroll taxes. Such mistakes can also impact reconciliation with other tax forms, such as W-2s.
- Misclassifying employees. You must take the appropriate steps to correctly classify each worker as an employee or an independent contractor. Misclassifying an employee as an independent contractor can result in retroactive payroll tax liabilities as well as fines and penalties.
- Processing payroll late or not at all. Late or inaccurate payroll processing not only creates unhappy workers, but it may result in fines and penalties depending on the jurisdiction, as well as, issues like missed premiums or late retirement plan contributions, which can take additional resources to rectify.
- Paying the wrong amount. Incorrect data entered into a payroll database can result in problems connected to paying employees at the right rate of pay and for all hours worked. Corrections can be time-consuming and can wreak havoc on your bottom line.
- Not maintaining adequate payroll records. State and federal regulations mandate businesses keep specific employee records. Some local and state jurisdictions may vary in their recordkeeping requirements, so employers must be familiar with such requirements in the location(s) in which they do business.
Outsourcing Payroll Leads to Productivity Improvements
Outsourcing payroll processing is a solution to both enhancing efficiency and helping to reduce your risk of the payroll processing mistakes described above. Among the key benefits:
More Time for Business Priorities
If you have a workforce, regardless of your business or industry, attending to payroll-related matters likely consumes a great amount of valuable resources. One pay period follows another (without interruption) creating a ceaseless demand for time and energy to ensure that employee data is input correctly — and then reviewed for accuracy.
The complexities of payroll processing require a significant amount of time committed on a daily and weekly basis. Although business owners are ultimately responsible for meeting payroll accuracy and filing requirements, having a provider on hand often saves a great deal of time and helps them feel more confident about staying up-to-date on legislation and regulations.
Integrity of Confidential Employee and Company Data
Data theft and breaches are all too common today, and payroll processing represents a potentially risky area for your company. Threats include identity theft, employees tampering with company records, or even embezzlement. The use of in-house payroll processing software is not risk-free, either.
By contrast, a trusted outsourcing vendor has information security controls designed to safeguard sensitive data. Together with redundant backup and multiple server locations, a quality provider invests in state-of-the-art systems for storing and protecting data, simply because it's part of the service provided to clients.
Stay Current With Tax and Employment Laws and Regulations
Every business with employees must comply with federal, state, and local tax and employment laws and regulations or face stiff financial (and possibly legal) penalties. Not only can these penalties cost you money, but they demand time and attention to avoid — time that takes you away from your business. A vendor that specializes in payroll processing has the knowledge to help you with compliance responsibilities.
Outsourcing HR Functions Boosts Efficiency
Outsourcing HR functions can result in a significant improvement in business efficiency. A skilled outsourcing company helps mitigate the risk of noncompliance with current reporting and filing requirements, as well as assisting with the development of worksite safety programs, and insurance benefits.
More small businesses are investigating the merits of entering an arrangement with a professional employer organization (PEO), which enables business owners to outsource the management of employee benefits and related areas, including these key tasks:
- Creating an employee handbook
- Building job descriptions
- Assisting with monitoring regulatory and legal compliance developments
- Maintaining Affordable Care Act documentation
- Providing comprehensive online HR resources
- Offering onsite employee training
- Helping with risk assessment
Outsourcing other key processes — such as marketing, website maintenance, and social media activity — are worth looking into as well. The more you can outsource to a reliable service or company, the more time you gain to concentrate on what will contribute to the growth of your business.
A More Efficient Business Can Help You Succeed
Employers who look to maximize their resources and execute business functions more efficiently can position themselves to enjoy the advantages that come from doing so. Those who don't are gambling with a future that can render their business obsolete.
Learn more how Paychex HR services can help you avoid costly and frustrating mistakes that waste energy, effort, and money. Instead, you can reap the rewards that come with improved business efficiency in key areas of your organization.