The Hidden Margin Killer – Operating Efficiency
We are halfway through the year and experiencing rising costs across the board nationwide. Many businesses are spinning their wheels trying to figure out solutions to the problems before them. While each business is complex and experiences its own unique set of challenges, there is one commonality among most organizations: they are all operating less efficiently than they should be and are potentially wasting large sums of money every year. Improving operating efficiency is imperative to a company’s survival and growth.
The International Data Corporation estimates that most businesses, no matter their size, suffer yearly losses of 20 to 30 percent of revenue to business process inefficiency. Let’s take a deeper look into what inefficient processes could be specifically impacting your bottom line: overall work flow, time to complete tasks, improper or lack of technology, and misaligned employee strengths.
When was the last time your management team sat down and evaluated the sales process from initial inquiry to final invoicing or delivery? If you’re like most organizations, it’s not something you review very often. Companies that perform well are always looking for ways to streamline their process to reduce the time of the sales cycle and how quickly they get paid. This, in turn, improves overall operating efficiency. To perform the analysis well, work with those in the sales department to understand the process they use and write it down on paper. Further questions to ask include: where are the bottlenecks, what could make this simpler and quicker, and are there any of these tasks that could be automated or assisted by technology? Remember, technology is meant to help employees perform better and more quickly, not to replace them altogether or be an unnecessary cost. Reducing the sales cycle alone can substantially increase revenue just by adding a higher quantity of transactions each year.
Time to Complete Tasks
This section can go hand in hand with the workflow section but it ultimately applies to every role within the company. Once the sales cycle has been analyzed, its shortcomings identified, and improvements implemented, take that same process and apply it to every department of the organization. It is extremely likely that some areas are performing more efficiently than others, with some processes working completely fine without the need for change. The biggest question we are asking at this time is, “Why is this taking so long to be completed?” Most of the time, the answer is lack of employee training, obsolete technology, or simply a lack of actual process. Fortunately, each of these operating efficiency problems can be solved with direct action by management: invest in training and education, replace or upgrade technology, and document the most efficient instructions for task completion.
It is worth noting that training programs don’t necessarily need to be an expensive endeavor that involves creation of videos and other digital content. It can simply be regular instruction with the employee from those with the experience to complete the task quickly and efficiently. The time spent teaching the process will more than make up for time lost by poor performance.
Improper or Lack of Technology
The point about poor performance brings us to my third point where the situation at hand may not be the employee’s fault. In many cases, an employee’s output is limited by the tools available to them. From my time doing consulting work, I can personally attest that most companies that I worked with were either using expensive technology that wasn’t a good fit for the organization or not using technology at all where they should be (sometimes at the tune of tens of thousands of dollars of unnecessary expense). This was especially the case with businesses trying to use spreadsheets for complex project management or sales production/delivery that relied entirely upon multiple individuals manually updating the sheets daily. There are many cost-effective software options out there designed for industry-specific project management or sales cycle process functions. Most of them allow you to automatically email or notify the next person in the workflow when a task is due through simple automation. Browse the product offerings by a few different providers, talk with their sales representatives about your needs and schedule demonstrations, and then choose the ones that meets both the company needs and budget.
Misaligned Employee Strengths
Finally, through the course of your discovery of company inefficiencies, you are likely to find that some employees are not suited for their current positions. Before placing blame on the individual in charge of hiring them, bear in mind that this may be the result of many factors. It is not secret that a lot of the job postings currently are full of either overly inflated “requirements” or are not representative of what the position actually entails. While it is also likely that we will encounter applicants that do a little puffing to their abilities, actual employee inefficiencies can be reduced early on by having accurate job descriptions and requirements for hire. This should come as no surprise, but this will involve an in-depth analysis of the hiring process, the current job descriptions for potential applicants, and the duties of the positions themselves. Once the new hire process has been improved, it is important to look at the employees already in place.
Just because an employee does not perform certain tasks well over others, that does not mean that they are bad employees. Often, an employee is either best suited for another position within the organization or is not fulfilled in their current role. This is where quality management becomes especially important. It is the responsibility of the manager to ensure that each employee has the necessary tools, training, and understanding to complete their required tasks. If the situation allows, it is perfectly acceptable to move employees into different positions with clear communication that they are not being punished or having their pay reduced. Because it can be a sensitive issue, this movement will require a bit of planning and finesse. But, the end result will contribute to improving operating efficiency within the organization.
There are countless ways, some creative and others not, that companies can lose money and kill operating efficiency. No matter the enterprise, the main purpose of business is to make money. For an organization to experience growth and sustainability for years to come, management needs to be mindful of inefficiencies within that are causing the organization to unnecessarily lose money every year. Fight rising costs by taking all the sections mentioned above and improving overall operating efficiency, the company can take what would have been lost profits and deliver more money to ownership/stakeholders or use it further invest in growth and increased revenues. There are other positive financial side effects of improving operating efficiency within an organization. At the absolute very least, the business can simply increase their profit margins while maintaining status quo of revenue.
Written by Joseph L. Fleenor, Jr. MBA MSA
As Mergers & Acquisitions Associate with Indiana Business Advisors, Joseph assists advisors throughout the entire transaction process. With his formidable experience in M&A, Joseph is able to inform all stages of the process, from initial valuation, estimates, through due diligence documentation and final purchase. When he’s not doing a deep dive into company financials, Joseph is working hard to ensure that IBA finds the right buyers for our client’s businesses by prepping informational materials and creating targeted marketing lists. As a fellow business owner and prior consultant, Joseph understands the intricacies and complexities that come with navigating corporate finance and strategy.
Joseph comes to IBA with a strong educational background. Joseph earned his Bachelor’s degree from Wabash College in 2012, Master of Business Administration in International Business and International Finance from Butler University in 2018, and Master of Science in Accounting from Purdue in 2021. In addition to his degree, he has a Financial Modeling & Valuation Analysis Certification and is working toward CFA level 1. Before becoming involved in the financial and investment industries six years ago, Joseph did a term in the United States Army as a multiple launch rocket system crewmember.
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