When it comes to your business, sometimes a simple tweak in your numbers is all it takes to help you work smarter, not harder.
Improving efficiency is one of the most underrated ways a business can work smarter, but many small business owners do not know how to measure efficiency in the first place.
While gross profit is one of the key financial indicators of how hard you are making your money work for you, this can be difficult to calculate accurately for sole traders and partnerships.
Working out your effective hourly rate is a fantastic alternative, and a brilliant calculation tool to help you measure efficiency in your business.
Let us look at a few examples.
Bonny and Clyde are a partnership, and they specialise in robbing banks.
Let’s take a look at how much effort they put into their robberies.
Say they each spend 30 hours planning and carrying out a bank robbery and end up with $10,000 in stolen proceeds.
That works out to $10,000 / 60 hours = a return of $166 per hour
Alternatively, they can rob rural gas stations, which they are more familiar with, and each spend 1 hour planning and carrying out the robbery and end up with $400 in stolen proceeds.
That works out to $400 / 2 hours = a return of $200 per hour
The maths says they are more efficient at robbing gas stations than they are at robbing banks.
Disclaimer: we wouldn’t recommend you go into the robbery business, as the life cycle of this business is generally quite short.
Jack and Jill are another partnership, and they climb the hill to dig wells.
Jack and Jill each spend 50 hours digging a well for $10,000 for a regular customer. This particular customer is a pain to work with and always complaining, so Jack and Jill tend to put in another
10 hours of managing the relationship with the client.
That works out to $10,000 / 110 hours = a return of $90.90 per hour.
Jack and Jill also offer custom “Hill Wells” for customers. For each of these they charge $2,000 with $300 in equipment costs and 2.5 hours of work each.
That works out to $2,000 - $300 = $1,700 gross profit / 5 hours = a return of $340 per hour.
So when we dig deeper (pun intended) we can see that the complaining client who drains them of energy and adds to their stress levels, is actually costing them a lot more than the lower value, less stressful sales.
Tim the Tool Man is a carpenter, and he employs a fully qualified chippy and an apprentice.
Tim works for a big building company.
He does a job for $20,000 that takes 4 weeks.
He pays his full-time qualified chippy $1,300 per week plus super of $123.50 per week
He pays his apprentice $700 per week plus super of $66.50 per week
His total material costs for the job are $4,000.
That works out to $20,000 income, with labour costs of $8,760 ($1,300 + $123.50 + $700 + $66.50 ) x 4 weeks and material costs of $4,000 for a gross profit of $7,240.
Tim’s gross profit percentage (not including his wage is) 36.2% This means for every $1 of income he makes 36.2c in profit, not allowing for his own wage.
Tim has worked 40 hours for each of the 4 weeks which means he has earned $7,240 / 40 hours = $45.25 per hour.
So what can Tim do to work smarter?
He can look at other jobs and compare them. By keeping track of the hours he and his team work on each job, he can start to see how much money he makes for each type of job.
He can also track the gross profit percentage for each job. If he notices that similar jobs are returning different gross profit percentages, he may be able to identify areas within his team that need strengthening.
Need some help to track efficiency in your business? Please get in touch and we can help you get on track.
Director & Business Coach