Why Your Business Productivity Matters

And What You Can Do to Improve It

What Is Productivity?

When we think about productivity, we frequently think about it as a personal metric. How productive am I in my day-to-day life or personal productivity at work. How do you optimize your day to ensure you can get the most amount of work completed.

However, one metric that will pop-up in nearly every due diligence is your company’s productivity. Productivity is an example of a north star metric, but one you probably don’t always think that much about. And, other than growth and profit, productivity is how all companies are judged. The question you should be asking yourself is, is my productivity growing over time?

How do we calculate productivity? In the most simplified, productivity is margin, meaning for every dollar you earn, how much, after you subtract out all of your expenses do you earn to your bottom line. Reviewing productivity over time allows you to ask, how efficient are you at running your business and have you made improvements over time to allow your business to be more productive

We could, in theory, be more specific about productivity and look at labor productivity or marketing productivity or sales productivity, but at the end of the day, it doesn’t really matter. It’s best to keep it simple. For every dollar you spend, how much are you making. I will also promise you that businesses which have greater productivity will be valued higher. Think of productivity as the oxygen for your business. The greater the oxygen, the more efficiently your business will operate. And just like running, if your body is starved of oxygen, you will not perform as well and eventually you’ll be gasping for air.

Why Buyers Love Productive Companies

Why does productivity matter for Buyers? Well, Buyers want efficient businesses for many different reasons. First, generating sales or revenue is usually the most difficult activity for any business. And, if you are generating a dollar in sales from your hard work, would you rather bring home $0.50 or $0.10? Building this in real numbers, if your business generated $10,000,000 in revenue, would you rather have a business with a profit of $5,000,000 or $1,000,000? If you were on the other side of table as a buyer, which business would you rather purchase?

Buyers also love strong productivity because it’s the best defense. If something doesn’t go well in the business, perhaps you lose a top client or you have an unexpected expense, and, having stronger productivity means you have wiggle room. In the example above, if profit were reduced by $500,000, which business would you rather have, the business that still has $4,500,000 in the bank or the business with $500,000 in the bank. In the $500,000 example, with only 5% productivity, there is very little wiggle room if a second thing goes wrong.

And, most importantly, Buyers love strong productivity because it is the best offense. Why? It allows for optionality. More productive companies make more money than less productive companies and they can invest in more new projects. More productive companies can also invest in initiatives that are riskier with a higher rate of return. Companies with less productivity don’t have the luxury of investing in new product lines or customers. It becomes significantly more difficult for companies with low productivity to grow unless they fix the systemic issues within their P&L.

Imagine how a Buyer would value each of the companies above. Both companies generate $10,000,000 in revenue, but one generates $5,000,000 in profit and the other generates $1,000,000 in profit. The business generating $5.0M in profit is likely to have a valuation multiple of 5-7x and the business generating $1.0M will have a valuation multiple of 3-4x. Therefore, the first business will be worth $30.0M and the second business will be worth $3.5M. That’s $26.M more in the bank upon sale for the more productive business. 750% more valuable as a company!!

How to Improve Productivity

Bring this back to you, what are some things that you can do to improve productivity?

The very first thing you can do is track productivity. Are your financials clean and are you paying attention to them? It sounds crazy, but many Business Owners we speak with don’t know their margins. They can tell you if they are having a good year or bad year based on sales or money in the bank, but that’s not good enough. Good enough is knowing how productivity has changed over time and why.

The second thing to do is look under the hood to understand what is driving your productivity metrics. For this, we must get more granular with our tracking. For the expenses used to drive sales, have they improved or not over time? And for the expenses used to produce the widgets or service you are selling, have those expenses improved or over time? Do you understand or not what’s causing these changes? Have you built a team around you that receives productivity metrics and operates the business with them? If you are not measuring or you are keeping the metrics exclusively to yourself, how can you expect others on your team to help and drive meaningful impact.

The third thing to do is decide what are the three key metrics in your business that drive productivity. In today’s digital age, it can be very overwhelming with the amount of data that’s available. Companies that sell sophisticated software packages show how easy it is to pull data, that you can have metrics on everything, that you can even get metric updates on your phone. More often than not, this amount of data and updates leads to analysis paralysis, focusing on too much information. Keep it simple. What are the top three metrics that drive productivity in your business? Does your team know your most important metrics? In a manufacturing business, your most important metrics could be machine uptime or yield. In a service-based business, your most important metrics could be hours billed vs hours available. Or, in some service businesses it could be ensuring you are billing your clients more margin rich offering

Now that you're measuring and know your business’s drivers, what’s next? The first thing we always do with our clients is set a goal or target. Where do you want to be? Keep the targets realistic. Thinking your targets are going to be a 50% increase in productivity is unrealistic. We normally recommend starting with 10-15% improvements. If you are consistently hitting the targets, you can, and should, change the targets. And make sure to share the targets with your team. Team members love to know where the business is headed and what they can do to improve it. It’s always better for the team to know targets rather than flying blind. Just like interest, improving your targets will compound your improvements over time.

The last thing to do is create a simple action item list. Build a list for each productivity driver. And, this is the most important part, when building the list, have your team members be the ones to initiate action items to improve the key drivers. Why? There are several reasons for this. First, in many cases, your team knows the ins and outs of the business better than you. They know what’s causing productivity gaps and what it takes to solve them. Second, it gives your team ownership of the business and builds trust. Instead of followers, they become leaders, and they also become more productive. If a team member doesn’t want to take ownership, it probably says a lot about their character and if they fit into the business in the long term

Why You Should Start Productivity Initiatives Now

Bringing all this productivity talk back home, imagine now you are selling your business, and you have significantly better productivity. First, you can sell your business for a better valuation because you are making more money, and your margins are better. And next, you are going to hold up better during due diligence. You are going to speak to the Buyer about how great the business is run and how each team member understands the key drivers, their goals, and how they impact productivity. Buyers will envision themselves scaling your business.

Very few businesses in the lower-middle market focus on these fundamental productivity processes, so your business will be a unicorn. Multiples will increase and you’ll attract the best and most qualified buyers.

You have to start early. Building processes, like these, in the quarter before you sell, will never work. Building these processes two years or more before you plan on selling will always work.