Many modern economists and entrepreneurs often ask questions about such a thing as business efficiency. The topic is quite difficult due to its specificity. It is very important to define the very concept of efficiency. In simple terms, we will talk about a qualitative or positive result in the process of any activity. This statement is partly true.
However, such questions require more in-depth research of the topic, because the assessment of business performance should include not only a verbal description of the activity, but also various generally accepted economic and mathematical formulas. Still, let's try to figure it out.
The economic meaning of this term is characterized as the ratio of funds spent to the result achieved. In other words, it is the result divided by the cost.
Let's try an example: an enterpriseengaged in the processing of metal products. 100 parts were processed. The final cost of one part is 2 rubles. The cost of one part, taking into account the processing process, is 1 ruble. It turns out that the efficiency of this production will be equal to 1.
This is the most trivial of examples. The fact is that in modern business, efficiency is not only and not always understood as indicators.
This can be the number of sales, and profitability, and even the number of products released. Such an assessment requires a rather narrow approach.
Each industry can have its own business performance metrics, making it almost impossible to define the concept.
If we return to the examples again and take an IT company, then its effectiveness can be safely assessed by audience coverage or by the number of users. If we consider a marketing agency, then there may be several indicators, for example, audience coverage, the effectiveness of events.
There is an opinion that the efficiency of a business is its stable and smooth operation without any problems.
When evaluating a business, a huge number of qualitative and quantitative indicators are used. It is possible to evaluate an enterprise as a separate production and property complex without including the business processes themselves in its value. In other words, the property is considered in the literal sense. Other business valuation methods involve including working capital, revenue,net profit, potential for development and many other aspects that are often ignored.
Professional consultants, for example, firms such as KPMG or Deloitte, are able to more fully assess the effectiveness of a business. They are able to analyze even the most exotic indicator and help the business owner make the right decision.
Ways to improve efficiency
Any enterprise has its own life cycle, and it is very important to determine the stage at which the company is in time. If we take into account the classification of business life cycles according to Adizes (nursing, youth, vigorous activity, stability, aging, bureaucracy and ultimately death), then it is very important to determine in time the stage at which the enterprise is located. Further ways to improve efficiency will depend on the coordinated action of the staff and the manager. It is very important to overcome the crisis in time or prevent its occurrence.
Other classic ways to improve business efficiency will include fairly simple things like reducing the cost of products, working on product quality, optimizing costs.
Great attention should be paid to your partners and suppliers. In addition, the introduction of logistics structures into the business will also have a positive impact on its efficiency.
Usually this section includes a description of the activities of the enterprise in its industry. Business performance analysis requiresmuch attention to data such as market size and product share in it. In addition, the level of demand for goods produced by the enterprise is often analyzed. This can also include the number of workers, equipment and other production factors.
If the activity is related to the provision of services, then similar enterprises, availability, price factors are compared.
In addition, business performance assessment may include an audit of accounting and management accounting and other indicators.
Easy Techniques for Small Businesses
As for small businesses, there is no need to reinvent the wheel. Don't overcomplicate yourself. If you don't need a bank loan, and things are going relatively well, then it's best not to waste time on various discounted rates of return and other rather complicated methods that are inappropriate for determining the effectiveness of a small business due to their cumbersomeness and difficulty.
In such cases, it is better to use classic indicators, such as, for example, profitability or the ratio of own and working capital.
To determine how you are doing, it is better to conduct a SWOT analysis. The abbreviation hides the following words: "strengths", "weaknesses", "opportunities" and "threats". It is enough to divide the board or sheet into four columns and write out three examples for each item that are somehow related to your case. Perhaps you will discover somedetails or learn about obvious problems for which there was not enough time, and new useful information and improving business efficiency are almost synonymous.
If we touch on the topic of the economic feasibility of any project, then a large number of formulas and a feasibility study are applied to them. A similar approach is taken when considering the effectiveness of a business plan.
For example, before embarking on a project, it is very common to evaluate the economic effect. Even if it is not a commercial activity, the result must ultimately cover the costs and be positive. Otherwise, such a project would be inappropriate.
The main indicator of project evaluation is the discounted cost of monetary resources, that is, the future value of investments, taking into account such a factor as inflation. This formula is called NVP, it is quite difficult to understand, so it is better to study it in the textbook of investment management. In addition, the effectiveness of a business project includes various payback indicators and other expert methods.
Sometimes it is allocated to a separate area. If you decide to develop your business, you will need a document such as a business plan.
Due to the absence of a rigidly fixed form, only a number of recommendations will be given below, because the effectiveness of a business plan depends largely on its proper completion.
In many ways it is similar to a feasibility study. As a rule, the business plan describes the essence of the plannedbusiness, goals and objectives. A certain forecast is also made for your type of activity, whether it be the sphere of trade, services, work. In the latter case, entry into the SRO may be required. This is a self-regulatory organization, notaries, lawyers and engineers join it. For many construction works, membership in such an organization is the responsibility of the firm.
In addition, your business plan should include payback periods, various scenarios and prospects for developing an idea.
Speaking of such models, foreign methods are often meant, related to time management and goal setting. In addition, this area is intertwined with strategic planning. It is called as follows: performance management system. In general, these are classic management techniques, such as time management, general meetings, and goal setting using SMART criteria. As you may have guessed, each letter stands for a foreign word that is related to goal setting. Namely: specific - special (useful for the organization); measurable - measurable (in numbers, for example, 5 pieces or 10 days); achievable - (possible, physically feasible); relevant - (actual); time-based (clear time frame).
In general, the methodology of SMART criteria proves to be quite useful for both employees and companies. It is used in various educational institutions, large corporations, and sometimes in small businesses. Due to its simplicity, it allows to improve business performance management.
There are other methods. For example, decomposition. An incomprehensible word can scare the reader a little, but not everything is so difficult. The essence of this process is to break down various business tasks into smaller components, down to the level of ordinary workers. It turns out that the entire control system is broken down, all its branches from top to bottom, everything that is related to the goal is affected. Sometimes decomposition helps resolve even the most protracted problem.
There are no universal or uniform indicators in order to accurately assess the performance of a business. Enterprises create such indicators on their own. They are called KPIs. This is an abbreviation in English that translates and stands for "Key Performance Indicators".
KPIs should include all the main aspects of a particular type of activity, for example, it can be the number of completed orders.
Again, KPIs are business process specific data. The most important rule: that they be quantifiable. For example, five applications or one hundred orders.
There are also classic KPIs that many giant firms use. These include turnover indicators, market volumes, NPV (net asset value), and the efficiency of one employee is also calculated.
There can be a lot of indicators.
Business efficiency is notindicators and reports. They, of course, play a crucial role in the process of functioning of the company. However, it should be remembered that first the result appears, and then the indicator and reporting. Many large corporations have failed due to the fact that top management was chasing key performance indicators, and not engaged in the real development of the company. Any corporations are, first of all, people and connections, and only then - financial statements. Of course, the turnover of the company is important, because no company will function without it, but it is even more important when employees are engaged in real business.
For start-ups, it is important to keep track of simpler things, such as balance sheets, tax returns, labor laws. It is very important to get comfortable in the business environment before engaging in improving business performance in the formal sense of this expression. If your business is functioning, that's good. In this case, you need to develop. But in the presence of crises, it is better to wait a little with all sorts of KPIs and solve more important tasks.
Improving business efficiency is possible without any difficulties associated with various indices and formulas. As mentioned above, simple methods like SWOT analysis can give much more than KPIs. In addition, there are no less interesting techniques, such as gap analysis.
From English GAP is translated as a gap. The essence of this method is simple. The current situation is taken, for example, the number of services sold and a similar plan fora few months ahead. Next, we consider the time period, the countdown of which has started from the moment the goal was set. Managers must then monitor the process of achieving the goal, adjust it and save the obtained data for future similar situations.
Another, no less effective method would be PEST analysis. It shows the political, economic, social and technical aspects of the external environment. This technique is interesting because it can open up new, previously unnoticed opportunities for the growth of your business, for example, the emergence of a technology that will make it cheaper to manufacture, or some kind of social aspect that will affect the demand for your products. All these tricks often reveal the obvious.
Many managers often make the logical fallacy of believing that a report on the work done is more important than the work itself. However, enterprises do not produce products by having a good measure of net asset value, but by performing a production function. Raw materials are bought, processed, packaged, logistics systems are created, and as a result, the product is sold at a premium. After these moments, it is important to talk about reporting, and not artificially inflate these business performance indicators. It is very important to focus on the functioning of the system and not on its evaluation.
So, business efficiency is not only a result minus costs, but also dozens of options for various formulas that show how well the organization, its management, and what prospects it has, for example,in a competitive environment or for growth.
If you decide to do business, then the key role should be assigned not to paperwork, but to building your business. The choice of the type of activity, the search for suppliers, the analysis of the target audience, the selection of a place for an office and marketing activities - that's what matters.