Part 6/8: Understanding Your Economic Engine: Productivity
In part 6 of this vlog series, Rick Phelps of ActionCOACH introduces three productivity metrics that should be used as key performance indicators in your business. The metrics can be calculated using the formulas below.
- Productivity of System (Earning Money) = Throughput Dollars / Operating Expenses
- Productivity of Sales Process (Making Money) = Throughput Dollars Sold / Operating Expenses
- Productivity of Your Sales Funnel (Quoting) = Throughput Dollars x Conversion Rate / Operating Expenses
These terms are defined below:
Throughput – The rate at which the system generated money through sales.
Operating expenses – All the money the system spends in turning inventory into throughput.
Earning Money = You produce a product or service and get paid for it.
Making Money = You sell a product or service only; doesn’t include realized income.
When calculating productivity with the equations above, any answers that are equal to 1.0 means you are breaking even.
Answers below or less than 1.0 mean you are in the red.
When productivity equals 1.1 or greater, you are earning the minimum net profit to sustain and grow your business.
You’ll want to use the three formulas above to ascertain the performance measure of productivity of your system and future productivity. Monitor the rates over time and you’ll gain a better understanding of how well your business is performing.