Astute business owners invest countless hours into managing their overheads. Reviewing expense items, surgically cutting costs and ensuring that the maximum amount of top line dollars makes it to the bottom line.
Often business owners completely overlook a substantial and unnecessary overhead – inefficiency.
Inefficiency, being the misuse or poor use of time and resource is overlooked as it seems theoretic and difficult to quantify. For that reason, inefficiencies can permeate a business and be seen across many business platforms including communications, finance, operations and of course management.
Upon intelligent questioning around their current processes, pretty much every business owner agrees that their business could be run more efficiently. Unfortunately, that is often as far as it goes.
As it can be difficult to quantify the tangible value of an inefficiency, it is easy to excuse it as insignificant.
To demonstrate the cost of a very simple and common inefficiency, take a look at the following example:
Bill is the business owner and manager at Widgets Pty Ltd. He employs 12 staff with a gross profit of 3.8 million per year. Widgets Pty Ltd imports and sells Widgets across Australia. Bill has a sales and marketing team, a finance team and admin team and a team handling the procurement and logistical processes.
Bill notices that the steady growth he has experienced year on year has begun to plateau so using astute business prowess form over 20 years in business, he decides it’s time to invest in further growth. Bill identifies a large portion of his time could be delegated to someone with management capabilities which would allow him to focus on business strategy, a fresh marketing approach, new market exploration and product research and development. Bill makes a smart move and hires a general manager to relieve him of his daily distractions, welcome Rod. Rod is a great culture fit, is passionate about Widgets Pty Ltd and has impressive experience and qualifications. This comes at a price though; Rod’s salary package is $144,000 per year. In rough figures, Rod is worth $75 per hour.
Before long Rod has taken over 90% of Bills daily duties and executes them with diligence and proficiency. Consequently, Bill does the following:
- Bill spends an hour a day assisting employees with regular tasks, Widget Pty Ltd has no documents procedures or systems manual for tasks.
- In the absence of quality assurance checklists or a peer review structure for common procedures, Bill spends an hour a day reviewing employee work.
- Widget Pty Ltd has poorly defined employee roles and responsibilities, so an hour of Bills day is spent ensuring frictionless workflow between teams and individuals.
- Bill spends a further hour each day attending undocumented meetings and resolving workplace issues.
Sadly, that sounds like a typical day for a lot of managers. It’s also costing the company $72,000 per year and 50% of Bills time. The $72,000 is quantifiable and disturbing enough. What is more concerning is the 50% more time Rod should be spending using his management capacity to lead the team and add serious value. The loss of opportunity here is almost limitless.
That is just the cost of inefficiency in one employees job role. That’s before we look at:
- Organisational structures and workflows
- Employee role suitability
- Employee accountability and incentivisation
- Inefficiencies in accounts payable and receivable procedures
- Administrative procedures and protocols.
- Customer service standards
- Stock control systems
- Cost tracking
- Sales processes
- Discount policies
- Procurement and estimating procedures
- Purchasing quantities
- Supplier negotiation
- Procurement approval processes
- Logistical partners
- Finance and credit providers
- Hire and lease arrangements
- Employee training programs
- Workspace effectiveness
- Quality control and warranty claim minimisation
- Project, CRM and Financial management systems.
- Much, much more.
The multiplying cost of inefficiencies may be difficult to quantify but sadly is a reality. Inefficient business practice leads to poor cashflow, low profitability and a lethargic team culture.
It can also lead to poor business decisions. Take Bill for example, let’s hope he chooses to engage an experienced business advisory partner to fast track his growth journey and not do what too many other business owners have done before him.
“I’ve just put on a general manager, I can’t afford any more help…”
If you’re concerned about your business being as not operating as efficiently as it could be, our team is ready to help set you on the right track to growth and success!