Business Basics for Entrepreneurs: Productivity Management

Business Basics: Productivity Management for EntreprenuersThe same productivity management tools and strategies used by Fortune 500 companies can be used by entrepreneurs like you!  No matter the product type or services of your small business, offered online or from a brick-and-mortar location, productivity management is an essential part of your business administration.

Are we there yet?

Look at the business goals you set for this year. Defining your productivity measures will help you figure out where you are now, how much and what kind of work you need to do to get where you want to be, and  identify areas of your process that need improvement.

Productivity is formally defined as a measure of the efficiency of a person, machine, factory, system, etc., in converting inputs into useful outputs.

Productivity is computed by dividing average output per period by the total costs incurred or resources (capital, energy, material, personnel) consumed in that period. Productivity is a critical determinant of cost efficiency.

Does that sound way over the top for your little business? Even if you are just starting out as a virtual service provider, you need productivity management – and are probably already doing it on some level!

How To Measure Productivity

Measuring productivity can be done for any business, but the way you figure it out depends on what your business is producing. What is it that your customers buy from you? That is your “output”.

Tangible Goods

Do you create and sell tangible products – items that can be touched like jewelry or clothes or decorative items?  What counts as a “unit” on your sales page? It might be one item like a necklace, or one unit may be a collection of pens, paper and stickers for a three month planner box subscription.

How much have you spent for the materials to produce each unit? You probably already have the information to calculate this part, if you have kept track of your business expenses.

Don’t include the cost of shipping, especially if you bill your customer for shipping and handling, but if you use special packaging or always tuck extra little goodies in the package, include those costs.

Next, you need to know how much time it takes you to produce each unit. Don’t guess and don’t assume! This is where the management rubber meets the road … you will need to track your time, or your employee’s time (even if your helper is your family member) to create that unit.

Track your time spent every time you create or assemble your product. Include time spent packaging the item. Keep a log of the dates, items and time spent. After a few rounds of making your product, you will be able to calculate and average of time spent for each unit.

Selling Services

Do you provide services like tax preparation, coaching, writing or virtual assistant services?  Your productivity measurements will be a bit different because you won’t have the cost of raw materials.

It is very important to track your time actually spent, just as you would if you were creating a tangible product like clothing or jewelry.

Your unit may be sold by the hour, or by a flat rate.

If you charge by the hour for your services, you can start from that, but add on any time you spend for preparation or research that is not billed directly to your client as part of their “hour”.

The same goes for flat rates.  Track all the time you actually spent writing that article or designing that customer’s website. Eventually, you will be able to use that information for future planning.

Virtual Evergreen Products

Virtual evergreen products are things like online courses, workbooks, planner inserts, knitting patterns … anything you create once that any number of customers can purchase and download on their own.

You will want to track the time spent actually creating the product, and if virtual products are the main focus of your business it makes sense to also capture the time you spend creating promotions for your product including podcasts, webinars, and YouTube videos.

Value Added

How much is your time worth?   How much do you want it to be worth? By including the worth of your time in addition to the cost of materials to create your product or service, and comparing that to your unit sales price to the customer, you end up with a measurement often used in business called Value Added.

In other words, Value Added is a measurement of everything you put in to your product to create wealth for your company.  Value added is more accurate than if you simply deducted the cost of your materials from the sale price of your product. This is the measurement that helps you quantify if your goals are realistic and if your business is sustainable.

Using Value Added for Business Planning

For example, let’s say you are a brand new freelance writer, and your goal is to earn $500 per week. If you get an assignment to write five 1,000 word blog posts in a week at $100 per post, you’re good to go, right? That’s $.10 per word… not bad for a newbie freelancer!

But wait… each article is on a subject you have no experience with and takes a lot of research. By tracking your time all week, you discover that by the time you sit down to write, do the research, draft the article, make the final edits and hit send to your client, you are averaging eight hours per article, or roughly 125 words per hour. That makes your time worth $12.50 an hour, and it will take you 40 hours a week to reach your $500 goal if you keep doing the same type of work at the same rate of pay.

If your goal is to make $500 per week working part time while your kids are little, or to eventually get to $2,000 a week, something has to change. Don’t be discouraged!  Your Value Added calculations will help you figure out what you need to do to make your business objectives a reality.

Tracking your actual time is critical.  Tracking showed you that you average 125 words an hour for technical topics outside your niche. If you continue tracking your time every time you write an article, it may show that when you are working on articles the same 1,000 word length, but in your area of expertise, you can bang those out in three hours!

Now you have the information to make informed decisions for your business. You know what areas to pitch, how to set your rates, and what your workload will be for the assignments you accept.

The same general method of number crunching can be used to arrive at the Added Value for tangible and virtual products to help you evaluate pricing and which products make sense for you to produce.

Are you already measuring productivity for your business?  How do you determine the value of your time as an entrepreneur?  Please leave your questions and comments below!
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