How to Calcuate Productivity

“How productive are you?” it is a simple question right? It is a question that many managers struggle to answer despite the platitudes given in board rooms and staff meetings about efficiency and being productive.   Most economist will agree that productivity can be defined as the measurement of output per unit of input.   More simply stated productivity is output divided by input.  An organization can easily calculate this equation and easily to determine the level of productivity in the organization.  It is done in most organizations quite frequently and without the explicit statement of a productivity report.  More commonly though it is called an Income Statement.

First we must understand and agree on the purpose of a business before we continue.  The goal of any for-profit business organization is to produce profit. The common counterpoints are often that the business must provide great products and services, be a great place to work and provide jobs, be a good community member, and the list goes on.  In any event the challenge is to place any other item as the primary goal of the business and ask how it will do it sustainably without profit.  Profit is the goal and through profit these secondary and important items can be accomplished.  The question of “how productive are you?” is really asking “how profitable are you in relation to the inputs (resources) utilized.”

Knowing that we are really measuring profitability of our activities the picture becomes much clearer and easier to calculate.   Our income statement shows us the sales of the organization in the revenue line or total sales (S).   Next we need to find the variable cost of our sales.  How much did it cost to produce one widget (if you are a service business you still sell a widget it might be a billable hour or car washed but it is still a widget).  If the organization sells a product the income statement will also have a cost of goods sold line which may be helpful to determine the variable cost.  In a service business we may have to reorganize some items to find the total variable cost (TVC) but it is still easily calculated.  If we take the total sales (S) minus the total variable cost (TVC) we find the throughput (T) of the organization.  The throughput of the organization is the rate it produces profit.  Some organizations call this the contribution margin or income before general and administrative cost. Next the income statement has the total operating expenses (OE) which do not include total variable cost.  Next we can calculate the productivity of the organization as throughput (T) divided by operating expenses (OE).

The ratio of throughput to the operating expenses shows us how productive we are at utilizing the resources required to produce profit.   If the ratio is less then one the organization by definition would be unprofitable.  Calculating productivity in using this equation forces a manager to think in terms of activities that generate revenue and those activities that do not generate revenue.  As managers we cannot eliminate non-revenue producing functions but we can work to control them and leverage those resources to support revenue producing activities.

Productivity = (T / OE )  where T = (S – TVC)

productivity, profit, profitability, throughput

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