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Productivity and quality of your products and services can greatly affect the profitability of your business. You can improve your profitability by getting the most from your existing resources.

The relationship between productivity and profitability

Productivity is a measure that takes into account the amount of input (eg manpower or material) needed to produce an output (eg the final product or service). If you use fewer resources to achieve more output, you will typically have high productivity.

Profitability is the revenue left over after all expenses and taxes have been paid. You can increase your profitability by producing more products while paying less for the resources needed to produce and sell them.

How does productivity affect profitability?

Productivity can affect profitability when, for example:

• you don't produce as many goods as projected
• the cost of raw material exceeds your cost budget
• the cost of labour is higher than expected

Many factors can affect productivity, including external conditions such as a supplier going bust, or an increase in the costs of raw materials. Internally, management decisions around resource allocation, budgeting and procedures are most likely to impact productivity.

Measure productivity for profit

You should regularly monitor productivity and measure the efficiency of your operations to get the most from your resources.

For example, you could monitor how many employee hours it takes to perform specific tasks or provide services. If the time increases, it may indicate inefficiency. Addressing the problem quickly will benefit your profitability.

Leadership is an important part of managing productivity successfully. Motivate staff by communicating your productivity targets and how you are going to measure them. Incentives can also help motivate staff to meet productivity targets. Make sure you define the targets carefully so that production speeds don't increase at the expense of quality.

Use KPIs to measure productivity

Use the key performance indicators (KPIs) that are most appropriate for your business. Your KPIs should:

• reflect your goals
• be measurable and comparable
• allow for corrective action if things go wrong

See how to measure performance and set targets.

Compare your business with others

It's useful to understand how similar businesses approach the same issues. This comparison is known as benchmarking. Benchmarking can be:

• on a basic, like-for-like level - such as comparing energy costs between similar businesses
• more detailed, such as sharing data and analysing production and stockholding patterns with other businesses you trust

See more on benchmarking your business performance.

Streamline your processes

Regularly consider if there are more efficient ways to reach your goals. For example, you may always produce a particular type of product at a specific time in the month, but would it ease your cashflow if you produced, shipped and invoiced it earlier, or later, in the month?

See how to increase efficiency to maximise your profit.