By Raúl Antonio Gorrín. Productivity is important in any business, and there are several ways to measure it. But the best way is to keep it simple, clear and actionable. Companies prepare budgets . Budgeted costs allow them to set prices, project sales and estimate profits. Companies base budgets on historical numbers, similar processes and calculated values. The budgets predict costs and revenues over a fixed period into the future. Once the budget period is finished, the company can determine actual costs and revenues as it books sales and pays invoices. It assigns the actual values to the same cost and profit centers it used for the budget, and it can compare the budgeted numbers with the actual figures.
When companies compare budgets with actual figures, there are often differences called variance. Variance is the number obtained by subtracting the lower of the actual and budget numbers for a particular item from the higher one. Reasons for variance can include changes in sales, changes in material cost or changes in labor cost. Variance can be favorable, if costs are lower or revenue is higher, or unfavorable for higher costs or lower revenue. Variance results from cost or price changes and from volume changes.
Another area of variance is when a sale is made we estimate the amount of labor time it would take to complete the job. That means measuring the hours—the ratio of budgeted hours to actual hours, that is. If 100 hours are budgeted for a job and it gets done in 90 hours, then productivity is at 111 percent. If it takes 110 hours to complete the job, productivity is at 91 percent.
Production staff need the hours so they can hold their crews accountable, and they need the hours to know how to schedule the work. As hours are worked, production inputs the hours on the tracking tool, so it can generate productivity reports.
Setting up these systems isn’t complicated. Keeping up with imputing data is the difficult part, but it’s worthwhile to know how to correct and improve performance and projects. As jobs are completed, the productivity numbers indicate if the estimated hours are more than or less than what was projected.
If a job takes twice as long as projected, you might find that you in reality lose money taking the job. There might be opportunities to increase productivity in any or all of these areas. If not, there’s a business decision to be made about the price of the job. It’s time to ask for an increase.
Keeping productivity at 100 percent or better is important to being profitable. It’s no secret we work in a labor-intensive industry, so driving results is a matter of understanding, tracking and reacting to productivity. By Raúl Gorrín.
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