What does productivity mean? A guide for small businesses

Productivity broadly refers to how much gets done, but you also often hear that UK productivity overall is lagging behind other countries.

So what does productivity mean in this sense and how is it measured? Find out how to apply the definition to your small business.

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What is productivity?

In economics, productivity measures growth and efficiency. It’s a ratio of what gets produced against the inputs needed to produce it.

Those inputs could include land and equipment, but labour is the most common measure.

This means that when we usually talk about productivity, we talk about how much a particular workforce produces. But how is productivity measured?

Using the labour productivity formula

When calculating a country’s productivity, economists use this calculation:

Gross domestic product (GDP) / total productive hours

But if you’re calculating your business’s productivity, you can use the labour productivity formula:

Output (e.g. goods or services) / total labour hours

For example, if your business makes £100,000 of goods in 2,000 hours, this costs £50 for each hour of work.

You can also divide the output by the number of employees, for example if it took 20 employees to make £100,000 worth of products, it cost £5,000 each employee.

It’s also possible to work out how efficient your business is. If you have a standard number of hours that it takes to complete a project or make a product, and it takes more time or less time, you can work out efficiency as a percentage. For example:

(Standard number of hours / number of actual hours worked) x 100 = percentage efficiency

So if the standard number of hours is 75 and actual hours worked is 82, you operated at 91.5 per cent efficiency.

What does productivity mean for your business?

As above, productivity in business essentially means how much you produce by number of employees, or hours worked.

Being more productive helps to grow your business, because it increases profitability, enables higher wages (attracting new employees), and improves customer satisfaction.

On the other hand, low productivity causes stagnation. It costs your business money in decreased efficiency and often means that your employees aren’t engaged with their work.

This means that keeping on top of your business productivity is important, so use the labour productivity formula above and track your results over time.

If you notice you’re lagging, you can put steps in place quickly to remedy the problem.

The Office for National Statistics has a productivity calculator that you can use to track where your business sits in relation to other businesses in the same sector.

The productivity formula is just one of many calculations that you can use to track performance and efficiency. Take a look at our guides that give more tips on managing the health of your business:

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• How to do a cash flow forecast (plus free template download)

Increasing productivity: tips for your business

There are a number of ways to increase productivity in your business. These include making better use of technology, empowering your employees, and implementing lean and agile processes.

Communication tools – email can be a significant drain on time. So if you find that it’s slowing your business down, you may see productivity gains in using software like Slack or Microsoft Teams.

Project management tools – it’s now easier than ever to see where your projects get held up. Tools like Trello, Asana, Notion, and monday.com let you move work through a virtual timeline, assign owners, and keep all your files in one place. These tools are usually customisable, meaning you can use them in the way that’s best for your business.

Product management methodologies – study how competitors in your sector operate to see if you can implement processes that are proven to work for your product or service.

Broadly speaking, Toyota popularised lean manufacturing, whose principles around minimising waste and maximising efficiency now extend far beyond motor engineering. And agile methodology is now at the forefront of product delivery – why not use agile principles in your business to increase productivity?

Reward and recognise your employees – your employees will often be more productive when they feel empowered to work in the way that’s best for them, and their efforts are recognised and rewarded properly.

What’s more, do they have all the tools needed to perform at their best? It could be worth surveying them to check how engaged they are – the data you get back can help you make improvements. Read more about employee retention and recognising employees to increase productivity.

What tips do you have about increasing productivity? Share them with the small business community below.