With Business Planning in full bloom and a year where we are talking about a very tight hiring market, I think it is time to talk about time. The whole point of this is to focus you on the most important things in your business. The tight hiring means that you will have to pay more for talent than you used to. All of this means that productivity must increase.
When I define productivity, I use a financial metric that is not often used. It is Revenue per Employee. Very simple, just divide Total Revenue by the number of employees. Productivity here is defined by the efficiency that employees produce Revenue. While not an end in itself, it does give some diagnostic metrics to the bottom line. By delivering more revenue without changing the number of employees, you can drive the metric up. As most operating expenses are related to employee costs, you can see how this will make the business more efficient.
The challenge for a Small Business Owner is to know where to start on this efficiency program. The place is Alignment. I talk about Alignment in many ways to try to get people to understand how this works. If you have clarity on who your target market and the ideal client is, then you can build your business to support that group with exceptional performance. You will serve others less well, but some will be served well enough to be clients of yours as well. This is the thing that puts a natural cap on the size of any company. The size of that market that is best served by your business is close to the limit of the size of your business. Now you won’t have a 100% market share of your target market. You will get customers outside of your target market. But put the two together and they are probably close, so that makes the TAM (Total Available Market) of that target market a natural limit for companies.
Let me put this in efficiency terms. To serve a 2nd target market, you will have to replicate some functions of the first company, expend more effort to land customers or sell at a lower price than you would like. All of that lowers the productivity of the company by lowering your Revenue per Employee. That is why this is a great metric to understand productivity. Does adding another person add value to your top line? If not, then you should ask yourself why you are doing it. Many times this effect is indirect. For example, an administrator might lower the grunt work time of your sales team at a lower hourly rate. That adds to your top line by giving your Sales Team more hours per week to be with customers and prospects. So, there are lots of ways that people contribute. But you do want them to contribute to your Top Line.
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