Productivity ratios are vital for determining how close your business is to maximizing output. They are also an important starting point for identifying bottlenecks and inefficiencies. There are many ways to calculate productivity rates, and not all are easy to understand. While you might need a math expert or an accountant to calculate productivity rates using more complex formulas, simpler formulas can provide equally important information.
There are various way to calculate productivity growth, but all involve dividing an output such as sellable goods by an input such as labor costs, raw materials or equipment.
Productivity growth rates examine the relationship between input and output. Although labor is the most common input factor, you also could use variables such as equipment, raw materials and money to calculate productivity growth rates. Generally, the formula for calculating the productivity growth rate is output divided by input. The formula is the same whether you’re running a manufacturing business or providing lawn care services. The true value of a productivity ratio comes not from performing a single calculation, however, but from calculating productivity rates according to a set schedule in which you measure changes over time.
You should calculate the current productivity rate as a starting point. For example, if you’re running a lawn care service business and find that it takes 24 man-hours per day for three employees to cut 30 lawns, current productivity is 30 lawns divided by 24 man-hours hours divided by three employees, or 1.25 lawns per hour per employee.
You can now take this calculation a step further by evaluating productivity in terms of the cost per hour to run each mowing machine. If fuel and equipment maintenance costs average $120 per day, it costs $4 per hour – $120 divided by 24 hours divided by 1.25 lawns per hour – to run three mowing machines during an eight-hour workday. Fluctuating fuel prices and increasing maintenance costs as the equipment ages can have a significant impact on this number over time.
Productivity growth or decline is simply the measure of changes over time. To do this, you simply calculate the new productivity rate and subtract it from a previous rate. For example, if a new calculation shows your employees are cutting 1.50 lawns per hour, employee productivity has increased by 25 percent.
You should also evaluate costs to determine whether productivity actually increased. For example, if it costs $4 per hour to cut 1.25 lawns, the per-lawn cost is $4/1.25, or $3.30. However, if costs rise to $6 per hour to cut 1.5 lawns, the per-lawn cost rises to $6/1.50 or $4. Productivity in terms of money actually decreases by 80 cents per lawn. If you’re cutting 30 lawns per day in a five-day workweek, costs rise from $480 to $600 per week.
A more complete investigation is necessary to discover how to overcome the increased costs and resulting lower productivity. This is why it’s vital to consider more than just man hours in calculating productivity growth rates.