JoshRunning a business is no simple endeavour. There are a great many different metrics to track even when business appears to be booming; one of the most important, though, and one of the least well-understood, is financial efficiency.
Financial efficiency is an essential measure of a company’s performance with respect to its expenditure; this measurement is at once specific and broad, being a key indicator of viability for investors and lenders and being calculable in a variety of different ways. Indeed, no two financial efficiency equations are truly the same, given the different size and structure of individual businesses.
What Does Financial Efficiency Look Like?
Generally speaking, financial efficiency refers to a ratio or percentage calculation designed to measure the effectiveness of certain growth strategies. Some might target the value of expenditure on customer acquisition, by taking the difference between two quarters and dividing it by the customer acquisition cost. Others might add growth rate and profit margin percentages together to measure growth against a sustainability benchmark.
How Can You Measure Your Business’ Financial Efficiency?
As just illustrated, there is a wide variety of calculations to use in measuring financial efficiency – not all of which are expressly relevant for a given business. Measuring your own business’ financial efficiency, then, is a matter of investigation and iteration. What are some specific ways in which you might measure your own business’ financial efficiency?
One of the simplest financial efficiency equations is the inventory turnover ratio, an equation designed to track the efficiency of a business’ inventory management and sales performance. This ratio takes the cost value of a given product, multiplied by the amount of said product sold in a given period (the ‘cost of goods sold’), and divides it by the average stock held. The result can be converted to a percentage, showing you how much inventory is sold – and whether you are investing too heavily in stock for your sales performance.
One of the more useful financial efficiency calculations, though, is the operating expense ratio. This takes your overall business expenses for a given period, and divides it by the gross revenue for that same period. The result is a percentage which, if higher, indicates less efficiency.
How to Drive Financial Efficiency
Though there are many ways of tracking efficiency, the numbers alone do not show you how to improve efficiency. The answers will be different from business to business, and from inefficiency to inefficiency, but there are numerous places to start looking. For one, you might find it more effective to use payroll outsourcing than conduct HR processes internally; this could save staffing costs and eliminate inefficiency relating to payroll or tax errors.
More generally, utilising automation technology can dramatically reduce the man-hours associated with a given task – improving financial efficiency as a result. Automation technology could also be implemented in tracking and re-ordering inventory, with smart algorithms adjusting stock management to reflect performance.