What is productivity and why should small businesses care?

We keep hearing about productivity in the news: The BBC reported in late 2016 that productivity had finally returned to pre-crisis levels. For January to March 2017, productivity had then fallen back below those 2007 levels. And now, we hear it has fallen again.

But what is productivity?

Productivity is a measure of how much we can achieve for each hour we work.

At a national level, it’s calculated as Gross Domestic Product (GDP) divided by the number of hours worked by the whole nation. Gross Domestic Product is the total value of all the goods and services produced by a country.

You can use the same measure in your business: Add your profit to your wages bill to give you the value of work produced. Then divide this total by the number of hours worked.

For example, if your profit last year was £50,000 and you’d paid yourself and your two workers £150,000 between you, then the value of your work was £200,000. Divide that by the number of hours worked (assuming 35 hour weeks) and you’ll get £36.63 per hour.

On its own, that figure won’t mean much. You’ll want to compare it to the same figure for a year ago, or more, to see if you are improving or moving backwards. You may want to compare your figure to the national average of the UK and other countries.

If you know that the same calculation last year gave you £40.00 per hour, then you know something has changed for the worse. If it was £30.00, then excellent, you’ve improved productivity.

Why would small business owners care about productivity?

Government worries about productivity because it affects the amount of tax they can collect. Small business owners should be aware of this measure too, but for a far more personal reason.

In short, the more productive your business is, the more money you are making for each hour of work. If you can find ways to be more productive, then you may be able to cut down on the number of hours you work. Or improve your own wages while not having to work longer hours.

The UK is falling behind the US, Germany and France in terms of productivity. Small businesses make up 51% of all UK private sector turnover, so small businesses aren’t immune from this.

“it takes a German worker 4 days to produce what we make in 5—Philip Hammond”

This presents those of us in small businesses with a unique opportunity. It must be possible to be more productive (like the US and Germany). And it is a lot easier for us to make changes in our businesses than it would be for a larger company.

So, what can we do?

• Look after ourselves and our workers. Happy, healthy workers are more productive.
• Invest in training. Better skills, means higher output.
• Invest in technology. Let’s not waste time on jobs that we can automate.
• Consider company culture. This is the hardest one to change, but German culture in particular promotes hard work and diligence, and could explain some of the differences in output.

What do you think? Can small businesses seize this opportunity? Leave a comment to let me know what you think.