Understanding your Efficiency Factor
For professional businesses, efficiency can be described as the ratio between revenue and the direct labour cost to produce that revenue.
The ultimate financial measure for an efficient practice is gross profit. To improve gross profit from an efficiency perspective, you must ensure you carry the right amount of labour. To determine the right amount of labour for your needs, you must have a “capacity management plan”. The starting point with a capacity management plan is to determine each team, department and wider businesses efficiency factor.
Efficiency factor is calculated by dividing revenue by capacity available.
The efficiency factor KPI is extremely important as it indicates which affecting area needs attention to increase profitability, if you have capacity for growth, or are carrying too much. Refer to the below table as a guide from our experience.
Capacity starts with understanding how many hours your professional employees are available to work, factoring all forms of expected leave and public holidays. The remaining hours will be what capacity is available (what’s possible).
Applying these hours by the relevant professionals charge out rate will calculate this into a monetary value. Once you have calculated the efficiency factor KPI, then you need to analyse what the percentage ranges mean.
Most professional businesses confuse their capacity management with the revenue component of a budget which usually incorporates a productivity target.
Once administrative time is factored in, most professional businesses refer to this as a productivity target. Capacity management targets what should be possible for the business not what you would like to achieve.
Efficiency is influenced by the volume of work produced, number of revenues generating employees (fee earners), pricing of services, internal systems in place and the experiences of the professionals.