Why operational efficiency matters when running a small business
Laura Tien
November 03, 2023
In this article, we’ve teamed up with Airwallex to break down operational efficiency for small businesses.
Operational efficiency has a significant impact on a small business’s bottom line. A strong foundation that puts the right systems and tools in place when a business is small will pay dividends as the business grows.
If a strong foundation isn’t set, the business will have reduced profits (or increased losses) until the basic structure of operations is streamlined. It’s easiest to implement these tools when your business is young so that you can continue to use them as your business becomes more established.
The following are some of the most effective tools and strategies for improving operational efficiency:
What is Operational Efficiency?
Simply put, operational efficiency analyzes the outputs a business produces and the inputs that a business needs to produce those goods/services. In quantifiable terms, operational efficiency comes down to inputs and outputs.
This ratio can be examined on a company-wide basis, or it can be analyzed in a more categorized framework. One of the most common ways to categorize is analyzing by department.
Overhead: Compare Other Options
Overhead generally increases as a business grows. Larger businesses need more space, more insurance, and often more benefits for their employees. Thus, finding ways to decrease overhead becomes more important when a business is larger.
Because most overhead is outsourced, the best way to decrease this category is usually by comparing how much alternative options would cost. Set a specific time of year when someone is charged with re-shopping leased space, insurance policies, benefits packages, software subscriptions, and any other substantial overhead expenses.
While researching these costs requires some time, the effort often more than pays for itself if the person finds even small savings on a large expense.
Labor: Automate, Communicate and Streamline
Look for ways to make employees’ lives easier, and you’ll likely reduce labor costs as a byproduct. Reducing how much time they spend on time-intensive tasks will have the most payoff, but even making routine short tasks more efficient can yield some savings.
As you consider how employees’ lives might be made easier, there are three easy ways to identify potential improvements that could be made:
- Automate: Are there any regular tasks that could be automated? This might involve setting up major infrastructure in a factory, but it also can be as simple as using an integration to fast-track your accounting and bookkeeping. Software is usually the most effective way to automate tasks, whether that’s with macro scripts, specialized programs, or recurring cloud services (e.g., backups). Amaka offers accounting integrations that automate manual data entry processes.
- Communication: Many simple software programs improve communication, reducing emails, confusion, and in-person interruptions. Make sure your business has a calendar program that everyone can access, and use a messenger application that supports different feeds. Other specialized programs may be helpful too.
Monday is a commonly used calendar software, and Slack is one of the most popular chat platforms. - Processes: Ask employees what processes could be streamlined to make their jobs a little easier. They might suggest clustering errands, changing workflows, or any other number of ideas. Employees often know best how they might more quickly do their jobs.
Manufacturing: Outsource and Adjust Orders
Not every business has manufacturing costs, but many can approach certain production processes much as a manufacturer would.
When reviewing what it costs actually to produce goods, look for ways to outsource and decrease per-unit costs when ordering:
- Outsource: Outsourcing processes is often more cost-effective than doing them in-house, particularly if they’re not your business’s core competencies. Printing, production, rendering, and more might be outsourced.
- Order: Whenever you place sizable orders for supplies or inventory, try to order as close to a quantity break as possible. Many wholesalers offer quantity discounts, and you’ll want the largest one you can get without tying too much capital up in inventory.
Delivery: Optimize Routes and Lower Shipping
Whether you directly deliver products or ship them, there might be ways to save through route optimization or alternative shipping arrangements:
- Optimize Routes: UPS has designed its drivers’ routes so that they make as few left turns (which often require waiting) as possible. You can do something similar through route optimization software such as OptimoRoute. Optimizing routes can involve adjusting where drivers go, what days certain delivery routes are made, and other improvements. Such actions can reduce fuel costs and drive time and possibly even allow you to reduce how many drivers your business employs.
- Lower Shipping: Review your shipping options periodically to see whether you’re still using the most affordable method. Keep in mind that some shippers might be cheaper when sending to particular areas or within particular time frames.
Finances: Outsource and Choose Payment Methods
Simply moving money around and keeping track of it often has some costs, especially if your business deals with overseas payments.
There are a couple of easy ways to mitigate these expenses:
- Outsource Accounting: For all but the largest businesses (and sometimes even then), outsourcing all accounting practices makes sense. This includes bookkeeping, accounting, and other financial tasks. Even if you’re a small business with a tight budget, outsourcing these processes will free up time to focus on your core operations.
- Global Payment: Globalization has led many businesses to purchase goods and services from other countries, and this means that lots of businesses must manage currency exchange rates.
One of the most efficient ways to limit currency exchange costs is using a global account that has low fees. You won’t eliminate exchange fees, but global accounts that are specifically set up for international payments usually have some of the lowest fees and best exchange rates available.
Pairing a global account with a virtual multi-currency card makes it easy and quick to pay international vendors in their local currencies. Quick payment isn’t just appreciated but can also have financial benefits. Your business might save on late payment fees and/or be able to manage cash flow better.
Make Your Business More Efficient
Your business can almost certainly improve one or more of these areas’ efficiencies. Put the processes and tools in place to improve operational efficiency, and then use the higher profit margins and net profits for whatever best benefits your business.
Invest in growth, build up cash reserves, increase disbursements or do whatever else you deem most useful.