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What is Operational Efficiency?

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What is Operational Efficiency?

Read Time: 6 minutes Published: March 21, 2022

Operational efficiency is an important metric in any business setting. The success of your business depends on its ability to realize high outputs while minimizing the required inputs – all while maintaining quality. To achieve this, you should focus on efficient operations. Efficiency helps reduce the wastage of money, time, and resources.

Efficiency may not seem like an easy concept to measure, but you can do so by comparing the inputs and the outcomes in your business. Let’s look at what operational efficiency entails and how you can evaluate and improve it in your business.

What is Operational Efficiency in Business?

Operational efficiency is a metric that focuses on the relationship between a business’ output and input by measuring the efficiency of a business’s profits as a function of the operating costs incurred. When the operational efficiency is high, your business is generating higher income while cutting down on the costs involved. 

What is the Difference Between Operational Efficiency and Effectiveness?

Operational efficiency refers to the ability of a business to reduce the wastage of resources like time and materials, while still managing to produce high-quality products and services. On the other hand, operational effectiveness entails doing the right things to help your business maximize the use of its inputs.

This means that operational efficiency helps you to complete tasks in the least time possible, using the least amount of resources possible, while operational effectiveness makes it possible for your business to produce high-quality products.

The Operational Efficiency Ratio

The operational efficiency ratio shows how efficient your business is at minimizing costs while generating income. It shows the impact of your management by comparing the total expenses incurred with the net sales or revenue.

What is a Good Operational Efficiency Ratio?

If the operational efficiency ratio of your business decreases, then the operating costs have significantly reduced. The smaller the operational cost, the more efficient your business is at generating profit. Typically, an operational efficiency ratio of 50% and below is good.

The operational efficiency ratio formula is:

(Operational expenses + Cost of goods sold) ÷ Net sales

Operational expenses vary depending on your business. They include the interest paid, taxes, and other expenditures, including:

  • Property taxes
  • Office supplies
  • Rents

The cost of goods sold refers to the overheads that are incurred during production. They can include:

  • Labor costs
  • Repairs
  • Maintenance costs
  • Wages
  • Cost of materials

Operational Efficiency Ratio Example

Let’s take an example of a company with $12 million in net sales per annum. Operational expenses for the year amount to $1.5 million, while costs of goods sold (COGS) is $6 million. Using the formula outlined above, the operational efficiency ratio for this organization works out as follows:

(1,500,000 + 6,000,000) ÷ 12,000,000 = .625 or 62.5%

Essentially, this result means that 62.5% of the company’s net sales are absorbed by operating costs, which is significantly higher than the desired ratio of 50% or lower. Keep reading for the steps a business in this position should take to improve operational efficiency. 

7 Ways to Improve Operational Efficiency

Businesses should always strive to enhance and improve their operational efficiency. If your efficiency ratio keeps increasing, your business expenses are absorbing a big chunk of revenue generated. 

To prevent this from happening, it’s crucial to analyze and find ways to control your costs. This will help optimize your business operational efficiency, and increase your profit margins. Here are seven ways to improve your business’s operational efficiency:

1. Understand and review your business operations

You should adopt routine operation evaluations to help identify inefficient processes. Streamlining your operational strategy will improve the operational efficiency of your business. You should also perform metric analysis and regular audits to evaluate your operations effectively.

2. Provide regular training

You can only improve or maintain operational efficiency if your employees follow company policies and best practices. Regularly training your employees on systems and processes is beneficial for your company’s operations. You can also adopt various training practices, including posting public cheat sheets, implementing a coaching or mentoring program, and documenting SOPs and methodology reports.

3. Simplify communication and access to information

Ensure that all your employees have consistent access to essential and accurate information. This can be implemented by adopting a secure and reliable network in your business and ensuring that employees have access to the systems, apps and resources they need to do their jobs. Inadequate access to resources leads to confusion and lost time, which seriously impacts productivity.

4. Focus on order fulfillment

As your business grows and order volumes increase, ensure you have the right tools in place to meet the high demand. Automate wherever possible to reduce the risk of human error, and create an environment where the relevant workers are supported to perform at their best. 

5. Prioritize your employees

Prioritize your employees through incentives and wellbeing programs, and develop KPIs that reward top performers. This will increase employee retention and satisfaction, which subsequently has a positive impact on productivity. Employees are the driving force behind your operational efficiency, and should be treated accordingly. 

6. Set higher standards and goals

Progress can only be made if an organization regularly assesses current standards and sets new goals to make improvements. You should also regularly assess the relevance of your systems to ensure that you only retain functionalities and services that help you to reach your goals. 

7. Review and refine processes

Refining the processes of your business’s daily activities can help improve efficiency significantly, particularly if you can automate repetitive work that takes up your employees’ time. Automation, regular reviews, and updating your processes are all vital to improving operational efficiency.

The Role of IT in Operational Efficiency

Leveraging technology in your business is key to achieving operational efficiency. With technology, you can effortlessly automate various aspects of your business, including onboarding and offboarding, device provisioning, security updates, and more.  

IT also helps in ensuring effective communication and information sharing, which enhances inter-departmental collaboration and productivity.  However, for IT to effectively contribute to your operational efficiency, it’s important to keep the associated costs to a minimum. Building an in-house IT team can be surprisingly expensive when you factor in the costs of software, hardware, IT tools, and personnel. 

Outsource Your IT Support

The high cost of managing an in-house IT team can be overcome by outsourcing to a managed IT solution, like Electric. Outsourcing your IT needs means enjoying the benefits of technology in your business without investing in an in-house IT team. You will not only reduce your infrastructure expenses, but also access professional and consistent IT support. Get in touch today to learn how our team of experts can help your business grow and maximize its profits by reducing IT costs.

Jessica Farrelly

Jessica is a content writer with more than 8 years of experience covering SaaS and the tech industry. She has worked with both B2B and B2C publications across North America, Europe, and APAC and currently writes about IT Solutions or Electric.

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