Business Valuation For Dummies
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An effective strategy for implementing change in your business means making the choices and adopting the tools and processes that generate the best results at the least cost for your business or organization. Cost here refers not to just dollars and cents, but also impacts on all other resources, including time and employee happiness.

Too often, people focus on the financial aspects of efficiency while ignoring or underestimating the effects on other areas. You do not want to run or work at a business that focuses on cost savings above all else.

Consider efficiency through the lens of a Pareto Improvement, named after Vilfredo Pareto. When you make a Pareto Improvement, you improve the situation of one person without negatively impacting anyone else. Giving John a higher salary without reducing anyone else’s salary or sacrificing someone else’s raise is a Pareto Improvement.

If, however, you only had enough money to give either John or Mary a raise — so John’s raise comes at Mary’s expense — it is not a Pareto Improvement.

More broadly, business efficiency is the application of Pareto Improvements in a way that considers not just individuals but also sectors of the business. A change is efficient if it increases customer service satisfaction without negatively impacting the IT or Finance departments.

This is in opposition to the idea of a zero-sum game, wherein there is a finite resource and adding some to Person A by definition means taking some away from Person B. Some people view world safety as a zero-sum game — when the United States gains four nuclear missiles, it is four missiles safer, and every other country is relatively less safe.

The terms efficiency and effectiveness are often used interchangeably, but they do not mean the same thing. A terribly inefficient process can still be quite effective. Effectiveness is how often a process gets to its stated end result. Walking and running are two effective ways to get to the store, but running may be more efficient given the circumstances.

Efficiency is different for everyone

In light of the definition given, it’s important to understand that there is no mathematical equation for efficiency that applies universally. Your organization’s specific goals, values, experiences, and resources all color whether a given choice is efficient or not.

For example, if you run an organic dairy farm, it would never be efficient to give your cows daily antibiotics en masse. This would make your milk non-organic, and effectively lower your output to zero no matter how much actual milk was produced. If you are a non-organic dairy farm, however, then antibiotics may make perfect sense to lower your healthcare costs and bovine fatality rates.

Additionally, resource costs are relative. Adopting the very latest technology is usually not the most efficient option for a low-tech business when it doesn’t have the employee skills to use it correctly or the in-house technical support to maintain it.

Similarly, making one change that saves 30 minutes per employee per month may not make that much of a difference in a four-person firm, but would free up the equivalent of multiple additional employees if a 1,000-person firm made the same decision.

Efficiency is sharing knowledge with others

Efficiency enhancements rarely happen in a vacuum. Even enhancements that seem straightforward, such as reviewing a bank statement and realizing you are paying “too much” on equipment maintenance, rely on outside factors. There is no set correct amount to pay for equipment maintenance — what matters is what everyone else is paying for it, and how your business and its needs fall on that scale.

There are always improvements to be had, new skills to learn, and new efficiency-enhancing technologies entering the market. There are experts who have been thinking about efficiency nonstop for over a decade and still learn new things every day.

The business world is generally a secretive one. There is much concern about competitors gaining access to your customer base, stealing your best employees, or digging the secret sauce recipe out of the garbage can.

But when it comes to efficiency improvements, there’s much to gain from sharing. In fact, if Motorola hadn’t shared its internal process for improving quality and cutting costs, Six Sigma would never exist. Same with Toyota and Total Quality Management.

So the next time you’re at a Chamber of Commerce meeting or an industry trade show, don’t be shy about talking efficiency shop. Not only can sharing tips help build strong bonds with vendors and potential clients, but you’ll likely be surprised at the value of the ideas you hear in return.

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