The Link Between Productivity and Business Profitability

Some of the most common mistakes entrepreneurs make when trying to balance productivity and profitability are not understanding the difference between the two terms, not knowing how to measure productivity, and not believing that there is a relationship between the two.

Productivity can be defined as “the degree to which an individual or organization has achieved their goals” while profitability can be described as “the ability of a company to generate money from its operations.” A company with a high level of productivity is able to outperform competitors and gain a competitive advantage focusing on the business benefits of high productivity.

Secondly, many entrepreneurs don’t know how to measure productivity specifically in their own businesses. To create an accurate picture of your company’s productivity levels, it is important to keep track of metrics like revenue generated per hour worked or cost per customer acquisition. These will give you a sense of your business’s overall efficiency.

Finally, many entrepreneurs don’t recognize that there is a link between higher levels of productivity and higher levels of profitability. A study conducted at Ohio State University found that “each 1% increase in labor productivity leads to a 1% increase in shareholder value.” With this evidence, it is clear that increased levels of productivity lead directly to increased levels of profitability.