5 Costs of Operational Inefficiency

operational inefficiency affects money, time, quality of work, risk and strategy

Inefficiency costs companies anywhere from 20% to 30% of their revenue every year, according to research firm IDC.

Are you losing revenue because of inefficient back-office operations? Given the statistic above, it’s a good bet you are. You’re not alone. Most, if not all, companies are losing at least some revenue because of inefficient business administration.

What are the areas where inefficiency is hurting your company and affecting your bottom line?

1. Money

If inefficiency didn’t have a direct negative effect on your company’s balance sheet, we wouldn’t be talking about it. Inefficient processes alter and slow workflows and dam up your revenue stream. Losing nearly a third of your revenue every year is not a recipe for success.

For small- to medium-sized businesses (SMBs), the impact is even greater because they have less room for error. Naturally, growing competition, changing marketplaces and economic downturns can affect your profits. Inefficiency has a similar effect.

You need resources to perform all the back-office tasks necessary to run a business, but it’s inefficient to do it all yourself or have a skeleton crew do it. In essence, you’re fumbling in the dark and/or reinventing the wheel all the time, which costs precious time and money.

2. Time

Time is money: If every little task your employees have to do takes longer than it should, your company is losing money.

No matter what industry you’re in or how big your company is, you have to keep your processes and systems up-to-date to remain competitive with other companies that are doing the same. It’s one reason why we’re seeing so much automation in business these days. Using manual processes for tasks that other companies are using automated processes for puts you behind the curve.

Inefficient processes can be complex and time-consuming. If employees are wasting time navigating through complicated processes, they’re not spending time doing the actual work you need them to do. If they’re on wild goose chases all the time tracking down the information they need to do their jobs, their tasks are taking a lot longer than they should. Again, time is money.

3. Work Quality

The efficiency of your operations directly impacts the quality of work your company does. If things take longer, there are more errors. If employees struggle with morale because of frustration, the work quality of your entire company falls.

Automation is playing an ever-increasing role in certain areas of business administration. Manual entry of accounting information, for example, increases the risk of errors when compared to automated platforms like QuickBooks, which is why so many accountants use automated accounting platforms.

But you still need the accounting expertise and best practices because accounting software can’t replace actual knowledge of accounting principles. An inexperienced bookkeeper or accountant could use incorrect accounting methods, erroneously value assets or inaccurately estimate expenses. You might find yourself facing an audit or penalties.

4. Risk

Inefficiency in business administration creates very real risks for your company. And the devil is in the details.

If you’re an entrepreneur, you’re working to turn a passion, interest or skillset into a business venture. You probably spend a lot of time figuring out exactly what products or services your business will offer, how you’ll offer them and how you’ll grow.

Maybe you don’t spend enough time on an effective recruiting strategy. Yet finding and keeping the right employees (like experienced accountants) can be just as important as anything else you do, for a couple reasons.

One, turnover costs money. Two, you need expertise in certain administrative areas to avoid risk. City, state and federal regulations are many, varied and complicated. Failure to comply with laws and regulations regarding employment practices and business operations can be expensive. Simply put, you need the expertise in place to stay in compliance.

5. Strategy

Informed, intelligent strategic decisions require an accurate picture of your entire organization. They also require time.

How can you make a big financial decision if you don’t have the latest, accurate financial data? Without knowing exactly how much money is coming in and how much is going out, you’re flying blind. Accurate, up-to-date accounting information is vital to all of your strategic financial decisions.

But you can’t make those decisions if you don’t have the time to step back and see the entire forest instead of just the trees. The time you spend on bookkeeping or other administrative tasks is time taken away from strategic planning that can ensure your company’s success.

Costs of Inefficiency

Inefficiency in business administration costs money, wastes time, diminishes work quality, increases risk and prevents you from focusing on the strategic decisions that drive your business forward.

No business is immune from inefficiencies, and every business should be assessing their processes on a regular basis. Even a single percentage point improvement can translate into significant revenue gains. It’s more than worth considering.

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