The impact of the credit crunch has meant small and medium-sized companies have fewer resources to spend on evaluating the efficiency of their business. Unlike large firms, which can afford to hire expensive auditors, smaller businesses often have to do their own cost benefit analyses armed with nothing more than a pocket calculator. So how can businesses determine efficiency without breaking the bank? My advice is to work out their cost per transaction (CPT), writes Robert Epstein, business lead, small medium business, Microsoft UK.
CPT is a financial measure which represents the total cost of managing a business transaction. It factors in everything needed to make the transaction possible, including IT, documentation and labour costs, and puts it all in to a single monetary figure. CPT works by recognising that efficient businesses typically have a lower cost per transaction than inefficient ones. By comparing your CPT to other similar businesses it becomes possible to benchmark your company and determine whether the processes you have need to be improved.
About three months ago I spoke to a director of a small engineering firm who was concerned that his business processes were inefficient. I recommended that he used the cost per transaction calculator on Microsoft's website to determine whether this was the case. A few days later I received an e-mail from the director saying his CPT was £17.50. To put this in to context, most companies have a CPT between £1 and £10 depending on what business sector they are in. Food producers typically have a low cost per transaction, between £1 and £4, because their invoices consist of simple line items that can be easily processed. Engineering firms, on the other hand, have a higher CPT, between £5 and £10, because their invoices are usually detailed and thus more complex.
At £17.50, the director was able to see that his business processes were inefficient and needed to be improved. After discussing the issue with his IT supplier he discovered that part of the problem was an archaic Sage ERP system which relied on DOS. The system was not interacting with other parts of the business and effectively doubled the time it took for each transaction to be processed. Interestingly, the director told me recently that he used his CPT calculation to justify to his stakeholders why they needed to invest in a new ERP system. It never occurred to me of using CPT in this way, as a sort of internal sales tool.
From my own experience, one of the most useful things about CPT is the way you can use it to monitor efficiency. Back when I ran my own small business I used CPT to monitor my internal processes after new IT or financial systems had been deployed. By regularly checking my cost per transaction I was able to see whether these processes had improved the general efficiency of my business. Quite often what thought had improved my business actually hampered efficiency. It is for this reason that I think CPT is truly worthwhile, and why I will continue to recommend it to small and medium sized businesses.