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    Is profitability the only way of judging the efficiency of a business?
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    (Original post by Demetre)
    Is profitability the only way of judging the efficiency of a business?
    I've just found this for you using the search function

    (Original post by Juno)
    Operational performance is basically how well the business is performing. The main way to measure this is to see how much profit the business is making - how much money is made when all costs have been accounted for? But sometimes, the business might deliberately be making a small short-term loss - they may be expanding, and so need to spend £2million on a new warehouse. If you just look at profit there, the business will look bad, but they can't be doing that badly if they had £2million to spend on expansion.

    So other things to look at might be
    • Customer numbers - how many new customers is the business getting, and how many repeat customers?
    • Market share - compared to the other businesses in the same sector, how is this one doing?
    • Customer satisfaction - do the customers come back because there is no alternative, or do they come back because they are genuinely happy?
    • Customer complaints - if you have more customers you're likely to get more complaints, but as a percentage is it increasing or decreasing?
    • Staff retention - if loads of employees are leaving, there's possibly something wrong with the business. Employees will always leave (because they want a change etc) but if there are high numbers it can indicate a problem
    • Share prices - if share prices are dropping it's usually a bad sign
    • Assets - what is the overall value of everything the company owns?

    If you wanted to look at the performance of a particular department (in a large business) then you would need to consider targets that specifically relate to that department. So there's no point looking at the sales generated by the IT department if they only speak to employees and have no customer contact. So things to consider here might be
    • First time resolution - are problems actually fixed, or are they just bodged/fobbed off and so people have to keep complaining about the same issue
    • Staff sickness - if there is a high rate of staff sickness it can indicate that employees are unhappy and less motivated
    • Compensation - if the company keeps paying out huge amounts of compensation, it can indicate that there are huge mistakes being made
    • Handling time - if transactions are taking a long time to process, it can indicate that there are problems (such as staff working slowly due to lack of motivation, or systems being unnecessarily complicated etc)

    (Original post by Demetre)
    Is profitability the only way of judging the efficiency of a business?
    Efficiency is measured by combining both consumer and producer surplus. As a result profitability alone isn’t a determinant of welfare. An example is the monopoly when firms charge higher, capturing more profits but consumer welfare is distorted and leads to the deadweight loss as producer gain is outweighed by consumer loss.
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