(Read “Growing Through Difficult Times” here.)

Consider the following generic description of how most of your businesses work. To help, imagine your business as a conversion system that starts by pricing an order, then selling it. After that, all materials and services necessary to complete the product are purchased. The purchased materials, etc., then enter a production process that uses machines, software, and people to create the final product and then package, ship, deliver, and invoice it. The production process, for all practical purposes, starts with the receipt of files from the customer. Everything that happens in the production process adds value to the materials, etc. purchased for the order. That’s why it’s called value added. Value added, like GDP for the macroeconomy, is the value of your company’s output. Productivity, as defined by economists, is the efficiency with which your company produces the added value. For the sake of clarity, we will define value added in the accounting sense, so we know where to go for the numbers we need to work with to improve productivity.

Starting with the dollar value of the sales, we subtract: