EBITDA improvement comes from two places: growing revenue and improving operational efficiency. Most PE firms focus heavily on the former while leaving significant value on the table from the latter. The difference between a 15% EBITDA margin and a 20% margin is the difference between a good investment and a great one.
This guide covers the operational efficiency metrics that matter most for PE portfolio companies - the KPIs that reveal where margin improvement opportunities exist and how to track progress as you capture them. We'll cover metrics across productivity, cost structure, sales efficiency, and working capital, with benchmarks and practical guidance on how to use each one.
These aren't vanity metrics. Each one connects directly to EBITDA through clear mechanisms. Track them consistently, benchmark against peers, and you'll see opportunities that would otherwise remain hidden.
The Efficiency-to-EBITDA Connection
Before diving into specific metrics, it's important to understand how operational efficiency translates to EBITDA:
Revenue Efficiency: Generating more revenue from the same resources (people, marketing spend, assets). Improvements here increase the numerator of most efficiency ratios and drive operating leverage.
Cost Efficiency: Delivering the same output with fewer resources or lower costs. Improvements here directly reduce expenses and increase margin.
Capital Efficiency: Requiring less working capital or fixed assets to support operations. Improvements here don't directly impact EBITDA but improve cash conversion and reduce capital requirements.
The best efficiency improvements combine multiple effects - they increase revenue while reducing costs and capital requirements. These compound effects are where the biggest EBITDA gains live.
The Margin Math
A 5-point improvement in EBITDA margin on a $50M revenue company is worth $2.5M annually. At a 10x EBITDA multiple, that's $25M of enterprise value created. Operational efficiency isn't just about saving money - it's about creating substantial value that shows up in exit outcomes.
Productivity Metrics
Productivity metrics measure how effectively the organization converts inputs (primarily labor) into outputs (revenue and value delivered).
Revenue per Employee
The most fundamental productivity metric: total revenue divided by total headcount.
Why it matters: Revenue per employee captures overall organizational productivity. Improvements indicate that you're generating more value without proportional headcount growth - the definition of operating leverage.
How to calculate: Annual revenue ÷ average FTE count (use average to smooth for hiring fluctuations)
Benchmarks by industry:
- Software/SaaS: $200,000-$400,000
- Professional Services: $150,000-$250,000
- Manufacturing: $150,000-$350,000 (varies by automation level)
- Distribution: $300,000-$600,000
What to watch: Track trend over time. Revenue per employee should increase as the company scales - if it's flat or declining, investigate why. Also segment by function to identify where productivity gaps exist.
Revenue per Sales Rep
A more focused productivity measure for the sales organization.
Why it matters: Sales team productivity directly impacts both revenue growth and sales expense as a percentage of revenue. Low productivity per rep suggests training issues, territory problems, or inadequate sales tools.
How to calculate: Total bookings ÷ number of quota-carrying reps (use ramped reps only for a cleaner view)
Benchmarks:
- Enterprise SaaS: $800K-$1.5M per ramped rep
- Mid-market SaaS: $500K-$800K per ramped rep
- SMB/velocity: $300K-$500K per ramped rep
What to watch: Compare top performers to bottom performers. If the gap is greater than 3x, best practices aren't being scaled effectively. Also track ramp time - how long until new reps reach productivity?
Utilization Rate
For services businesses, the percentage of available time spent on billable work.
Why it matters: Utilization is the primary driver of services gross margin. Every percentage point of utilization improvement flows directly to margin.
How to calculate: Billable hours ÷ available hours (typically 2,080 per year for full-time)
Benchmarks:
- Consulting: 70-80%
- Implementation services: 75-85%
- Managed services: 80-90%
What to watch: Track by level (junior vs. senior) and by practice area. Identify what drives utilization variance - is it demand, staffing, project management, or something else?
Cost Structure Metrics
Cost structure metrics reveal how efficiently the company converts revenue into profit.
Gross Margin
Revenue minus cost of goods sold, divided by revenue.
Why it matters: Gross margin determines how much of each revenue dollar is available to cover operating expenses and generate profit. It's the foundation of the P&L.
How to calculate: (Revenue - COGS) ÷ Revenue
Benchmarks by model:
- Software/SaaS: 70-85%
- Professional services: 30-50%
- Manufacturing: 25-45%
- Distribution: 15-30%
What to watch: Track by product line and customer segment. Wide variance suggests pricing or cost issues in specific areas. Also track trend - declining gross margin is a warning sign that requires investigation.
G&A as Percentage of Revenue
General and administrative expenses divided by revenue.
Why it matters: G&A captures overhead that doesn't directly drive revenue. High G&A percentage indicates overhead that hasn't scaled with growth or inefficient administrative processes.
How to calculate: Total G&A expense ÷ Revenue
Benchmarks:
- Under $20M revenue: 12-18%
- $20-50M revenue: 10-15%
- $50-100M revenue: 8-12%
- Over $100M revenue: 6-10%
What to watch: G&A should decline as a percentage of revenue as companies scale. If it's increasing or flat, investigate what's driving overhead growth. Common culprits: executive headcount growing faster than organization, facility costs, professional fees.
S&M as Percentage of Revenue
Sales and marketing expense divided by revenue.
Why it matters: S&M efficiency indicates how effectively growth investments translate to revenue. High S&M percentage isn't necessarily bad if it's driving growth, but it should decrease over time as the company scales.
Benchmarks (SaaS):
- High growth (>50% YoY): 40-60%
- Growth (25-50% YoY): 30-45%
- Moderate growth (<25% YoY): 20-35%
What to watch: Track S&M efficiency over time. The ratio should improve as the company builds brand awareness, customer referrals, and repeatable sales motions. If it's not improving, investigate the underlying drivers.
| Cost Category | Key Question | Typical Opportunity |
|---|---|---|
| COGS / Gross Margin | Are we efficient in delivering our product/service? | 2-5 points of margin improvement |
| S&M Expense | Are we efficient in acquiring customers? | Improved CAC payback, higher LTV:CAC |
| G&A Expense | Is our overhead appropriate for our scale? | 2-4 points as % of revenue |
| R&D Expense | Are we investing appropriately in product? | Better output per R&D dollar |
Sales Efficiency Metrics
Sales efficiency metrics measure how effectively go-to-market investments translate into revenue.
Customer Acquisition Cost (CAC)
The total cost to acquire a new customer.
Why it matters: CAC determines the efficiency of your growth engine. Lower CAC means you can grow faster with the same investment, or achieve the same growth with better margins.
How to calculate: (S&M expense) ÷ (new customers acquired) for a given period. Can be calculated as blended CAC or segmented by channel.
What to watch: Track CAC by channel and segment. Some channels are more efficient than others. Also track CAC trend - it typically increases as you exhaust easier-to-reach customers, but shouldn't increase faster than LTV.
CAC Payback Period
The time required to recover customer acquisition cost through gross margin.
Why it matters: Payback period indicates how quickly you recover your growth investment. Shorter payback means faster cash recycling and less capital required to grow.
How to calculate: CAC ÷ (monthly revenue per customer × gross margin %)
Benchmarks:
- Excellent: <12 months
- Good: 12-18 months
- Acceptable: 18-24 months
- Concerning: >24 months
What to watch: Payback should be significantly shorter than customer lifetime. If payback is 18 months and average customer tenure is 24 months, unit economics are marginal at best.
LTV:CAC Ratio
Customer lifetime value divided by customer acquisition cost.
Why it matters: LTV:CAC is the fundamental measure of unit economics. It answers the question: is it worth acquiring customers at our current cost?
How to calculate: (Average revenue per customer × gross margin % × average customer lifetime) ÷ CAC
Benchmarks:
- Excellent: >5x
- Good: 3-5x
- Acceptable: 2-3x
- Concerning: <2x
What to watch: LTV:CAC below 3x suggests inefficient customer acquisition or poor retention. Investigate both sides - can you reduce CAC or increase LTV through better retention and expansion?
Magic Number
The efficiency of sales and marketing spend in generating new revenue.
Why it matters: Magic Number measures how much incremental revenue you generate for each dollar of S&M investment. It's a key indicator of whether to invest more in growth.
How to calculate: (Current quarter net new ARR) ÷ (prior quarter S&M expense)
Benchmarks:
- >1.0: Invest aggressively - S&M is highly efficient
- 0.75-1.0: Healthy - continue investing
- 0.5-0.75: Moderate - investigate efficiency opportunities
- <0.5: Concerning - fix efficiency before investing more
Sales efficiency metrics aren't just for SaaS companies. Every business has a customer acquisition cost and lifetime value - the calculations may differ but the concepts are universal. Understanding unit economics is fundamental to profitable growth.
Working Capital Metrics
Working capital metrics measure how efficiently the company manages cash tied up in operations.
Days Sales Outstanding (DSO)
The average number of days to collect payment after a sale.
Why it matters: High DSO ties up cash that could be used for operations or growth. It also indicates potential collection issues or unfavorable customer terms.
How to calculate: (Accounts Receivable ÷ Revenue) × days in period
Benchmarks:
- Excellent: <30 days
- Good: 30-45 days
- Average: 45-60 days
- Concerning: >60 days
What to watch: Track DSO trend and aging buckets. Increasing DSO or growing older buckets (60+, 90+ days) indicate collection problems that will eventually become bad debt.
Days Payable Outstanding (DPO)
The average number of days to pay suppliers.
Why it matters: DPO represents free financing from suppliers. Higher DPO (within reason and payment terms) improves cash position.
How to calculate: (Accounts Payable ÷ COGS) × days in period
Benchmarks: Vary significantly by industry and supplier relationship. Generally, match DPO to payment terms - don't damage supplier relationships by paying late.
What to watch: Opportunity often exists to negotiate better terms with key suppliers, especially as volume increases. Also look for early payment discounts that offer attractive returns.
Cash Conversion Cycle (CCC)
The total days to convert inventory and receivables into cash, net of payables.
Why it matters: CCC measures how long cash is tied up in the operating cycle. Lower CCC means less working capital required and better cash flow.
How to calculate: DSO + Days Inventory Outstanding - DPO
What to watch: Track CCC trend. Improvements free up cash that can fund growth or reduce debt. Deterioration consumes cash and may indicate operational issues.
Building an Efficiency Dashboard
Tracking efficiency metrics requires systematic measurement and regular review. Here's how to build an effective efficiency dashboard:
Metric Selection
Don't track everything - focus on the metrics that matter most for your business model:
- SaaS: Revenue per employee, CAC payback, LTV:CAC, Magic Number, NRR, G&A %
- Services: Revenue per employee, utilization, bill rate realization, G&A %, DSO
- Manufacturing: Revenue per employee, gross margin by product, inventory turns, OEE
- Distribution: Revenue per employee, gross margin, inventory turns, CCC
Review Cadence
Different metrics require different review frequencies:
- Weekly: Activity metrics (calls, meetings, utilization hours), AR aging, cash position
- Monthly: Financial metrics (margins, expense ratios), sales efficiency metrics
- Quarterly: Trend analysis, benchmark comparisons, deep-dive investigations
Benchmarking
Context makes metrics actionable:
- Internal benchmarks: Compare to prior periods, budget, and across business units
- Portfolio benchmarks: Compare to similar companies in your portfolio
- External benchmarks: Compare to industry data and public company disclosures
The Efficiency Review
Institute a monthly efficiency review alongside your financial review. Don't just look at what happened (financial results) - examine how efficiently it happened (operational metrics). This dual lens reveals improvement opportunities that pure financial review misses.
From Metrics to Action
Metrics are useful only if they drive action. Here's how to translate efficiency metrics into EBITDA improvement:
Identify Gaps
Compare current performance to benchmarks and historical best. Gaps indicate opportunity:
- Revenue per employee 20% below peer benchmark? Investigate productivity drivers.
- G&A percentage 3 points above target? Audit overhead categories.
- CAC payback 6 months longer than it should be? Examine channel efficiency and pricing.
Diagnose Root Causes
Metrics show symptoms; you need to find causes:
- Low revenue per employee might be driven by overstaffing, pricing issues, or productivity problems.
- High DSO might stem from billing delays, collection process, or customer quality.
- Poor gross margin might indicate pricing, vendor costs, or operational waste.
Quantify Impact
Calculate the EBITDA impact of closing gaps:
- If G&A drops from 15% to 12% of $50M revenue, that's $1.5M annual EBITDA improvement.
- If gross margin improves from 42% to 45% on $50M revenue, that's $1.5M annual improvement.
- If DSO drops from 55 to 40 days on $50M revenue, that's ~$2M of cash freed up.
Prioritize and Execute
Focus on the highest-impact, most achievable improvements first. Build momentum with quick wins before tackling larger transformational initiatives.
Frequently Asked Questions
How do we balance efficiency with growth investment?
The goal isn't minimum cost - it's optimal efficiency. Invest in areas that drive growth (sales, marketing, product) while driving efficiency in areas that don't (G&A, overhead). The best companies improve efficiency AND accelerate growth simultaneously by focusing on different parts of the P&L.
What if improving efficiency hurts quality or customer experience?
Real efficiency improvement shouldn't hurt quality - it eliminates waste, not value. If "efficiency" initiatives damage customer experience or product quality, they're not efficiency - they're value destruction. Always track quality and customer metrics alongside efficiency metrics.
How quickly can efficiency metrics improve?
Timeline varies by initiative type. Pricing improvements can show results in 30-60 days. Procurement savings often take 60-90 days to negotiate and implement. Productivity improvements typically take 90-180 days to materialize. Structural cost reductions may take 6-12 months.
Should efficiency targets be the same across portfolio companies?
No. Targets should reflect each company's stage, industry, and strategic priorities. A high-growth company should tolerate lower efficiency for faster growth; a mature company should prioritize efficiency. Use benchmarks appropriate to each situation.
How do we track efficiency metrics across diverse portfolio companies?
Standardize definitions and reporting frameworks while allowing for business model differences. A portfolio intelligence platform can automate data collection and normalization, enabling cross-portfolio comparison with consistent methodology.
The Bottom Line
Operational efficiency is one of the most reliable sources of EBITDA improvement in PE portfolios. Unlike revenue growth, which depends on market conditions and competitive dynamics, efficiency improvement is largely within management's control. It's the value creation lever that works in any environment.
The key is visibility. You can't improve what you can't see. By tracking productivity metrics, cost structure ratios, sales efficiency indicators, and working capital measures, you create the visibility needed to identify opportunities and track progress.
Start with the metrics that matter most for your business model. Establish benchmarks - internal, portfolio, and external. Review regularly. When you find gaps, diagnose root causes and quantify impact. Then execute with focus and discipline.
The math is compelling. Consistent efficiency improvement - even just 1-2 points of margin per year - compounds into substantial value over a typical hold period. That's the power of operational excellence: predictable, controllable value creation that shows up in exit outcomes.
Track Efficiency Metrics Across Your Portfolio
Planr provides real-time visibility into operational efficiency metrics across all your portfolio companies. Identify gaps, benchmark performance, and track improvement.
