By John Rosling, UK CEO of Shirlaws
Most businesses we see are operating well below their maximum capacity and consequently are missing significant potential profit.
When I talk to clients they can all tell me their turnover, profit margin and cash flow. But few business owners can tell me the maximum capacity within the business and their current running rate (what percentage of that capacity is being used efficiently).
A business that is making efficient use of all its resources (people, equipment, machinery etc) is running at around 80 percent capacity — there will always be holidays, sickness, plant malfunctions etc that will prevent 100% use of resources. Very few businesses operate anywhere near their true capacity. What a waste!
“It is usually easy to gauge which businesses have a capacity issue. They are the ones that feel busy, but are not profitable. Ones where staff seem to be working flat out and yet there’s no time to take on more work or plan where the business is going.”
So how do you measure capacity? If you run an organisation that sells time-based services then you can obviously look at the potential hours available and actual hours sold and see what additional capacity exists within the business. For other types of companies, choose a measure that is appropriate to your business — and you may need a different metric for different functions in the business. It’s then vital to look at what constraints there are in the business. For example, you may have a machine that is producing 100 units a day, but you are only able to distribute 50 units a day because of the functional efficiency of this part of the business — a bottleneck that constrains your ability to maximise efficiency.
By understanding capacity issues you can get more clarity around business planning and growth strategies. Let’s stay with the time-based business. A consultancy that is only working at 50 percent efficiency (but is unaware of the fact) and wants to grow, will probably take on more staff. The owner will probably be pushed to recruit by division heads who are apparently unable to take on any new business. Yet increasing the number of people you employ who are not working efficiently (or to their full capacity) only decreases the company’s profitability and is not growing the business, but merely expanding it.
Profitable growth occurs when an organisation plans its future in a series of ‘platform’ and ‘growth’ strategies.
In a platform phase, the company increases its efficiency and profitability. This is initially achieved by implementing the efficient functionality we covered in the previous article 'The Fully Functional Business'.
Inefficiencies occur when roles overlap and for example operational people are spending too much time on administrative tasks. In our consultancy example, it is inefficient for a consultant who is charged out at £1,000 a day to spend 50 percent of their time on non-specialist admin jobs. Platform initiatives may also include training of staff or improving processes and systems — anything which raises efficiency levels but does not actually grow the capacity of the business.
When the implementation of these platforms has increased the running rate (over time) from 50% to around 75% then the business needs to change from a platform to a growth strategy. This could involve investing in resources such as additional staff or new premises, or could be about looking at market position, products or pricing strategies or changing client criteria to concentrate only on larger, more profitable clients and stopping working with smaller clients. We looked at these strategies in previous articles: 'Understand Your Business Cycle', 'The Fully Functional Business' and 'Capacity Planning - The Secret To Controlled Profitable Growth'.
If the distinction between “platform” and “growth” is confusing imagine a cup half empty (50% capacity). When it is almost full (having followed a platform strategy), the contents need to be tipped into a bigger cup — and that is a growth strategy — at which point the contents revert to taking up perhaps 50% of the larger available volume. When you have consolidated that growth (platform strategy again) you will change to another growth strategy. And so on.
You and your board can use this concept to plan the journey (vision) you would like to take to your commercial goal. For example, you can imagine that a strategy of building your running rate (platform) to 80% before making modest investments to grow your capacity (growth) such that running rate drops to 65% would feel very different to, say, a 40%/60%/40% strategy.
You can also plan ahead exactly what platform and growth strategies you will adopt and when these will be phased in, how much each will cost, and exactly what impact that will have on your run rate and therefore your profitability. That is a far more useful document than most business plans, will allow you to feel absolutely in control — and make a fairly compelling case to your bank.
Understanding this capacity model enables you to plan and develop a profitable growth strategy for your business - and gets you off that hamster wheel.
To find out more you can download my new book for free at www.shirlawscoaching.co.uk
• Know the capacity of your business and current running rate — these enable you to plan and develop a profitable growth strategy for your business.
• Understand where the bottlenecks that choke the profitability of your business are — and release them.
• Understand the difference between Platform Strategies and Growth Strategies and use these to maximise profitability today and plan your growth tomorrow.
• Develop a Capacity Plan and use this as a daily management tool.
Shirlaws is an international business performance and coaching company. We help business owners achieve their business and life objectives. Our programmes have changed the lives of thousands of business owners all over the world by removing barriers to growth and ensuring their business pays them richly in money and time. What Shirlaws brings is a language and system for growing businesses and building internal capability. A language and system that gives our clients three simple things: more time, more money, and less stress. Founded in 1999 Shirlaws has now grown to include operations in North America, UK, Europe, Middle East, Australia and New Zealand. Our coaches take the many complex issues involved in running a business and help make them simple and easier to manage. We work alongside clients to guide their businesses to achieve long-term, profitable and sustainable business growth.
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