Planning for profit
Businesses need to make time to plan for the future says Darren Shirlaw
Efficient capacity planning has the power to take you along the route to growing your business profitably. Darren Shirlaw reveals how you can achieve it
Clients can all tell me their turnovers, profit margins and cashflow situations. But few can tell me the maximum capacity of their business or its current running rate or what percentage of that capacity is being used efficiently.
A business making efficient use of all its resources is running at around 80% capacity – there will always be holidays, sickness, malfunctions, etc. But most I see are operating below this, and lost efficiency means less profit.
The hamster wheel effect
It is usually easy to gauge which businesses have a capacity issue. Some are busy, but not profitable and staff seem to be working flat out, but there’s no time to take on more work or plan for the future. Everyone involved feels like they’re on a hamster wheel with no way out.
If you run an organisation that sells time-based services, you can look at the potential hours available and actual hours sold to see what extra capacity exists. Other types of companies can look at constraints. For example, if a company produces 100 units a day, but can only distribute 50, it has a bottleneck that’s constraining efficiency.
Understanding capacity makes business planning easier. A consultancy that is unaware it’s only working at 50% efficiency and wants to grow, is likely to take on more staff, driven by division heads who are apparently unable to take on any new business. Yet having more people who are not working efficiently only decreases 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 efficient functionality – assessing which job functions and activities are required to operate the business and then allocating roles to the people who are most appropriately skilled or experienced for that job.
Inefficiencies occur when roles overlap and, for example, operational people are spending too much time on administration. For example, it is inefficient for a consultant who is charged out at £1,000 a day to spend 50% of their time on non-specialist admin jobs.
When the capacity running rate is finally increased 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 more staff or new premises, or unbundling products or changing pricing strategies. One firm of lawyers I worked with increased growth by concentrating on larger, more profitable clients.
Imagine a cup half empty (50% capacity). When it is almost full (following a platform strategy), the contents need to be tipped into a bigger cup (growth strategy), where the contents revert to taking up 50% of the available volume. When you have consolidated that growth (platform strategy again) you will change to another growth strategy. And so on. Understanding this capacity model enables you to plan and develop a profitable growth strategy – and gets you off that hamster wheel.
About the Author
Darren Shirlaw founded Shirlaws in Australia in 1999. Since then he has spearheaded its development across three continents. It is now one of the fastest growing international business coaching organisations, working predominantly with mid-tier clients (20 to 1,000 employees). Darren also has nine years’ of valuable experience in the fund management industry.