You probably know how much revenue or income you produced last month. You probably have a figure in mind for sales over the next few years. But if you’re like most businesses, you’ve never done the exercise to determine your current capacity to reach these targets.
That’s important, because not knowing your capacity to grow means you can’t be sure how efficient – or not – your business is at any time. It also means not being clear on how you are going to move from where you are today to that goal you have in the future What is Capacity?
Capacity is the maximum output, usually revenue, a business can generate given its current resource mix.
Most "instinctive" business planning is top-down – it’s based on what the owner, partners or managers want to achieve, without first asking "what is the maximum we can achieve with our business right now?"
The classic example is setting revenue or profit figures by taking last year’s information, and adding 10 percent. This can sometimes mean placing too high an expectation on an already super-efficient team. More often, however, it’s setting a target which is too low – the business has the capacity to increase revenue by much, much more.
So how do you know? Think of your business as a cup. The size of the cup, its capacity, is the maximum revenue you can generate.
Your capacity figure is a "perfect world" figure – with all resources at maximum efficiency, how much revenue could you generate?
For example, 12 accountants charge $200 per hour, work 40 hours a week and 50 weeks a year. Their annual capacity is 12 x $200 x 40 x 50 = $4.8 million per yearCapacity Distinctions
Gross revenue is not capacity
Annual budget is not capacity
Net profit is not capacity.Running Rate – Water
The water in your cup represents your actual revenue.
This is called your Running Rate, and it’s measured as a percentage of capacity (100 percent).
For example, if your Capacity is $2M and you actually generated $800K in revenue, your Running Rate would be 40 percent
Calculation: Running Rate = Actual Revenue / Total Capacity
Your Running Rate is an important measure of your business.
Your current revenue as a number on its own doesn’t tell you much
Running Rate is an objective measure of efficiency
A business may be busy but revenue indicates how productive it actually is. Running rate compares productivity with capacity, measuring your business’ efficiency
That unrealised capacity relates to the inefficiencies within a business. Since capacity represents maximum efficiency, any space between capacity and actual must be inefficiencies. As the water level increases, and your Running Rate increases, inefficiencies are removed.
Uncontrollables
So can you fill the cup with water? Not in a practical sense – any unexpected movements will cause you to spill some water
The same is true in business – all organizations are susceptible to uncontrollables, aspects of a business such as illness which are outside of your control, and which prevent a business from achieving capacity
Uncontrollables usually account for between 20 percent and 30 percent of a business’ capacity.
Many businesses have encountered difficult periods by budgeting for 100 percent without appreciating that the maximum realistic running rate is only ever 70 to 80 percent. It is also quite probable that a company with less than a 40 percent running rate is not achievable over the long haul
What are your Strategic Options? Once you are aware of your Running Rate, you can select the appropriate type of strategy for your business. All strategies fit into one of two categories:
Platforms: Strategies which reduce inefficiencies in a business, filling the cup with water and usually making it more profitable
Growth: Strategies which increase the capacity of a business, growing into a bigger cup, though not necessarily increasing revenue or profitability
Platform versus growth is going to be influenced by your risk appetite. Do you want to grow in increments or are you looking for world domination. There is no wrong answer. ...
Nigel Hartley is a Business Coach with Shirlaws Coaching, Shirlaws is an international coaching firm that works with businesses in three areas-revenue, productivity and strategy, and we focus not only on commercial aspects of doing business, but on the cultural factors that affect human interaction as well. You can contact Nigel on 707-573 7154 or by email at nhartley@shirlawscoaching.com. www.shirlawsonline.com
