Knowing Your Operational Capacity:
Avoid Blowing Your Revenue Engine
Do you know exactly how much money your current operation can produce? Over a 90 day period in 2009 I presented our “Tuning Your Revenue Engine” seminar to more than 100 business owners and professionals. Less than a handful actual knew the maximum capacity of their business. That is, exactly how much revenue their business can produce without adding additional assets to the operation.
I frequently discover this problem with small to medium sized businesses when they call wanting to increase sales. When I ask “how much more sales do you want?” More often than I care to admit the answer is, “as much as you can get.” Wrong answer! This answer throws up a red flag for how well the rest of their business is running.
Not knowing how much more business you can handle is the kiss of death for your company. Not being able to deliver on orders will put you out of business faster than having too few sales.
So how do you figure your maximum capacity? It’s actual very simple. First, determine how long it takes someone working around the clock to complete one unit of your service or product. This is referred to as your cycle time.
Next, take the total number of available work hours and multiply this by the number of employees that complete work. Then divide this number by your cycle time. The result is the maximum number of units your business could produce – your maximum capacity. To determine the maximum revenue just multiply the maximum capacity by the average price per unit.
Let’s look at a quick example. A service company with about $2.1 million in revenue wants to grow their revenue to $3.5. Can they get there from here? It takes a technician, of which they have 20, about 3 hours to provide their service to a customer. So, in a typical day a technician can make 2 service calls or about 6 hours of billable time. If you multiply this time 20 days in an average month there are 120 billable hours per month.
Here is their maximum calculation:
Now, let’s see what the maximum revenue is in this example. The average price is $295. This means their Maximum revenue is $236,000 per month or $2,832,000 annually. We see in this example they cannot reach their goal of $3.5 million without adding operational capacity (more service techs). That means a capital investment that they may not be able to make right now. So, the owner may need to reassess their revenue goal.
The key here is you would know exactly how much you can sell before problems are created in operations and can set your sales objectives appropriately. In a future posting we will look at the sales calculations to better understand what it will take within sales to produce the $2.8 million of capacity we have to sell.
This is not the only way to arrive at the conclusion we did here. I would like to hear from you, the reader, to see how you make these kinds of decisions for your business.