Knowing Your Operational Capacity

Knowing Your Operational Capacity

Avoid Blowing Your Revenue Engine – Visiting Your Operational Capacity

Many small to medium sized businesses struggle increasing sales because they don’t know their operational capacity. When I ask “how many 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.  You need to make sure you understand your operational metrics not just your financial ones.

Not knowing how much more business you can handle can be the kiss of death for your company.  Not being able to deliver on your orders will put you out of business faster than having too few sales.

Do you know exactly how much money your business operation can produce?  Over a 90 day period I presented a workshop of our “Tuning Your Revenue Engine” management model to more than 100 business owners and professionals.  Fewer than a handful actual knew their business’ maximum capacity.  Without knowing your business’ maximum capacity you don’t know  exactly how much revenue your business can produce without adding additional assets to your operation!  Can you see the problem here?

How Do You Calculate Your Maximum Capacity?

cycle time in operational capacityIt’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?

Next, it takes a technician, of which they have 20, about 3 hours to provide their service to a customer for a single job. 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:

             __800___   =       120      X       20      ÷   ___3___
              Maximum     Tot. Avail.   # of Ops       Hours to
              Capacity           Hours       Personnel     Produce 1 Unit

 

Operational Capacity Decision Making

better decision using operational capacityNow, let’s see what their maximum revenue potential is in this example.  The average price is $295.  This means their Maximum revenue is $236,000 per month or $2,832,000 annually.

In this example, we see they cannot reach their $3.5 million goal without adding operational capacity (more service techs).  That means a they need a capital investment to get there.  So, the owner may need to reassess their revenue goal or start saving for the inevitable hire.

The key here is to know exactly how much you can sell before you will run into an operational problems are created in. Now, you can appropriately set your sales objectives. In another post I look at the “Tuning Your Revenue Engine” sales calculations so you can calculate what it will take from sales to produce the $2.8 million of capacity available to sell.

Calculate Your Operational Capacity!

Learn more about applying the Tuning Your Revenue Engine model one the Business Growth Simplified website.  Just click the icon and find out more. 

Want to calculate your operational capacity for yourself and use this simple yet powerful management model to make more predictive and profitable decisions by joining us at our regular FREE Tuning Your Revenue Engine Masterclass webinars. Just click the button below to pre-register for our next webinar.

 

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