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” and more often than I care to admit the answer is, “as much as you can get,” but that’s the 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 kill your your company. If you cannot deliver on your orders, then you’ll go out of business faster than if you have 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?
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?
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, then 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
Find out more on calculating maximum capacity and using your operational metrics to make more profitable decision using the revenue decision. Just click the link for more information on this powerful Business Growth Simplified online course.
Why Operational Capacity is Important in Decision Making
Now, 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 run into an operational bottleneck, 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.
Need Help Calculating Your Operational Capacity?
Want to calculate your operational capacity yourself? Then use our simple yet powerful management model Tuning Your Revenue Engine. The resulting metrics help you make more impactful and profitable decisions. Begin applying this powerful model to your business using one of a number of different methods we offer. Just click the icon and find out more.
Looking for More Immediate Results?
Calculating your operational capacity and integrating it into your business planning is the best way to see immediate results. Put your operational capacity calculations to use with our High Impact Business Planning tools and implement a higher degree of control into your day-to-day actions and performance monitoring. Click the button below and review 3 different ways you can apply High Impact Business Planning to your business.
If you are still stuck and need help, then use a fractional COO to bring the expert operational executive you may lack to your team. In a matter of hours, six-figure talent such as this can evaluate your operation and develop predictive metrics to help you drive accountability to all levels of your small business. If you want this kind of insight and control in your small business, then contact us at email@example.com today.