WARNING: This week’s BlackBoard Friday Episode uses mathematics and 3 different coloured chalks. Entrepreneurs with ridiculously profitable businesses are encouraged to look away now!
For the rest of us mere mortals, it’s time to face the truth: knowing our numbers usually leads to having higher numbers at the top of the bank account, and the bottom of our P&L statement.
Your journey to greater profit and improved cash flow begins by understanding the real capacity of your business, your team, to generate revenue. Not some mythical perfect world scenario, and definitely not whatever level of mediocrity some of your team consider business as usual.
Knowing that one number can open your eyes to new opportunities. And it starts by calculating your capacity in one of the ways I explain, in simple terms, in this week’s episode. Click to watch it here.
Who is Jacob Aldridge, Business Coach?
“The smart and quirky advisor who gets sh!t done in business.” Back independent since 2019.
Since April 2006, I’ve been an international business advisor providing bespoke solutions for privately-owned businesses with 12-96 employees.
At this stage you have proven your business model, but you’re struggling to turn aspirations into day-to-day reality. You are still responsible for all 28 areas of your business, but you don’t have the time or budget to hire 28 different experts.
You need 1 person you can trust who can show you how everything in your business is connected, and which areas to prioritise first.
Welcome to this week’s Blackboard Friday’s video where we’re going to be talking about money. I’m going to focus on money because money is exciting and energizing whereas doing math tends to be a little bit boring for most business owners; however, there’s some simple math that we may be able to do to help you make more money. That ought to keep you engage for the next four to five minutes.
Now interestingly enough, we’ve done a review of all the blackboard Fridays topics that we’ve discussed, and I haven’t spent a whole lot of time talking about your capacity engine. This is a key tool that I use with an awful lot of my clients to help them identify whether its hidden profit sitting in their business and set some trigger milestones for when they need to grow. If you think of your business, all the team, the resources, the technology you’ve got, can abstract all of those into the concept of an engine. When they’re working together, they’re humming all those little combs, and Pistons powering away they’re going to create a certain amount of output, which in a business we tend to define in terms of dollars. How much money can your team produce monthly?
Now an engine has certain capacity, a certain amount of power that it can put out when everything’s running well together. What I encourage my business clients to do, is to calculate what that figure is for them. Because you’ll probably bogged down in the stuff, you’re a busy business owner and if you ask your team, they’re also going to tell you that they’re busy and that you need more resource. But do you need to invest in that growth yet or is there some waste some inefficiencies built into your current engine that you can get rid of to put more money in your pocket or to create some spare cash to invest in that future growth?
So, to do that, the first thing we do is calculate the capacity of your engine. What is that hundred percent? And then if we look at the utilization rate, how much of that revenue are you actually achieving each month? The gap between those two represents waste in your business. How much waste you tolerate is going to depend on how you want to feel on the journey. You might be happy with a lot of waste because that allows you to grow quite fast but most business owners, I talked to want to get rid of some of that before they’re ready to grow. They just struggle on where to start, and it starts with calculating your capacity. Now the more complex your business, the more details you may need to go to calculate this.
But I want to talk about the three most common ways that you can calculate the capacity of your business and as a result see how much money you might be leaving on the table each month through inefficiencies. The first is a very simple hourly rate. If you’ve got ten accountants to each bill $200,000 a year, then the capacity of your business is ten times $200,000.
Hourly rate is definitely the simplest way to calculate your capacity, but most businesses have started to shift away from that teams don’t like calculating all of the time that they’re doing, clients don’t want to be on the clock the whole time, they want more of a value based conversation, and so increasingly I find businesses are talking about their capacity based on the value of the projects they’re delivering, all the clients that they’re managing. This is a slightly more complicated process in part because unless you can separate each individual and the clients that they’re working on, it tends to require you to understand how your team work together.
How many clients facing staff you might need versus the administrative staff to support them and the business development or growth staff to keep feeding them the work. That team mix can then simply be multiplied by the number of clients that they can manage on a monthly or yearly basis and then multiply the gain by the average dollar value of each client. It’s a little more complex than just seven and a half hours a day by an hourly rate but it is something that is achievable for most clients. Indeed, to let you in on a little secret, a lot of clients to a value based really do bring it back to time anyway.
The third way to calculate capacity can get a little trickier and this is when you start to break up different divisions within your business, when your customers or clients start to touch multiple areas that each have their own level of capacity. So as the customer goes through the journey, they might deal with sales, then the onboarding process for your business, maybe the actual delivery of the work, and lastly often the accounting department when they get their invoice and must pay it.
You can go through and calculate the specific capacity for each of those. How many sales can your sales team bring in each month? How many new clients can you onboard? How many actual client projects can your delivery team, as it currently exists, deliver in each month? From the accounting department, how many invoices can make it out? How many debtors can they analyze? What you will discover is that some of those teams are going to have a smaller capacity than others those other constraints within your business.
As an example, I ran with a client, we did this, and they felt they needed more sales. They needed to grow the revenue of the business and the inefficiencies they saw were within their sales team. When we calculated it, indeed their sales team was doing quite well and could add some more people. Their onboarding team however was challenged. There were enough new clients coming on that they were struggling to keep up with them. Adding a new salesperson, bringing in more new clients was going to completely overwhelm them. We needed to increase the resource in that onboarding team to release that capacity so that the sales team could push more revenue through the business, to get more power out of that engine.
Think about your business. Think about even on a gut feel level how much you feel, when everything is humming, your business can generate each month? And then do the animal analytical element. I encourage you to do that because when you do the numbers it’s much easier to share the assumptions in the calculations with your team to get their buy-in from them so that they are not just your gut recognize the waste that exists and can then work together to reduce that waste, put cash in your pocket, and help fund the future growth.
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