Transcript for Episode #167 ‘Solid Foundations: Your Capacity leads to Revenue‘
Host: Scott Weaver
Date Sept 7, 2022
Welcome to Arise2Live Podcast, episode 167.
We continue the series on Solid Business Foundations for business owners. Today’s episode is about why it’s important to know four major types of capacity found in companies that impact profits.
Arise2Live’s purpose is to bring clarity and perspective so you can have freedom in both your business and family life.
Let’s listen in.
.Scott Weaver: For a long-term smooth-running company, it is important for business owners to know, and understand, the capacity of their company and in themselves. Why? Because capacity is a key part of dealing with the business environment you are in. Like the captain of a ship knowing what the ship can or cannot do when facing a storm. Understanding the capacity of your company grounds you with reasonable expectations that leads to better decisions and avoiding some pretty serious mistakes.
Hello everyone! I am Scott Weaver, the Arise2Live business coach and this is episode 167. Thank you so much for listening in today. This is the second episode in the Solid Business Foundations series. Each episode is more or less stand alone, but together they add up to be more than the sum of the individual parts. So I encourage you to listen to the whole series and please tell others about this, too.
There’s a couple of things I would like to share. First is that I am in the process of writing my first e-book. It’s about creating a vision for your company that matches who you are with your business goals. The manuscript is done and I am in the editing phase – did you know there’s at least 5 different types of editing? Me neither, until I got into this. It’s been crazy, but I want to produce a good, high quality e-book that business owners can actually use. None of the fluffy-puffy stuff we see so much out there.
Second, there’s some updates to the services I do. Not only is it about the coaching but also consulting. Coaching is more guiding while consulting is guiding and doing some of the work inside the company. My ability to know the stuff and know how to do the stuff is one of my biggest competitive edges. I’m now highlighting that more for those in the manufacturing and construction industries. Please sign-up on the Arise2Live website for a free coaching session if you, or a business owner you know, needs deeper insights than the Arise2Live podcasts provides.
All-righty, on to the main topic. 3:00
For business owners to run their company, including their personal life and family, to run a solid foundation they need to know the 4-areas of capacity: Operations, Financial, Personal, and Vision Capacity.
I know that talking about business capacity is a little like talking about changing the oil in your car or making sure the lug-nuts on your tires are tight so the wheels don’t fall off. It’s boring. I get it. It’s not the most exciting thing, but it is also very important to increase cash-flow and grow. It’s something the successful owners and founders think about every day. When you account for the company’s total capacity abilities, you make smarter decisions with less stress. Also, you know where to pinpoint your improvements.
For example, if you don’t know the capacity of your employees, either in hours worked or their skill set and you ask them to do something beyond their capacity… Well you’re setting them up for failure and getting a boatload of frustration on top of not getting the task completed on time or with desired quality. These are not good things.
What is Capacity? 4:25
Let’s start with the statement that all people have some sort of capacity limitation. The proof is simple. We have an upper-bound limit of 24 hours a day, that is the maximum amount of time allocated to us. That’s our time capacity per day. We live our whole lives with that limitation and there’s a zillion personal productivity tools out there to help us make the most of it.
But capacity is not a limitation. Yes, they are a bit similar, but again, capacity is not the same as a limitation. We all have the limitation of 24 hours in a day, but we also have the capacity of 24 hours. What are we going to do in that 24 hours allocated to us. So, capacity is the ability to do something, not a barrier. Yes, sometimes we need to increase capacity, but in reality that means increasing the ability to do something.
Your company has capacity, too. For our purposes in this podcast, your business capacity is the same as revenue capacity. Again, business capacity is the same as revenue capacity.
Revenue capacity is the maximum revenue your business can consistently generate over time. This goes beyond operational capacity, where that is the maximum output that can be sustained in a perfect world. Again, business capacity is really revenue capacity and that’s why I include 4 different capacity areas—they all impact revenue. They all impact success.
This emphasis on revenue echoes my previous episode on Right-Sizing your company. To right-size your company, you focus on what revenue is required to do what needs to be done. Business capacity is related because it quantifies, or clarifies, the amount of stuff that can be done.
How is Capacity Estimated? 6:45
Figuring out the exact amount of capacity is actually pretty hard to do. It can be done and all the huge manufacturers have teams of gurus to figure it out. However, for the rest of us, we need to make estimates and that is done by calculating the upper bound of capacity.
Upper bound is the maximum capacity, the maximum that can be possibly done in a perfect world. The basic equation is pretty simple: resource productivity multiplied by time. Whatever resource is doing or making and how long does it take to do that.
For example, one upper-bound calculation is if all your employees worked a perfect week to get stuff done, say 40 hours to make 1000-widgets in-a-perfect world where machinery doesn’t break down, materials always arrive on time, employees take no vacations or need to take their kids to the doctor, there’s no difference between the rookies and the veterans.
Another upper-bound example would be using those perfect world sales specifications for machinery. Say, one machine outputs 100 widgets per day. It never needs material loaded and somehow all those widgets magically get taken off the machine. Oh yeah, it never needs maintenance or repairs.
Yeah, us business owners would be speechless if that ever happened. That would be like being in operations heaven.
Yes, upper-bound capacity is easy to calculate and that’s why they are used. Of course it is a perfect world but they are still used in planning and estimating slack. Let’s say you want to double revenues from last year and your company depends on a certain piece of equipment. You can estimate your company’s output to do that and then, this is key, then compare it with the upper bound that machinery has. If doubling revenues is higher than the upper bound or even close to it, then you’re buying new equipment to meet your goals. This estimate can be figured out fairly quickly.
Capacity is also related to slack. Slack is the difference between capacity and your current operating level in a capacity area. Now I do want to say something about real world operations. Generally, it is not good for a business or a person to be operating at maximum capacity all the time. One reason is opportunity. When a customer asks you to create a new high-value product, you don’t have the slack or capacity to do it and so you lose out. The second reason is if there’s a problem, any type of problem, a disruption in the supply-chain, or equipment failure. no matter how small, then you’re not going to meet your promise of customer deliveries. It’s risky to operate at 100% for long-periods of time.
In business school, I heard that many corporations operate at about 60% of capacity. That might work for a major multi-national company, but not for small companies and businesses. They should be around 80-90%. When customer orders lead to over 90% capacity, it’s time to start thinking about increasing capacity or dropping low-margin products. Slack is important to adapt to the unexpected.
The two points here about capacity is that business owners can quickly estimate the upper-bound capacity and it is very risky to continuously operate at 100%.
Four Types of Capacity 10:58
In the real world, a business capacity is not just set by operational resources and efficiencies. There are at least for types of capacity areas that impact revenues. Remember that business capacity is revenue capacity, so it is important for business owners to know what each capacity area is, otherwise planning and forecasting can end up with the wrong answers and ultimately the wrong goals.
Operations Capacity 11:34
At a high level, operations capacity is basically producing stuff you can sell. Stuff could be widgets, houses, or services. The usual suspects for these types of operations include machinery and employees.
Machinery: a machine or computer can only operate so fast at a certain level of quality. I know we talked about this earlier, but I’ll recap here in different words. The upper bound, perfect world machinery capacity is widget produced by operational hours. That’s the best the machine can do and doesn’t include maintenance, or load time, or repairs or training time.
Employees: both the number and skill level of your work force. Your employees can only do so much and work for so many hours. This sets a production capacity limit or ability. If you are pressing them to go beyond their full capacity, that’s like trying to put water into a glass that is overflowing. At best there will be tension and frustration. The worst is over commitment to customers and employees quitting.
Of course there’s more things that impact operations capacity. It might be good for you to list them out on a piece of paper after listening to this episode.
Another company ability is Financial Capacity. I’m not just talking about money in the bank, but your access to cash that you can spend on your company. All entrepreneurs have a need to raise money for the company and there’s only basically four sources: your savings and assets, customers, loans, and investors. To increase financial capacity, three out of the four sources require you to convince others to give you their money. It’s a tough challenge.
The third capacity is about the business owners themselves. It’s about you. Often it’s called Personal Capacity.
For clarification, I’m not talking about the legal definition of personal capacity, that is where a person can act on their own and not act as a representative of some organization. No, we are not talking about legal things here. We are talking business.
It takes a lot of time and energy and brain power to run a business. Your personal capacity defines so much of what gets done and what doesn’t get done. This is so important that in John C. Maxwell’s book: “the 21 Irrefutable Laws of Leadership”, the very first chapter, chapter 1, is called “Law of the Lid” and talks about personal leadership ability and increasing it.
The final capacity ability is Vision
Now some of you might be surprised that I included vision as a capacity area. Vision capacity here is the ability to have creativity and ingenuity, to see what things could be and that ability comes in various sizes on people. At the end of the day, creativity and ingenuity, these things can improve your company or not having them can stagnate your business. Vision capacity is important.
We can say that your vision for the company is the destination you are leading it to, leading your employees and the team. The bigger the vision, the more forward thinking the business owner is. Sometimes a business owners can get into a rut. They get so focused on the day to day operations, they can’t see a better future. Like an owner refusing to buy a $10,000 machine upgrade to reduce employee stress and increase revenues with new high-margin products. That impacts things in the long run. Yes, your vision of the future of your company impacts your future revenues.
Improving Capacity 16:06
Well, I wish I could give you a simple list of how you can improve everything in these four areas, but that is going to be very difficult in a podcast. Every company is unique and every business owner is unique. They have different goals and different skill sets. there are a lot of resources out there in each of the 4 areas. Lean manufacturing, for example, has many websites and books on it and there’s even university courses and you could probably get a degree in it. Lean manufacturing is an area for operations capacity to improve it and it’s a deep dive, too deep for a podcast.
But what is common about improving capacity in all areas, is that it requires some homework and thinking time. Thinking about your company and thinking about what could be better. What does a better future look like? It takes time to see through things and it takes time to understand what the bottlenecks are in each of the four areas but it is worthwhile doing because it heavily impacts the revenues coming in.
In this episode, capacity is not a limitation. It’s the amount available to use. Don’t think of it as a barrier, but say, “hey, I got this much to play around with.”
Business capacity is revenue capacity and this understanding is key to running a strong company. Many successful business owners understand this and that is one of their secrets.
Calculating an exact capacity amount can be challenging, but we can estimate the upper-bound capacity using the basic equation: resource productivity multiplied by time. This upper-bound capacity amount is the perfect world, maximum production possible, whether in widgets, service jobs completed, access to cash, or creativity. It’s that point where it never gets better than that and when you’re doing forecasting or trying to estimate revenue, and trying to figure out how much to sell, it is very helpful for success to compare it to your upper-bound capacity and see if you need to buy new machinery, hire more people, or just improve efficiency.
The four main capacity, abilities, in this podcast are:
- Operations Capacity
- Financial Capacity
- Personal Capacity
- Vision Capacity
It is worth the effort to identify the upper-bound capacity in each of these areas and estimate how much slack you have. Are you running too hot for long-term success or do you have some excess to go faster? Just answering those questions will direct you on a different path.
When you understand how much you have to work with, you make better decisions for your company and that is one way you Arise2Live.
Sponsor: Today’s sponsor is Arise2Live business coaching. A professional and structured system to get business owners to grow and gain freedom from the chaos of running a business. Scott uses a proprietary four step system to get you the results you need. Start running a thriving business, not a self-created job.
Schedule a call today on the Arise2Live.com website.