Bookkeeping is the daily recording of financial transactions so you can tell how much income your business made, how much you spent, and how much was left over. The...
What is the maximum amount of revenue you can generate based on your current processes and systems? This answer to the “Maximum Capacity” question should serve as a target for you before making any changes within your business. It also serves as a gauge of when to ramp up staffing and beef up your internal systems and processes.
Let’s talk about how this works in practice. Suppose you are a consulting firm that generates income off the knowledge and skill of your employees. You are a fee-based company, so you’re not selling tangible products. That means production hours of your team members is how you generate revenue. Let’s also suppose you have one owner and two staff members.
Generally, you want to be charging about 2-3 times the “burden rate” for you to be a profitable business (see our prior blog post on burden rates). Here are four reasons why:
- Overhead costs must be covered by your fee income. These can include employer paid payroll taxes and benefits, rent, equipment, software, licenses, office supplies, etc.
- Administrative time – your employees need to continue to learn and grow or the knowledge that you are selling becomes less valuable. You can’t bill training time to a client, but it is vital for the longevity of your company.
- Time off – holidays, PTO, and sick time all need to be paid to employees, but again that cannot be charged to the customer.
- Profits – every company is in business to make money. If you aren’t making money, you won’t be able to stay in business. It’s that simple.
Back to our example… suppose you set your target billable percentage for each employee at 75% and the owner at 50%. What this means is that the total hours of an employee’s working hours should be 75% client work and 25% non-client work (50/50 for the owner)
You may find that your employees are only operating at 65% capacity. That means you are leaving money on the table without changing any of your expenses! Your goal as the owner should be to bring in more business and push more work down to your employees. Perhaps another solution to the question is that the systems or processes are outdated and that is hindering the ability of your team to reach full capacity. That may require a software upgrade or just a change in the way things are done.
At this point, you should know if it is a sales and marketing problem (not enough business), a staff skill issue, or a systems issue. You must identify the problem!
You need to know this “capacity” number at every level of your business. If you want to go the next level, you will have to increase your capacity and the first step is filling up your current capacity.