You’ve got a revenue plan – but do you have the capacity to deliver on it?
I’ve been fortunate (or unfortunate, depending on your viewpoint on such matters) to be included as a reviewer on budget planning activities with various companies. Being the owner of a company, I’ve done my own budget planning for the fiscal year. Early on it was a based on a trending of earning per types of offering and an average revenue generation target per resource. Now that I’ve got a few years of data gathered from performance over the past 4 years, I have a lot more detailed information at my finger tips to generate revenue plans along with cost and cash flow plans.
Capacity is one of those aspects of the plan. Logically, my target bill rate for the fiscal year multiplied by expected billable hours provides insight into a revenue plan per employee. In an earlier week, I blogged about the billable hours metric (Does the ‘man month’ metric still work in today’s world?). For companies in the early stages, the man month metric is a good starting point. As you gather company data, you will begin to trend and be able to predict billable hours and utilization. With the right data gathering tool, such as a PSA (we use Netsuite OpenAir for which we also providing consulting), you will also be able to break down the hours and utilization by level or type of resource if you have a multitude of resources and varying rates on your price list. All great information for your capacity plan.
The other half of the capacity equation for revenue planning is the bill rate of the resource. New companies have to rely on the industry benchmarks for a best estimate of bill rates. With a few years of data, you’ll get trending information to revise your price lists and get a good feel for what your target customer base will accept as maximum and average. One issue I face as a company owner, which is a good issue to have, is we have a unique customer base in the fact that they are very supportive of our company and loyal. Always willing to provide a reference and we have ongoing relationships with most clients continuing year after year. In recognition of this partnership attitude, I try to refrain from raising bill rates for them as my way of rewarding their support. Of course, this impacts my capacity as my target bill rate each year needs to reflect a combination of revision due to salary changes, company investments, increases in operating cost, etc. and consideration of a fantastic customer base that I want to continue to keep happy.
With billable hours and target bill rates in hand, now I’m able to do the simple math to plan out expected revenue based on current employees month after month. At this point, I overlay my overall revenue plan which is computed based on a planned growth rate (also based on trending information of year over year growth) and see what situation I’m in. Usually there is a point in time that the revenue plan and the capacity plan lines start to diverge (meaning you don’t have enough capacity to deliver on your revenue plan) – and this is where the magic needs to start happening in your capacity plan.
OK, it’s not magic, but it does look like magic in your planning worksheet as you start to plug in new employees and leveraging subcontractors. As the lines start to diverge, you put fractional FTE’s in place (aka subcontractors) with higher cost but same target bill rate to close the gap. Now look at your Revenue vs. Margin graph and you’ll see that you’ve just started to make those separated lines start to merge as your cost rises with the use of too many high cost subcontractors. Solution – plan on hiring resources full time and limit planned use of subcontractors to avoid impacting your bottom line.
When you hire someone full time, though, they are not productive 100% right away. Go back to your historical data gathering and see what type of trends you have for ramp up billability. Is it 2-months? 6 months? During those first few months, what is the average billable utilization of your new employee? Use this as your ramp up capacity plan for realistic contribution of those new resources. This is what looks like magic. Plug in those short term subcontractors and longer term resource hiring until you get your revenue and capacity graph to align closely while ensuring your Revenue vs. Margin graph still achieves your overall bottom line margin target.
It’s a long process generating a revenue and capacity plan for most companies, but it is worth it for both a reality check of company performance, staffing plans for hiring, and an ongoing measure of how the company is doing throughout the course of the year. I can’t imagine running a company without this plan and leveraging it each month to validate my operational model. If you don’t have one of these in place, let’s talk. If you have one, then you already know what I’m just sayin’!
