What Are the Limits of My Business?
Introducing our OAS - Operations Assessment Services!
A company's capacity is measured by its ability to produce the goods and services it wishes to provide to the marketplace. There are variables that affect capacity, such as machine performance and setup, employee performance, and material quality. However, capacity is not just measured against warehouse size, equipment and human capital, but also includes financial resources.
Every business should evaluate their physical and financial resource capabilities. Those resources need to be integrated into their business plan to determine how far they can go with their current investments, so that they can make more informed decisions. If a business is already heavily invested in equipment or labor resources, consideration may need to be given to selling products or services at a lower price, at times, in order to cover some of the already invested capital. Although the practice of reduced-price or fixed-price selling can be tricky, it is also something that may be necessary at certain points in the year, or due to business conditions.
Many businesses face a different challenge. They are undercapitalized and reluctant to pull the trigger and make the investment in equipment or labor. Although this is a conservative strategy, which can minimize risk, it can also lead to lost opportunities. Most businesses cannot ramp-up overnight because it takes time for equipment to be acquired, hiring to occur, and training to take place.
There are four key areas to measure in most businesses:
- Sustainable Growth. This is the maximum rate at which a company's sales can increase without depleting financial resources. Increased sales require more assets of all types for which payment must be made. Retained profits and new borrowings generate some cash, but sometimes only limited amounts. This puts a limit on the growth that can be achieved without straining the company's resources and is the reason for businesses to maintain appropriate retained earnings levels.
- Production Capacity. This is the maximum output you can produce in a given period of time. Capacity planning is an assessment of both long- and short-range needs and the company's ability to produce the projected demand. Capacity planning can affect hiring/layoffs, suppliers and budgets.
- Operating Leverage. This influences the mix of fixed and variable costs and the level of investment in a plant and equipment. Higher operating leverage means higher fixed costs and will provide a higher percentage of operating income once fixed costs are covered.
- Asset Utilization. This measures the speed at which a firm is turning over accounts receivable and inventory. The business owner should be able to measure internal capacity and adjust to changes that continually take place in the firm's operations.
Have your business or your clients recently analyzed these conditions in their organization? BIK's outsourced Controller|CFO Advisors can review these processes with you. We offer limited-scope, fixed-fee, 100% satisfaction-guaranteed OAS. We are confident in our abilities to significantly add insight and value to your organization. If you do not see the value, you do not have to pay the fee.
The BIK Controller|CFO Advisors:
Tony Battaglia
Tim Beck
Dave Halick
Al Knox
Larry Schmitt
Mark Stricker
Together, we can perform a variety of accounting and financial services to help businesses run more efficiently and economically. Our objective is to improve your customer's bottom line through better processes and procedures. Contact us today at cfoservices@bikcpa.com or call 847-281-3209.
Visit our web-site at www.bikcfo.com
