Yes you do need to calculate your capacity
By: Hayley Richardson
Tags: Startup Lessons, Operations, Business Strategy, Startup, Operations Management

You’re an agency. You’ve got some clients, a good team, good prospects for the future, and a growing client base who are your biggest fans. Great!

You have work that comes in and work that goes out, and you are absolutely killing yourself to make sure that you’re giving your company your best shot. Just a couple years ago you never imagined having a team of 30 people or having to think about things like, “employee retention”, “churn”, and “team retreats”. You’ve even found yourself late at night thinking about how you should start laying down some structure and processes to scale, that is, after all, what “real companies” do, right?

So far, your team has been giving things there all and have been content to work at your company for the opportunities that it affords in experience and knowledge, and let’s face it — fun. Late nights, early mornings, weekend travels, it’s all worth it, right?

You might have lost a few clients here and there, or blown the odd pitch, but you still win more than you lose, and you’re still hiring people (albeit in junior positions) and you still think of yourself as a start-up. The chaos and dis-organization running rampant throughout the company are just mere symptoms of growing.

Or, at least you tell yourself that.

Deep down you know that you need to really start thinking about laying down some proper structure, and thinking of career progression paths, trainings, improving your processes (even more fundamentally, figuring out what they ARE exactly), and putting yourself in the position to scale.

But where to start?

How about starting with your capacity.

Or better yet, how about making sure that every client you work on is, in the words of L’Oreal, worth it.

How can you do that?

Do you know how much it costs to run your business? I don’t mean, how much money do YOU take for your salary (which is most likely much less than you would like to be taking), but the amount of money you’re paying in FIXED and VARIABLE costs. If you don’t have these numbers somewhere, open up a Google Sheet and list down ALL of the costs associated with running your business.

Rent

Accountant

Payroll specialist

Electricity

Gas

Software licenses

Hardware

Salaries

Taxes (my favorite in Italy)

EVERY SINGLE THING I’M NOT KIDDING

2. After you have that down, figure out an average on a monthly basis. We’re eventually going to get down to an hour, but for now, the month will do. For my fellow math illiterates, this means divide by 12. No judgment from me guys, I had to take Intro to Math 11 to graduate.

3. Take that average and divide it by 22 (the avg. number of workdays per month) and this will tell you your BARE BONES 0% margin cost of running your company each day. (Apologies in advance for the average of averages — economics and stats majors, you know what I’m talking about.)

4. Take your bare bones 0% margin cost and and divide it by 8 (the avg. number of work hours per day) and this will tell you how much money you must make each HOUR with a 0% margin to keep things afloat.

I am hoping that this number doesn’t surprise you too much. Actually, I kinda hope you look at that number and are surprised a little. And I’ll tell you why. I bet you haven’t thought about this before. I’ll bet you’ve been so busy thinking about your next pitch and your Next Big Thing that you may have left these little details on your “boring things to delegate to someone else, later on….definitely low priority” list. Am I right?

“This is all fine and dandy”, you’re thinking,”but what does this have to do with my capacity?”.

Glad you asked.

Now you know your absolute minimum hourly cost with 0% profit margin number you can start having fun.

Do you know how much time you’ve been spending on your clients? No? OK, let’s take a step back.

Do you know how much money your clients have been paying you on a month by month basis? Cool.

Import all your finance data (really, you just need the Client Name, the date, and the amount of money paid) into Google Sheets or Excel and then divide that amount (less taxes) by your MINIMUM HOURLY COST. This will tell you how many hours you can spend on the client to break even with 0% profit.

Now, if you DO know how much time you’ve been spending on clients, compare the actual amount of time spent with the hours that you SHOULD be spending and see if there are any surprises. I’m willing to bet with a high degree of probability, that there are. I’m willing to bet that you have clients where you are spending an insane amount of time, for a mere pittance, and that there are cases where you’re not spending much time at all but turning a big profit. Keep in mind, that because we’re talking about a 0% profit margin here that any time you are overspending on a client is costing you money. Each and every minute and second. On the other hand, those clients where you’re spending less time than you could, is where your profit is. If you really wanted to have an eye-opening moment, add up that whole column and see how much profit you are actually making each month.

In case you’re wondering when I’m going to show you the money, I need you to do one more thing. It’s easy I swear.

If you have your billing hour with breakeven costs, you can now try adding in a profit margin. This varies between how much you want to make, what the market or product will withstand, and maybe even a little “finger in the air” analysis.

Start with adding a 50% margin onto everything.

If your billing hour is $20 adding a 50% margin makes it $30.

Re-run the numbers on your sheet and see if a profit margin of 50% makes a difference or not. If it does in some cases, and doesn’t in others, have a look at the clients where a 50% profit margin makes no difference and then figure out why you’re spending too much time on them. Do you have the wrong person managing the account who needs more time than someone else? Is the client exceptionally difficult to work with for some reason? Was the amount of time it would take to work on the client grossly underestimated at the contract phase?

Once you know the type of problem you can start addressing it.

Now that you know how much you should be charging to make a profit you can roughly estimate (oxymoron?) how much time you should be spending on them from the outset, and based on this, you can also see what your team’s capacity is capable of.

People have the same 8 hours per day, 40 hours per work week to utilize against client work.

You can find your total team capacity by taking the number of people on your team (do not include people who don’t contribute directly onto client projects like Finance, or HR, etc) and times that number by 8.

So if you have 5 people on your team, you times 5*8 and have 40 hours per DAY, which is 200 hours per WEEK, 800 hours per MONTH to work on client projects and still turn a 50% profit.

Look at one of your months and calculate the amount of hours spent and see if it’s GREATER THAN or LESS THAN the number of hours your team has in available capacity per month.

If it’s GREATER THAN — then you need to figure out where you can reduce time spent on non-profitable clients, how to automate time consuming tasks, or whether you need to invest in more training for your team or specific members.

If it’s LESS THAN — then you know that 1) you are in a good position to take on extra clients without hiring additional team members, and 2) you need to ensure that the “extra time” that your team has is going to good use.

Keep in mind that when we’re talking about the amount of time your team has we’re not talking about YOUR time, or your Senior staff members whose time, let’s face it, might be slightly more valuable than your last intern who’s still in training, we’re talking about the mythical man hour (oh yes, I DID go there!)

This is all just to give you a better handle on your team capacity and, as a side effect, your profitability. Some side effect, huh?

Knowing your team’s capacity, and billing hour, is an absolutely fundamental piece of information that will help you in every single effort that you make from Sales to Onboarding to Execution. I highly suggest you move this task up on your list of things to do. It’s easier than you think and has the potential to have a greater impact than your Next Big Thing, I promise.