Episode 26: How to Get Your Capacity Plan Humming

Episode 26: How to Get Your Capacity Plan Humming

“As Jamie uses that analogy with the glass of water you want to, if you want to grow, you've got to have that cup, not at the full at the ring...” 

In this episode of The Wize Guys, Brenton Ward, Jamie Johns, and Ed Chan talk about Capacity Plan – The most critical tool for a high-performing and profitable production and discuss how having a capacity plan in place is one of the fundamental tools they recommend for scaling a practice. They provide some insight into capacity planning and why it's so important to the growth of the business.

They also discuss what are the most common reasons for overcapacity. What are the negative outcomes because of this and what are suggested approaches to correcting this? Learn more on this episode to get you started to work on your capacity plan in place!


Timestamps:

1:11 - Understanding the context of a capacity plan
2:25 - The importance of having a capacity planner
5:04 - How to science right with your people
8:54 - The rule of thumb
10:20 - Tips for capacity planning
13:12 - Most common reasons for overcapacity
17:38 - Key points to work in capacity planning
23:29 - Reasons why you need spare capacity
28:02 - How to allocate productivity with training
30:12 - Is it ok to disclose staff salaries to the team?
32:04 - How to determine charge-out rates

Quotations:

“In our industry, productivity really gets the clarity because between charging right and productivity and the number of hours a person works, this is what your capacity is per person and wallet. It’s not an exact science. It's a really good guide, particularly if you're trying to grow your firm.” - Jamie Johns

“So just getting the balance rights important between servicing and growth. If you want to grow, you've got to spend more time in front of your clients.” - Ed Chan

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Transcript

Episode 25: How to Get Your Capacity Plan Humming

“As Jamie uses that analogy with the glass of water you want to, if you want to grow, you've got to have that cup, not at the full at the ring, but you've got to have the water, you know, 10% less and under the rim so that when you pour some more water into it, you can actually hold that water without it overflowing.” 

Brenton Ward: All right, guys. Ed gets stuck in and wants to start off with you on this topic of capacity planning. A lot of firms that join us at wise, know what a capacity planner is, but typically don't have a capacity planner in place in their practice. So I want to go back to the basics here of the fundamentals as to the importance of capacity planning and your insights and some context of this conversation around capacity planning and why it is so important to the growth of the business over you. 

Ed Chan: Sure. Thanks, Brenton. I guess if you've got to match, obviously you got to match a capacity with the number of fees that you have, because if you mismatch it, then you're going to be either not profitable. If you have too much capacity and if you don't have enough capacity, then you're going to stress out all your staff. You're going to take a very long time to do the work for the clients. So you're going to get unhappy clients. 

So as everybody knows, the three challenges to run your businesses are, you know, make sure there's enough sales or fees, make sure you've got the capacity to do that work, and management of those resources that you need to do the work's importance. And if you get those three, right, then hopefully you'll have happy clients. So everybody's got to when your clients win, they've got to get their work done in a timely fashion. And also, you know, not, you got to be competitive with your pricing. You're going to have happy staff. So, they're not stressed out.

They get paid well. And then as the shareholder, you, the shareholders are going to win as well. So they've got to make money and get a return on the capital that's invested in the business. So your objective is to create a win-win-win for everybody. 

But in order to do that, you've got to manage your business properly. And if you don't manage it, then people lose you. Either appliances that, you know, take a long time to do the work and it's too expensive, or, your staffing up being overworked or underpaid or the shareholders don't make any money. So, all of that comes to how you match the capacity with the workload. 

And of course, it's a bit of a science to doing that. It's just not a gut feeling. And you know, when I first started, the way that I do it is, you know, all the staff had complained about how busy they are. They've got too much work on, so I'd just go put on another body. 

So I just used to throw bodies at the workload without really knowing what I was doing. And, and then, then when I thought that I was, you know, getting it right, then I didn't understand that you know, you got to bring complementary skills yet. You've got to create teams. And in that team, you have different skills. And because if you play people out of position, in other words, if you use a very high-cost person, who's on a very high charge, outright doing very, very low-level work. And then at the end of the job, you end up having to write time off or you, if you charge it to the client, it becomes too expensive for the client. And then I ended up leaving and you weren't there to grow if you're too expensive and, and you don't make any money. All right, because you know, you've got clients leaving, but you have to be able to put some science behind matching your capacity with the workload. 

So, and then, of course, the low-level tasks that you have in your organization should be done by a lower-cost person. As I indicated, if you use a very high-cost person to do a very low-level task, then you're going to be too expensive. And so you've got to get your team structure, right? So you've got to have your, you've got to have your client manager with your senior production manager and the accountants underneath them. And the positions in that team structure dictate the charge out rights they're on and, and the workflow and so forth. 

So today we're talking about capacity. So in the capacity planet, which is in the Wize Vault, you can download that for your own use. It helps you put your people in the right position. And then based on that position, you have a charger, right? 

For example, the managers should be checking and reviewing and training, and they're on a high charge at right, because they're more expensive, but for them, it's about quality, not quantity. And then like they have the more junior accountants working for them. That's grinding up all the lower types of work at a low cost so that you're not only getting the right person doing the right kind of work, but you're charging them out at the right level to your clients. And then everybody wins. 

So the staff's getting challenged, doing work that they're at their level. So they're constantly, you know, improving, developing, moving forward in their career. And then the more senior people are doing more high-level work. So you're challenging them at a higher level of work.

They're not just doing bank reconciliations or low-level work, and you're challenging them at their availability. So everybody wins and hopefully, you'll make some money because, you know, the people are being charged at the right charge at rates, but you need to work that out more scientifically than just gut feel because often you get pressured by the staff to put on more people and you have peaks and troughs in your businesses as the mind.

Obviously, when you're at a peak and everybody is complaining about the amount of work there is, there's a tendency to just go and hire more bodies. And then of course the peak drops off. And, and now we're in the low in, and then there are heaps of people around and struggling to be able to find work for them. 

You can't do it by just listening to people. It's gotta be a lot more scientific than that. You've gotta work out the numbers and that's what we do in a capacity plan. And it's absolutely essentially doing this. Otherwise, as I said earlier, you either don't make any money or you burn out your staff, or you're too expensive, or you're teaching. You might be too cheap for the clients. And, somewhere along the line, if you don't get the science right, and be a bit more scientific with the way you're running your business, then you'll pay the price.

Brenton Ward: So talk to us a bit about your journey around that pre-capacity planner, pre-team structure, and now six, seven years on from using that. And you've really fine-tuned that to a point now where it's a guiding pillar in the, in the firm and you may even walk us through a little bit of it if you don't mind. 

Jamie Johns: Yeah. That's all right. Before I met ed, you know, I was always, when I start on my own fam. I think I spoke to peers and colleagues that were starting out and had had a small firm like myself as well. And it was just me and say one, our counting, but I'd always was a way of Brenton of the rule of thumb, you know, particularly in the accounting industry. And we can talk about the bookkeeping as well, of course, but there was always this rule of thumb, a third, a third, a third. 

So what I mean by the third, a third, a third is of your revenue or of your turnover. A third of that would go to wages, for example. So a third of your revenue wages, and then the rule, the second rule of thumb was a third of your revenue would go to overheads or your expenses. And then a third of the revenue, the final third we'd go to the profit. So there was, there was this sort of rule of thumb Brenton from a high-level context that, whatever your revenue was, if you could sort of make it keep a third of it for profit would be a good thing. 

So that was really probably what Ed is guided by. And, you know, prior to working with air that ran the capacity planner, I could look at an account and salary and if an account was on, you know, 50,000 to just to keep it simple, you know, they should bill out say 150, so that follows that rule of thumb. But when I started working with Ed. They had the wall, I looked at the individual sort of KPIs of the candidates. I just said ‘I'd never forget ed getting up on the whiteboard, it'll remember, and going through and asking what's PayPal's charge-out rates.’ And so I had to really think about that and get clarity, people's charge at weights and question, ‘What is the charge outright? How was that determined?’ 

So probably Ed was frustrated but picked these Brenton to pieces. And then, we spoke about productivity. In our industry and what's productivity and really get clarity on productivity because between charging right and productivity and the number of hours a person works, this is what your capacity is per person and wallet. It’s not an exact science. It's a really good guide, particularly if you're trying to grow your firm. And you can probably manage a small team by brute force in the early days, but once you stop putting on people and building teams, you've really got to have a better method and just a gut feel on what people should be doing. 

The capacity planner will show you that you need spare capacity and we can talk about that. ‘What is spare capacity? What productivity should finders, minders, and grinders have as well?’ And not only that, ‘What's the profitability?’ Your single biggest cost from the world over is wages. ‘How do you manage your wages?’ The capacity piano that we work with shows you the gross profit estimate per team and the, and the cost of goods sold. It’s always said that the most important KPI or a toy affirm, it's a great question. ‘What is it? It's the cost of the good soul?’ That's the most important KPI and the biggest influence you can have. If you can get your cost of goods sold, right. Then you're all, you're a long way toward running a profitable firm. 

So hopefully that gives you a bit of some sort of context before I met her then and after. But back in the old days, it was that rule of thumb, a third, a third, a third, but then much more, I guess, scientific around the capacity planner Brenton. So that we can hype it to work through our current capacity planner.

Brenton Ward: Jamie was mentioned there about, you know, just adding, adding some science to all of us and that I know it is a bit of a combo of art and science when it comes to capacity planning. 

So Ed, right down to the letter. But how have you seen this develop over the years, and any comments on working with Jamie over that period to get this right? 

Ed Chan: Yeah, absolutely. So I just want to add what Jamie was saying about getting the possibility right. Because when you look at a normal accounting firm, they have faith in their P and L and their fees received. And then all the costs under category code expenses, ours is more you've got a cost of goods sold. You've got your opening with your cost of the wages. And then you're closing with, and it gives you a gross pro and that should be around your pasta.

Good. So it should be around 40% if you're at it because that's the largest cost of your organization. If you can get that in control, then the profit would just fall out the bottom because your fixed overheads are around 35%, and there's not much you can do with your fixed overheads because of your rent, your software, and so forth, and it's pretty much fixed. And if you get around 35%, your fixed overheads and your cost of goods sold is around 40%, then the profit will just drop out at 25%. And then if you can squeeze a bit more out of your cost of goods sold in terms of getting the team structure right. The right people doing the right kind of work. And they're at 85% productivity. If you get all those boxes fit, then you're going to have a minimum of 25% return at a dollar. If the goodwill was valued at a dollar per dollar, then that's a 25% return on your capital. 

Now there are not many other businesses out there or investments like property or shares or anything like that. We'll give you a 25% return. The reason why we do this is to separate out how hard you're working versus how hard the business is working. So if we can get those KPIs right, and make them in and get them working around 40% cost of goods sold, then you're working your business pretty hard because often you could be doing all the work that the business should be doing. You could have very good numbers, but if you're working really long hours, then the business isn't working, you're just doing all the hours that the business should be doing. Then the harder the business works, the less you have to work with the list of businesses working, and the more you have to work. 

So in order to identify how hard the business is working is the reason why we present the financials in the way we do with the cost of goods sold and fix overheads and profit. And, and in order to, to work towards those KPIs, we work with this capacity planner. 

As Jamie said, in the team, it's a bit like if you're running a soccer team, you've got different positions, you've got a goal you're on a winger, and they all have different roles. So we have a client manager, a senior client manager who deals with clients. Their productivity is very low because they are communicating with clients and doing the sales that they set up companies and doing sales with the clients. And so their productivity is around 50%. But if the, at the lower end where you have an accountant or a grinder, that's just doing all the work. Their productivity should be more than 80-85% if they don't have any distractions. And as long as you make sure that when they work before they start the job that there's nothing missing or is much of it is in, then they don't have to pick the job up, but the job down, pick the job up and put the job down. And that costs money and time. So if you get all these things working, then you should end up with a minimum of 25% EBITDA, a dollar per dollar is goodwill. At my practice, we're doing about 33%, you better. So minimum 25. So the average of 25 is very realistic.

Brenton Ward: Okay. Jamie, add to that for us, in terms of some actionable steps and walking through, you know, we're walking firms through this every day now in wise growth, as part of the foundation planning sessions, what are some of the key points that you want to touch on here? 

Jamie Johns: I think at a fundamental level, if we work through the capacity planet, first of all, for example, it's a great process to do straight away, but it's very good at the start of your financial year that you can work out, what a forecast of your actual fees will be for the year ahead. So, you get a pretty good feel of what you've just done in the current year in terms of actual fees. And then, you should try and estimate might be a little bit of growth, 10% growth, or whatever it may be. But first of all, you know, work out what your forecasted fees are for the year ahead. And that's really important because you got to plan plan, plan. Let's say it all. Sinai's if I filed a plain to file, so the capacity planner, it's probably my number one planning tool. That's going to count and send soon to have a five-team. I just couldn't live without it. So that's the first, probably the first point Brenton is to work out and estimate what your actual fees will be on a per-team basis for the year ahead. 

The next point then is you really want to jot down and you can see, hopefully, I'm still sharing my screen there, but you want to jot down all your finders, monitors, and grinders. If you like, but at that level, like who the senior client manager is. And again, you've got a different topic another day, but get that team design, right? The senior client manager, the assistant point manager, and so forth, and jot them down as you can see on the screen there. And then, at least everyone in the capacity planet, because we're listing their salaries because we want to look at, ultimately at the end, we want to look at the profitability. As ed mentioned, all of this team would be the next thing. 

Obviously, you gotta put how many weeks a person works, how many hours in the week that they work and that'll give you the total hours. Then as we mentioned at the very start about when I started working with Ed, ‘Well, what should people's productivity be?’  What is productivity and our member in the time when I first started working with it, there were a lot of probably other coaches and, and commentators saying that ‘Don't worry about productivity?. Just don't keep time sheets. Don't worry about productivity, just fixed fee or value price.’ And the rest will fall into place. Not there could be further than the truth, to be honest. 

Again, we can talk about what productivity is. So make sure you understand what productivity is. Then, the second point there is ‘What is a person's charge out, right? And how was that determined? So, and we can do a deep dive into those with Ed's help here and now, but obviously once you calculate how many they are working, what their productive hours are by their charge at right, you'll get an individual person's capacity. So their capacity is if they did those productive hours or they charge it, right, that person's full capacity is said in this example, $206-250, that's the full capacity. So if you worked through that for each individual, you'll get the capacity. 

And this is just, for example, we've got an accounting team, a bookkeeping team, and charge rights for bookkeeping. Most people would know different two accounts. And, you know, also if you have an offshore team, then you can make your bookkeeping very profitable. And then obviously you have the overall teams or the overall firm's capacity. And in this particular case of just for argument site today's example, I've said, look, our forecasted fees is 600,000 and a canning work, and we've got about 150,000 in bookkeeping work. So our overall phase is 750,000. Then our team's capacity is a bit over a million dollars. They were me and 32,000. And so what that leads to is, is an analysis around what is the spare capacity. So if I've got 750,000 in fees, but if our team was working, all things equal was working to their productivity and charging out at that raw hourly rate, then we've got about $282,000 of spare capacity, or as a percentage of our capacity around 27%. 

One of the most important things I think I went with Ed was, one of the questions why is the senior court manager only 50% productive, or the assistant managers,75%? For example, now it's not an exact science, but what you have to realize is the role that these people are doing. So that the biggest act there Brenton is to understand why a person's got that productivity. And if they're not doing billable work or chargeable work, you know, what is that other 50%? And particularly if you're a client manager, it's talking to clients, it's talking to new leads, new referrals, having AGM with clients, taking them through the process and telling them how good you are, what their tax outcome is, or if it's the bookkeeping, it's what their figures actually mean. And what I found is clients actually value the biggest point is actually talking to the account and all the bookkeepers. That's what the clients value. They don't really value the processing work in the backend. And while it's important, it's all about what the client's perception is. So it's important to make sure that you have spare capacity in the firm, and I'll probably bring it in here, but I would say 80 to 90% of the firms over the years of mentoring, I would say I didn't a hundred percent of the firms don't have spare capacity to grow. And if you don't have spare capacity to grow, it's a bit like this glass of water probably can't see it there. But if that glass of water is full and I've got no capacity to put more water in or put more fees in, the cups going to overflow in an accounting or bookkeeping firm, that means lack of service, you can't get the work done and you can't get back to clients. You simply can't manage a client's ethics expectations because everyone's just flat out. 

I've spoken to that many accounts over the, a bit like Ed would often say that, like, they just want another client, and their body language is like, ‘Oh, it's just pain is like, do I have to work Saturday to get this work done?’ So, whereas, you know, someone who's leading a team, who's got the spare capacity. It's like, oh yeah, yeah, we can, we can take on your work. We've got the people to do it. We've got the spare capacity. And your whole psychology is a different side. Yeah. 

Brenton Ward: Just a voice on a point there, the question from Michael Jamie and Thomas's incident in the Chapman's on the spreadsheet, their spare capacity, what's the sort of average range you want to keep in the firm. And then you might, you might elaborate on this as well.

Ed Chan: Yeah. It just depends on how fast you're growing. If you're growing very, very fast, then you probably want more like 15%. Plus if you've just been cruising, then you want at least 10%. As Jamie uses that analogy with the glass of water you want to, if you want to grow, you've got to have that cup, not at the full at the ring, but you've got to have the water, you know, 10% less and under the rim so that when you pour some more water into it, you can actually hold that water without it overflowing. 

That means, you know, you're losing clients by not returning calls. You're not getting work done in the right amount of time. If you get the balance right between the two, then you're going to have very happy clients and they're going to refer work to you because they are happy. And, and this church, well, we think 10 to 15% is in the normal. But if you go to too much capacity there and you're not growing to fill that capacity, then you're not going to have a very profitable firm. You're going to have too many expenses. And your EBITDA will drop.

Or if you have too much capacity and just like, you have too little capacity, that's gonna cause other problems. Like I said, a long turnaround times and, and so forth. So getting that right is so important. So you should be looking at this constantly, especially when you're growing and you've got like a team member left and you've hired another team member. The first place you go into is this. And of course, if you're growing before you make a decision to hire anybody, you come in here and you plan it out and make sure that you're planning your capacity to suit the level of fees that are coming in or the anticipated level of fees that are coming. You gotta be ahead of the curve. You'll be looking at it constantly. 

Jamie Johns: The key to it too is to make sure you work with your senior client managers, the leaders of the teams, Brenton, and Ed. And as soon as you educate them, like these days at scarf example, as soon as one of the senior client managers wants to hire someone, they instinctively guided the capacity planning because they know that that's what I'll go to and they'll know that that's what is allowing on.

So it's really good when you get that culture where everyone's focused on the same tool or the same philosophy of how do we hire, what's the, what's the process? So it was just like the other day, my senior client managers will always come to me and say, Hey, JB of offering couch, my capacity planner. And I've looked at the phase of one rice, and recently, I think I'll need another person. So it's just so good. Cause you get on the same page strategically.

Brenton Ward: In terms of allocating time, do you allocate a percentage of productivity to training or fixed hours on that? Or is it different for team member roles? Ed, any comments on that? 

Ed Chan: Yeah, you'll notice that the manager's productivity is less than in that case. Jane who's on 90%. So Jane is on 90% because she's got no management responsibilities, she's just there to grind produce. So you notice that the others, the senior production manager, they arose, her job is to manage the staff and train them. You notice her productivity is at 70% because the other 30% is to make sure that she's training the staff. And then the right at the top, Alec who's the senior client manager. He's half his day is spent just talking to clients, right? And like Jamie said, the communication with the clients, the relationship with the clients, and you notice that his production is 50% now. 

As Jamie said, this is not fixed in concrete or anything. This is all flexible. It just depends on your team structure there. And the experience level in those teams. Now, what we find though, is if you get the senior client manager in this example, Alec doing more grinding work, right? So his product production goes from 50% up to 80%. Then you won't have as happy clients and you won't get as many referrals. So just getting the balance rights important between servicing and growth. If you want to grow, you've got to spend more time in front of your clients. And the likes of Alec need to do less grinding and more face-to-face work meetings, Zoom calls, discussions, that kind of work, and then you'll get more referrals. But if you don't want to grow anymore, Alec can do more grinding work and you won't grow.

Brenton Ward: Okay, so the managers would do high-level training and then deliver on only the key concepts to the team?

Ed Chan: Yes. 

Brenton Ward: Yeah. Okay. Perfect. 

Brenton Ward: Do you disclose all staff salaries on your capacity planner to all staff or just show the team title, Jamie? 

Jamie Johns: Yeah. So once you've got all your team structured right in the people in the right seats, as we say, only the senior client managers. The senior client managers are responsible for their team's Brenton. As they're responsible for the setting, and the salaries, they are responsible for the annual performance reviews. So as I say, I'm there to support them in that. So I can be in the meetings if they want me to be there, but generally, and you get going as they get the confidence up, you don't need to be there. So I only answered the questionnaire.

Only the senior client manager sees the salaries of their team members and the rest don't know the rest only their own salaries. 

Ed Chan: The reason is that you want that person in this example, Alec, to run that team. And if you constantly bypass him, him or her, and do their job for them, including reviewing the salaries for their team, then they're going to just sit back and let you do it. 

So this is the concept of management from the bottom up, not from the top-down. The top-down management is, is where Jamie jumps in there and interferes and bypasses Alec can do or Alec’s job for him or her. And he, or she would just sit back and let you do it. But instead of doing that you let them, that's their job. You can be there to support them, but you've got to let them do their job of running that team and take responsibility for that team. But you can reassure them that you're there to help them and you'll be there to guide them, but you're not going to do it for them.

Jamie Johns: That's right. 

Brenton Ward: So wouldn't mind spending those few minutes just on charge-out rates for everyone's benefit. So could you, Jamie just quickly run through either that tab or any insights into determining charge-out rates? 

Jamie Johns: Yeah. Well, I mean, I sort of probably come back to that rule of thumb. I said earlier a third, a third, a third, but it's a bit more, there's a bit more to it than that, but charge out rate is what, if you get some work done, whether it's bookkeeping work or, or canning work or tax consulting, whatever if you want to ask, the question is, ‘Well, what is the market value for that type of work?’ 

I remember years ago, I used to ring around in my local town of Ballarat. I'd ring around and find out what people were charging for individual tax returns. Cause I'd want to say part of what I find out, what, whatever the other firm is charging. Some firms were obviously more expensive and some firms are less expensive. So the charge-out rate is it's not an exact science, but it's a determination of what the market is charging for a particular type of work. So there's bookkeeping work for example. And then there's tax preparation work. 

So part of that process,  Brenton is the market value that sets for what type of work. And then once you've sort of determined that it's then really important on your teams to have the right resource mix. And what we mean by that is literally what we've got on the screen. We've got a senior client manager who you can see areas, you can see what their salary is, right? So again, that's what their salary is. And so what you don't really want is having the wrong people in your team doing the wrong type of work. So you don't really want to see any client manager doing some bookkeeping when you can only charge that out and recoup it, or bill it at say$60 an hour, but that person's cost per hour is like $70 an hour. So you've got to have the resource mix, right? 

Try and get the right people on your team, and appreciate as you're small. And as you grow, you have to sort of put people in the right seats, but you want to try and get the right people doing the right type of work Brenton. That's really important. And often that can be a struggle for some accountants cause they want to do everything. And I don't want to let go. Now they don't want to let go of doing that type of work. But the only way, the founder can influence people is by showing them the results, which is why, or I show the senior client managers following the Fab 5 Key Performance Indicators. Because when you look at the KPIs, it'll just tell you exactly in seconds, literally what's happening in that team. So, charge out, right? Yeah. Ed might be unexplained a bit more, but again, you should, it should be market value. It should be attached to the person's role, and also that person's salary or their cost as well. Then from that have the right resource mix and then the right people on the team doing the right work. So, admin doing admin, the bookkeeper's doing bookkeeping tax accountants, doing accounting work and so forth and so forth. 

The good thing with the capacity planner is you can see what the overall gross profit is. So you might have some spare capacity in this particular case, we're probably got a little bit too much capacity, arrange of say 10 to 15, but we've got 27%. In this particular case, this team will be growing really fast, as mentioned. And we might fill that capacity pretty quick in the next three months. And then what that means is if we fill capacity that seven 50 or go up our profit, our gross profit will go up because we want GDP of 60%. They'd mentioned earlier what the cost of goods reverse of that is the cost of goods is 40%. So with this analysis, you can see what the gross profit is and you can see their gross profit that's is if we're at full capacity. So if we actually did full capacity, which is around a million dollars, we'd get a 66% gross profit or 34% cost of goods. So, but yeah, won't let Ed explain the charge yet right a bit more.