The Wize Way

Episode 141: Mastering Capacity Planning for Your Business

• Wize Mentoring for Accountants and Bookkeepers • Season 1 • Episode 141

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Are you struggling with capacity planning in your firm?

In today's episode of The Wize Way Podcast for Accountants and Bookkeepers, Brenton Ward, Jamie Johns, and Ed Chan 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. Find out more about matching the fees with productivity and workload! 

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Brenton Ward:

From Wize Mentoring is The Wize Guys Podcast, a show about accounting and bookkeeping practice owners and the many stories, lessons and tips from their experience of transitioning from a time- poor practice to a business that runs without them. I hope you enjoy and subscribe.

Brenton Ward:

Okay, let's get stuck in, Ed. I want to start off with you on this topic of capacity planning. A lot of the firms that join us at Wize 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 to this conversation around capacity planning and why it is so important to the growth of the business Over to you Sure.

Ed Chan:

Thanks, Brenton. I guess if you've got to match, obviously you've got to match your capacity with the amount 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 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 running a business are, you know, make sure there's enough sales or fees, make sure you've got capacity to do that work and management of those resources that you need to do the work's important. And if you get those three right then hopefully you'll have happy clients. So everybody's got to win. Your clients have got to win. They've got to get their work done in a timely fashion. And also, you know you've got to be competitive with your pricing. You're going to have happy staff so you know they're not stressed out, and they get paid well. And then, as the shareholders, the shareholders have got 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. Either the clients, you know, take a long time to do their work and it's too expensive, or you know, your staff end up being overworked or underpaid, or, you know, the shareholders don't make any money.

Ed Chan:

So, all of that comes down to how you match the capacity with the workload. And of course, it's a bit of a science to do that. It's just not, you know, gut feel. And you know when I first started the way that I do it is, you know all the staff would complain about how busy they are, they've got too much work on, so I'd just go and put on another body. So I just used to throw bodies at the workload without really knowing what I was doing, and then when I thought that I was, you know, getting it right, then I didn't understand that.

Ed Chan:

You know you've got to bring complementary skills in, 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- out rate doing very, very low- level work, and then at the end of the job you'll end up having to write time off. Or if you charge it to a client, it becomes too expensive for the client and then they end up leaving and you won't be able to grow. If you're too expensive 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 organisation, 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 senior client manager with your senior production manager and the accountants underneath them, and the positions in that team structure dictate the charge- out rates they're on and the workflow and so forth.

Ed Chan:

So today we're talking about capacity. So in the capacity planner 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'll have a charge-out rate. And so, for example, the managers should be checking and reviewing and training and they're on a higher charge-out rate because they're more expensive, but it's about quality, not quantity. And then they have the more junior accountants working for them. That's grinding out all the lower types of work at a lower 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 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 work and they're not just doing bank reconciliations or low-level work, and you're challenging them at their level. So everybody wins and hopefully you'll make some money because you know the people are being charged at the right charge-out rates.

Ed Chan:

But you need to work that out more scientifically than just gut feel, because often you know you get pressured by the staff to put on more people and you have peaks and troughs in your business, as as do mine, and obviously when you're at a peak, you know everybody uh is complaining about you know the, the amount of work there is.

Ed Chan:

So there's a tendency to just go and hire more bodies. And then, of course, the peak drops off and uh, and now we're in the in, in the low, and then there's heaps of people around you know, and you're struggling to be able to find work for them, and you can't do it by just listening to people. It's got to be a lot more scientific than that. You've got to, you know, work out the numbers, and that's what we do in a capacity plan, and it's absolutely essential you do this. Otherwise, as I said earlier, you either don't make any money or you burn your staff out, or you're too expensive or you're too cheap. You might be too cheap to the clients and you know, 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:

Absolutely and we'd love to hear any questions on that from what you've just said there, Ed.

Brenton Ward:

Jamie, we were talking yesterday between you, Ed, and me and kind of reflecting on our own journeys of practice growth. And you know, when you said coming into mentoring with Ed, you guys at Sky were a decent-sized firm at that stage but didn't have a capacity plan or didn't know what a capacity plan was, or didn't have the right one at least. 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 you know it's a guiding pillar 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 I was always. When I started my own firm, I think I spoke to peers and colleagues who were starting out and had a small firm like myself as well. It was just me and say, one accountant. But I'd always been aware, Brenton, of the rule of thumb, 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 second rule of thumb was a third of your revenue would go to your overheads or your expenses, and then a third of the revenue, the final third, would go to the profit. So there was this sort of rule of thumb, Brenton, from a high-level context that you know, 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 I was guided by. And you know, prior to working with Ed around the capacity planner you know I could look at, you know an account in salary and if an account was on you know $50,000, just to keep it simple, you know they should bill out say $150,000, you know. So that follows that rule of thumb. But when I started working with Ed, while I looked at those individual sort of KPIs of the account, as I just said, I'll never forget Ed getting up on the whiteboard Ed will remember and going through and you know asking what's people's charge out rates, and so I had to really think about that and get clarity around people's charge out weights and question what is a charge out rate? You know, and how is that determined? So, probably picked, probably frustrated Ed, but picked his brain to pieces. And then you know and how is that determined? So, probably picked, probably frustrated Ed, but picked his brain to pieces.

Jamie Johns:

And then you know we spoke about productivity. You know in our industry, what's productivity? And, uh, you know, really get clarity around productivity, because between charge rate and productivity and the number of hours a person works, this is what your capacity is per person, and while it while it's not a um, an exact science, geez, it's a really good guide, particularly if you're trying to grow your firm and, and you know you can probably manage a small team by brute force in the early days, but once you start putting on people and building teams, you've really got to have a better method than just gut feel on what people should be doing. And the capacity planner it will show you that. You know that you need spare capacity and we can talk about that. You know what is spare capacity. What productivity should finders, minders, and grinders have as well? And yeah, so, and not only that, you know what's the profitability. Your single biggest cost in your firm the world over is wages. So how do you manage your wages? You know.

Jamie Johns:

The capacity planner that you know we work with shows you the gross profit estimate per team and the cost of goods sold. You know it always says that the most important KPI in your entire firm. It's a great question. What is it? It's the cost of goods sold. It'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 a long way to running a profitable firm. So hopefully that gives you a bit of sort of context. Before I meant it 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 happen to work through our current capacity planner.

Brenton Ward:

Thanks for tuning in. If you liked this episode, please remember to subscribe and leave us a five-star review. For more practical Wize tips on how to build a business that runs without you, head over to wizementoring. com forward slash podcast to download a free copy of the Accountant's 20-Hour Workweek Playbook. We've included a link in the show notes below. See you in the next episode!