A Tactical Guide To Optimize your Business's Capacity

Good Morning Operators!

It’s been an exceptionally busy few weeks attending Main Street Summit, doing a few podcasts in Dallas, as well as doing our executive planning in Minneapolis this past weekend. I am incredibly excited for what’s coming in 2024 for not only CaneKast, but for operators in general!

We are putting together a project called Revive Capital, a capital firm put together for the express purpose of turnarounds in manufacturing. We are going to start sharing our playbook in multiple ways including

• buying turnarounds ourselves and sharing the ins and outs of how we are restoring them and their employees

• investing in, and working with others who want to purchase a turnaround and use our playbook

• teaching our playbook through 1-2 day intensive, in-person sessions.

If you are interested in any of these, I encourage you to reach out by replying to this email. They are all months away from being officially announced, but your ideas on how these can be maximally beneficial to you will help me plan and create these effectively. 

THIS WEEK
A Few Things You May Have Missed

AMA
How do you think about cash flow in a Recession?

I think the best place to start is to set our timeframe. Decisions based on cash flow now, versus in 50 years set you up to make very different decisions. In my case, I always think about multiple decades, and what the right moves are with that context.

I also look to maximize survivability and long-term value, not necessarily current profitability or growth rates. For this reason, we usually aren’t growing as fast as we could, or being as profitable as we should. Again, with a 50+ year perspective, this matters less.

So then what does matter?

Here are a few things we know from looking at history.

• There will be a number of recessions and expansions.

• During expansions, we are busting at the seams on a number of capacity measures.

• During expansions, prices get bid up on our inputs as well as our product

• During expansions, it’s harder to hire.

• Expansions are temporary.

• During recessions, businesses tend to cut prices. There are opportunities for equipment and facilities, as well as acquisitions (see below for how these impact capacity).

• During recessions activity slows down.

• Recessions are temporary.

Based on this, the play becomes clear:

1. In an expansion, you want to change nothing. Instead, you want to collect as much cash as possible.

2. In a recession, you want to invest, train, swap, and reset the labor force

So cash flow is something that builds in an expansion, with the knowledge that you’ll use that cash hoard later to

1. Survive upcoming issues

2. Invest in upcoming opportunities

Then, during the recession or industrial pullback, you can buy cheaper equipment, and acquire struggling businesses. You can train and reset how your operations work, preparing for the next expansion.

Your one goal during expansion is to maximize cash and store it away.

Your one goal during recessions is to do all of your investing, training, market-share acquisition, and preparing the company to once again collect as much cash as possible when things turn up.

What you don’t want is to

1. Be reconfiguring people, equipment, or processes during an expansion - this will eat into your throughput and lower your sales, margins, and cash flow

2. Trying to maximize cash flow during a recession because you need to survive, and by doing so, you miss out on great investments, or training and process improvement opportunities.

MAIN ISSUE
Maximizing Business Capacity: The Key to Scaling Your Small Business

Understanding capacity is essential in scaling a small business.

Understanding your business's capacity is more than just a numbers game; it's a vital step in scaling your small business effectively.

Capacity, in simple terms, is what your business can achieve with its current resources.

Knowing this can help you identify:

• Poor resource utilization

• Underperforming labor

• The need for new resources

This knowledge isn't just useful for your business. It can be applied to assess other companies too, allowing you to combine your efficient playbook with their underutilized resources.

So, how do you measure and maximize your business's capacity?

Let's dive in:

Identifying Your Business's Bottlenecks

Think of resources that limit the amount of business you can handle.

These could be anything from your workforce to machinery. Ask yourself, "What areas, if expanded, could help us handle more business?" This process is about identifying and increasing your capacity.

👉️ Action Steps:

• Conduct an audit of your operations.

• Identify resources that limit your output.

• Ask yourself, "What could help us handle more business?"

Categorize Your Resources

Group your resources into short, medium, and long-term categories based on how quickly you can adapt or change them.

For instance, staffing can be adjusted more rapidly than purchasing new equipment.

👉️ Action Steps:

• List your resources under 'Short-term', 'Medium-term', and 'Long-term'.

• Understand how quickly each resource can be modified or upgraded.

Select Key Resources

Choose the most crucial resource from each time frame category. These will serve as your benchmarks for measuring capacity and business growth.

👉️ Action Steps:

• Pinpoint one key resource per time frame.

• Focus on these for immediate, mid-term, and long-term improvements.

Focus on the 'Production Unit' of Sales

Instead of just looking at sales figures, focus on what I call the 'production unit' - the core unit your business produces or sells. This approach helps you measure resource utilization regardless of price changes or sales growth.

👉️ Action Steps:

• Define your 'production unit' (e.g., billable hours for services, products for retail).

• Track these units to measure production activity.

Set Metrics

Now, establish metrics for each time frame. These will be your targets for production units per resource.

👉️ Action Steps:

• Create achievable targets for each key resource.

• Use these targets to track progress and guide decisions.

Understand Your Market and Set Benchmarks

Analyze your best and most challenging periods. Look for the upper limits of your metrics before quality or performance drops. Gather similar data from industry peers to set realistic targets.

👉️ Action Steps:

• Review your business’s historical performance.

• Research market metrics through scuttlebutt

• Identify capacity limits based on past experiences.

Establish Performance Targets

Use the data collected to establish clear targets. This will guide you in measuring monthly performance and resource utilization.

👉️ Action Steps:

• Set practical, data-driven performance targets.

• Use these as benchmarks for resource utilization.

The Power of Knowing Your Numbers

By focusing on these strategies, you can:

• Improve Resource Utilization: Gain a clearer understanding of how your resources are used and where improvements can be made.

• Strategically Plan for Growth: Identify the right moments to expand your team, invest in new tools, or increase your operational space.

• Evaluate Opportunities in Other Businesses: Assess other companies for potential efficiency improvements using your own successful strategies.

• Enhance Team Performance: Recognize when your team needs additional training or resources to improve their productivity.

Implementing these strategies provides a structured, practical approach to growing your small business. By understanding and managing your capacity effectively, you're setting your business on a path to sustainable and efficient growth.

Remember, in the long run, the most successful companies are those that consistently achieve a high return on every resource. Treat your resources as investments, and strive to increase production units per resource. This strategy will not only make your company more efficient but also significantly more valuable over time.

Keep these points in mind, and you'll be well on your way to scaling your small business!