What are the Limits of My Business?

Written by the Controller | CFO Advisor Team

A company’s capacity is measured by its ability to produce the goods and services it wishes to provide to the marketplace.  There are a number of variables that affect capacity such as employee attendance, machine performance and set-up, and material quality.  However capacity is not just measured against warehouse size, equipment and human capital, but also includes your financial resources.

Sustainable Growth Rate is the maximum rate at which a company’s sales can increase without depleting financial resources.  Increased sales require more assets of all types which must be paid for.  Retained profits and accompanying 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.  This is a reason for businesses to maintain appropriate retained earnings levels. 

Production capacity is the maximum output that 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 influences the mix of fixed and variable costs and the level of investment in 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 measures the speed at which the firm is turning over Accounts Receivable & Inventory.  The business owner should be able to measure internal capacity and adjust to the changes that continually take place in their operations.

BIK’s outsourced Controller|CFO Advisors can help assess the production capacity of your business and its sustainable growth rate.

The BIK Controller|CFO Advisors:

Tony Battaglia
Tim Beck
Al Knox
Larry Schmitt

Together we can perform a variety of accounting and financial services to help your business run more efficiently and economically.  Our objective will be to improve your 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.bikcfoservices.com.