Many businesses plan for growth in different ways using various techniques to formulate their strategy for success so it is written in black and white to be used as a blueprint for growth. In an online article, Gavin Simpson’s case study documents the story of the short-lived low budget food retailer ‘Caffix’ in Central London that sold meals for £1, but closed within 10 months of trading. This shows the pitfalls from its oversight when planning for growth in terms of misunderstanding the required time and cost allocation to enable and sustain growth, despite its honorable intentions.
The problem faced by Caffix was that the time required for heating baked potatoes for lunch time customers was taking up the time of its limited staff meaning this would result in additional customers having to wait and in the process deciding to ‘give up’ and go elsewhere which was not foreseen in terms of the required time and resources needed to meet demand.
Weiner (2002) details the pattern analysis required within cost structures when planning labour cost by using designed mathematical formulae in his journal article on the same topic but with a focus on industrial enterprise such as construction or manufacturing. (Weiner, 2002)
However, start-up businesses can apply the same sentiment of analyzing the costs associated with the tasks a business performs to achieve an outcome or output or otherwise result for its paying customers through effective business planning. Taking into consideration that “to make a profit, [the] total revenue [generated] must be greater than total cost.” (Tutor2u, 2016)
An alternative way of thinking about this is to consider “activity-based costing (ABC) [which] is a system for assigning costs to products based on the activities they require. In this case, activities are those regular actions performed inside a company. [such as] talking with [the] customer regarding invoice questions” is an example of an activity inside most companies.” (Wikipedia, 2016)
In other words, a business such as Caffix would need to consider the total labor and activity-based costing in terms of allocated cost per hour as well as the associated materials and supplies required to deliver a service to each customer, which would make up the variable cost. Now, to have an understanding of whether a business will achieve a profit, it would need to calculate the total revenue generated by each customer subtracted by the total variable cost.
The planning of this is important as a business grows, for example if a business allocates a certain amount of time to complete a project for one customer say 16 hours per week over 1 month and said business only has 2 staff working 35 hours per week, this would mean there is only capacity to fulfil 4.4 customers per month.
Therefore, in this instance, if the business grows and takes on more than 4.4 customers in any particular month the business would need to allocate additional labor resources i.e. staff time. But crucially, if the business tried to accommodate such an increase in customers by using the same 2 staff members there would be a time deficit in the sense that the team would not have enough hours in the day to do the work taking into consideration workload. Which is greatly increased if the number of additional customers exceeds by more than 1.
However, the business could decide to bring in additional labor if the economics works to the point of not detrimentally affecting its ability to achieve a good profit margin or alternatively, the business may simply choose, where possible, to stop taking orders for a given month once it had reached its capacity or better still operate a waiting list system so it keeps a pipeline of customers for the months ahead.
Williams and Cooper (2002) state one of the impacts of organizations or businesses on individuals in the workplace is stress created as a result of heavy workload making individuals think “why do I take on more work?” (Williams and Cooper, 2002)
Therefore, careful planning of time and cost allocation to the activities of a business will enable it to avoid the pitfalls experienced by Caffix while at the same time managing time more effectively in terms of allocating sufficient time for workers to complete tasks without imposing unrealistic performance pressures on staff.
In other words, with activity-based cost and labor cost calculations analyzed in advance, this could help a business to have a clear picture of the profitability of its business when planning for growth while at the same time managing workload.
Photo by Olu Eletu (Source: Unsplash.com)