Capacity planning in the budget
/The Need for Capacity Planning
A budget should account for the capacity of the business to generate the sales indicated in the budget. This calls for consideration of all bottlenecks that can impact sales. A common example is when the CEO budgets for twice the sales in the next year, but with the same number of salespeople, on the assumption that they will be twice as efficient. Even if there is an increase in the budgeted number of salespeople, it will take time to ramp up their selling capabilities, and training them may take time away from the existing sales staff. Similar capacity issues can arise elsewhere in a budget. For example:
Plant and equipment. The production facility may already be near its maximum practical capacity, and cannot produce the budgeted amount of goods.
Staffing. Some staff positions require extensive training, which cannot be rushed. Picture the amount of time it takes to train a craftsman to produce a concert-grade piano. This training period must be built into the budget.
Product development. A standard process must be followed to ensure that new product designs are properly tested for safety issues and failure rates. This testing process cannot be rushed, or else a company may face an expensive product recall or customer lawsuits.
Overhead positions. As a business grows, a variety of overhead positions must be filled, such as additional accounting staff, production planners, purchasing staff, and so on.
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Capacity Planning in the Budget
Capacity constraints can be identified within a budget model by relying upon the advice of operations staff regarding bottleneck areas. Also, consider creating a capacity analysis page in the budget that identifies the areas where more resources will be needed. An example follows for the planning of staffing changes in the sales department.
|
Quarter 1
|
Quarter 2
|
Quarter 3
|
Quarter 4
|
|
| Budgeted revenue |
$8,000,000
|
$10,000,000
|
$12,000,000
|
$14,000,000
|
| Budgeted sales staff |
27
|
32
|
38
|
42
|
| Budgeted sales per person |
$296,000
|
$313,000
|
$316,000
|
$333,000
|
| Historical sales/salesperson |
$250,000
|
$250,000
|
$250,000
|
$250,000
|
The capacity analysis example shows that the the budget will probably not be achieved unless there is a substantial increase in the number of salespeople.
Another example of capacity analysis is shown in the following table, where an organization has altered its consultant billable hours percentage in order to make the budget numbers work.
|
Quarter 1
|
Quarter 2
|
Quarter 3
|
Quarter 4
|
|
| Budgeted consulting revenue |
$2,106,000
|
$2,268,000
|
$2,565,000
|
$2,888,000
|
| Budgeted consulting staff |
52
|
56
|
60
|
64
|
| Budgeted billing rate/person |
$90
|
$90
|
$90
|
$95
|
| Budgeted utilization percentage |
90%
|
90%
|
95%
|
95%
|
| Historical billing rate/person |
$87
|
$87
|
$87
|
$90
|
| Historical utilization percentage |
82%
|
80%
|
84%
|
73%
|
The analysis shows that a very high billable hours percentage is required for the business to meet its revenue budget, which is not realistic when compared to historical results.
In short, capacity modeling is an excellent tool for mitigating the risk that a budget will be formulated with unrealistic capacity assumptions.