Last week, we had an overview of “3 Tips to Manage The Madness In Your Business.” The first tip was shortening cycle times. Depending on the type of business you’re in, all of us have a sales cycle, delivery cycle and a billing/payment cycle. If you’re a product, manufacturing or contracting company, you also have inventory or work in process, which is included in your production cycle. In theory, if you are able to reduce the amount it takes to sell, make, deliver or collect your business can do more in the same amount of time. Depending on your strategy and processes, you would choose to improve the cycle that has the most impact on your business either in financial or non-financial terms.
For example, if my strategy is to sell more I would look at the number of sales people I have and determine how many sales calls it takes before I get an order and calculate an average of sales calls to order. If it takes me 3.5 calls to get an order, then shortening my sales cycle 10% would be to improve my sales calls to order to 3.15. Let’s pretend I make 30 calls per month/330 calls per year. At 3.5 calls to an order, I get 94 orders. If I improve my close rate by 10%, then I get 104 orders. If my average order is $50,000, then 10 orders could give me as much as $500,000 in additional revenue for the year.
The same logic can apply to your production, delivery or billing/payment cycles. In my last article we talked about a residential builder shortening his production cycle for building a house from 16 weeks to 14 weeks. In other words, you’re shortening your cycle time by 12.5%. If you build 200 houses per year at the current rate of 16 weeks, by shortening the production cycle time to 12.5%, you could build another 25 homes. If your average profit per home was $25,000, then that increases your gross profit by $500,000 when implemented.
When you decided to go faster, you must be aware of any quality deficiencies on the way. Because you’re asking people or processes to go faster than they have in the past, something is going to change and you have be alert of the outcomes generated because of the change and determine if you are sacrificing quality for quantity.
At this time, it’s probably helpful to establish some key performance indicators (KPI’s) to watch for in your financials. These key performance indicators could be things like revenue per client or sales person, gross profit per client or sales person, labor utilization rate, inventory or receivables turnover are all examples. You should pick the ones you want to focus on. Are you generating the expected results. why or why not? Generally, your ability to go faster will be a result of people being effective and efficient and having the proper processes in place to eliminate mistakes or redundancies or execution. Remember any change in cycle times could take as long as six months to see the impact in your financials so, be sure you give it ample time. What are some things you do to improve cycle times?
