THE FABRICATOR’S SIGNAL | ISSUE 7
Use realistic throughput to set the operating expense your shop can afford, then protect the capacity that keeps work moving
The uncomfortable part of a slowdown is how little of the business slows down with it.
There may be more room on the installation calendar, and estimates may take longer to become orders, but payroll still arrives on schedule. The rent is unchanged. So are insurance, subscriptions, and most of the other commitments you made when more work was coming through the door.
You know what it took to build your team, so you do everything you can to keep it together. You follow up on opportunities, encourage your salespeople, and look for work that will fill the schedule. A few good weeks could make a meaningful difference. Meanwhile, the business continues spending at a level those good weeks have yet to justify.
Often, the owner absorbs the difference. You take less out, put more in, or postpone something that matters to you. Keeping the company going becomes the priority, and your reward for owning it becomes whatever you can withdraw without creating another problem.
You can carry that arrangement for a while. You may even convince yourself that carrying it is simply what a responsible owner does. Eventually, it deserves a harder question: What has to change for this business to support you, too?
That question is why Mike Michalowicz's presentation at BizX in Tampa struck me as so relevant to fabricators. Mike, the author of Profit First, challenged owners to put profit into the plan before deciding what the operation gets to spend.
When you are wondering how to cover payroll, that can sound like advice for someone who has fewer problems than you do. But the difficulty of finding room for profit is exactly what makes his message worth examining. It forces you to look at the expense the business has come to expect, and whether the work available can actually support it.
Start with the money the work produces
The familiar accounting equation puts expenses ahead of profit: Bring in sales, pay the bills, and see what remains. Mike's argument is that this sequence influences behavior. Expenses become commitments we must honor, while profit becomes something we hope those commitments leave behind.
Reversing the order makes profit a commitment of its own. It gives the owner a reason to question spending that might otherwise continue simply because it has become normal.
There was a detail on Mike's companion worksheet that made the connection to fabrication especially clear. Before allocating money to the different purposes within a business, he subtracts materials and subcontractors from sales to arrive at what he calls real revenue:
Real Revenue = Sales – Materials – Subcontractors
That distinction matters when a substantial portion of every countertop sale is already spoken for. Some of the sale pays for material, and some may pay a subcontractor to perform part of the work. What remains must support the operation and provide its financial return.
This closely aligns with throughput, or $T, which we use in Synchronous Flow. Throughput is sales less totally variable costs. When materials and per-job subcontractors make up those costs, the underlying calculation is the same. Regular employee payroll remains an operating expense.
Mike's system then allocates real revenue among profit, owner's pay, taxes, and operating expenses. Owner's pay compensates you for your work; profit is the return on owning the business. Profit First manages cash, while our model measures operating results and includes compensation for the owner's work within operating expense. The categories differ, but both approaches focus attention on the money the work actually produces.
That is the amount your business has to work with. A reassuring sales total can obscure it, particularly when material and subcontractor costs vary substantially from one job to another.
Set expense from expected throughput
One way to plan is to add up operating expense, add the profit you want, and calculate how much throughput you need to earn. That is useful for setting a sales goal. It becomes a problem when current expense is treated as untouchable and every shortfall is assigned to the sales team.
Another month passes with the same commitments, supported by a target everyone is working toward but nobody has yet achieved.
For an owner under financial pressure, the calculation also needs to run in the other direction:
Expected $T – Target NP = Affordable OE
OE is operating expense, and NP is net profit. Start with the throughput you can realistically generate from the work available. Subtract the profit you intend to produce. What remains is the operating expense the business can afford.
Consider an illustrative shop expecting $120,000 in monthly throughput and planning for $20,000 in net profit. It can support $100,000 in operating expense. If it currently spends $135,000, it is losing $15,000 a month, and there is a $35,000 gap between current spending and the expense its profit plan allows.
At that throughput level, cutting $15,000 would stop the loss. Producing the planned profit requires closing the rest of the gap as well.
That view is uncomfortable because the gap consists of real decisions. There may be a position added during a busier period, overtime that has become routine, or extra support built around a recurring problem that was never resolved. Each expense may have had a reasonable explanation when it was introduced. Over time, those explanations can become assumptions about what the business simply requires.
Of course you should pursue more sales. Better follow-up, stronger relationships, and improved conversion can change the amount of work available. Better flow can also help you complete more of the profitable work you already have. But additional throughput takes time to develop, and this month's bills cannot be paid with work you hope to win later.
The immediate responsibility is to bring spending into line with what the business can reasonably earn while you keep improving that earning power.
A smaller allowance exposes the problem
Mike illustrated the behavioral side of this with an idea most of us understand immediately: If you want to eat less, use a smaller plate. A large plate leaves room to serve a little more. A smaller one makes you decide what belongs on it.
His toothpaste example made the same point. With a new tube, you can squeeze out a generous stripe without much thought. Near the end, you roll the tube, flatten it against the counter, and work the last bit toward the opening. You become resourceful because getting a useful result from what remains now matters.
Owners do something similar when they have to make a tighter operating allowance work. Expenses that once seemed unavoidable become questions worth investigating.
Take recurring overtime. Paying it may get Friday's installations back on schedule, which is a real and immediate benefit. If the same recovery is needed every week, however, the business is continually paying for a problem it has not solved. Missing information, poorly prepared work, or shifting priorities may be consuming time the company already pays for during the normal workday.
While the money is available, it is easy to keep buying relief. A tighter allowance gives you a reason to ask why the relief is needed so often and what would allow the work to move without it.
As Mike put it, Profit First "doesn't fix your business. It reveals what needs to be fixed within your business." The spending limit exposes the problem. Understanding how the business operates is what allows you to do something about it.
Cut expense without cutting flow
We have seen this play out in a fabrication business under serious financial pressure. One client had to make a substantial reduction in its workforce. Yet with significantly fewer people, the company maintained production volume. Later, that smaller team achieved record volume through the plant.
The result raises a question any owner carrying too much expense should consider: How much of the staffing we regard as necessary reflects the way we have organized the work?
With Synchronous Flow, this client became more deliberate about where people were needed. Management identified the operation governing production flow and concentrated labor where it helped that operation produce. Staffing elsewhere could then be evaluated against what the whole system needed to complete the work.
Additional help can make almost any department's day easier. The business needs to understand whether that help allows it to deliver more work, protect quality, or maintain the reliability customers expect. Those contributions matter even when they are difficult to see from one department's workload alone.
Consider a shop whose production pace is governed by one operation. Keeping that operation supplied with complete, ready work may be an excellent use of labor. So may handling support tasks that would otherwise interrupt it. Contrast that with adding another person ahead of an already adequate queue. That person can create more unfinished work without increasing what the plant can deliver.
Both people can look busy. What matters is what their work enables the business to complete.
The client's experience does not establish a staffing target for another shop. It does show why headcount alone is a poor explanation for production capacity, and why understanding the constraint becomes essential when expense must come down.
You need to be able to discern when a reduction will remove excess from when it will remove the support that makes throughput possible. Cutting the latter can leave you with a smaller payroll and a larger financial problem.
This also requires judgment about spare capacity. Some resources need room to catch up after disruptions and keep the constraint supplied. A person or machine that is occasionally idle is not automatically excess. The question is whether that capacity serves a purpose and how much the system needs to protect flow.
When orders are scarce, demand may be the immediate limit on the business. Even then, the work you have must move through the shop reliably. An expense reduction that creates delays, remakes, or dissatisfied customers can undermine the income you need to preserve.
Often, the necessary changes do include fewer positions. These decisions affect people who may have helped build the company, and they deserve care. Continuing to fund an expense structure the business cannot support also puts those people and their remaining coworkers at risk. Understanding how each role supports flow gives the owner a better basis for making a difficult decision.
Give the gap a number
For your next operating review, bring three figures to the table for the same period: the throughput you realistically expect, the net profit you intend to produce, and the operating expense you are currently committed to spending. Use the first two to establish the affordable expense, then compare it with the third.
Now you have a defined gap to close. You can examine the operation against a specific financial requirement instead of issuing a general instruction to spend less or work harder.
Choose one recurring problem that consumes labor or creates recovery expense, and ask what would have to change for that expense to become unnecessary. Look at how it affects the constraint and the completion of customer work. You may find an opportunity to reassign people, resolve interruptions, or reduce overtime by improving how work is prepared and released. You may also find an expense the available business simply cannot carry.
Then check the result against both sides of the equation. The reduction needs to improve the financial outcome while preserving the throughput the business depends on. That is how you begin making the business more capable with the resources it can afford.
If you can see the financial gap but are unsure where to make changes, that is a good reason to get help now. After years of building a company, it can be difficult to distinguish a genuine operating requirement from a familiar way of doing things. You may know expense must come down while worrying, quite reasonably, about cutting something the shop needs.
At Synchronous Solutions, we help fabricators connect financial requirements to what is happening in the operation. If that is the decision in front of you, start a conversation with us. We can help you understand what is limiting throughput, what needs protection, and where changing the way work gets done can reduce the expense required to do it.
When the business is losing money, every month of delay consumes cash and leaves less room to work through the changes. Getting clear while you still have choices gives you a better chance of making deliberate decisions.
BizX offered plenty to consider about growth and scale, and we will return to those themes in future issues. This is the foundation I would start with: an operation that can earn a worthwhile return from the work available today. As demand improves, you will have a clearer understanding of what the business actually needs to handle more.
For now, put profit into the plan and let it challenge the arrangements that no longer fit. You have worked hard to build this business. It should be able to support you, too.
