Navigating Business Rapids - The CFO-Pro Newsletter

You are in your car and suddenly you find the two-lane highway narrowing to one lane. Traffic flow slows to the pace at which two lanes of traffic can merge into one. Your speed of 60 slows to perhaps 20 and can even be a stop and go to move ahead one car length. This is a bottleneck.

Bottlenecks are occurring everywhere in the business world. They happen in the processes employed in every business. They happen in production, distribution, fulfillment, billing, filing, etc. They happen in manufacturing companies, distribution, retail, construction, real estate, consulting, financial services, and service businesses of all kinds. Bottlenecks are rampant in non-profits, and in government and the bureaucracies they employ.

Capacity constraints affect a company’s ability to grow. Firms that find themselves bumping up against their system’s capacity constraints soon find that growth has stopped; profits begin to decline unless expenses are cut accordingly.

Any part of your business that has a capacity bottleneck will find the production and efficiency of everyone reduced to the speed of throughput at the bottleneck. The operation will slow to the lowest common denominator—the productivity at the slowest part of the process.

For example, if a bottleneck is reducing throughput by 30%, and your customers are unwilling to wait in line, your sales levels could be 30% lower than what they should be. How much margin are you losing at the bottleneck? If your normal throughput is $1,000,000 annually and the bottleneck reduces it by 30%, you have a new sales level of $700,000. At a gross margin of 60% applied to the lost sales of $300,000, the lost profits amount to $180,000! And this is just a one million dollar organization!

Worse yet, are you paying for “stand around” time while the under performing parts of your process “catch up” to the rest of your production?

As for the government bottlenecks, they just seem to throw more people and money at it without addressing the three culprits. And you and I are paying for this bad practice as government and bureaucracies have become the largest employer of record throughout our entire economy!

If you are concerned that your business is leaving money on the table due to bottlenecks, and want to quantify the expense and explore alternative solutions, please contact me directly at jlafferty@cfo-pro.com or 630.269.7646. I’m available to discuss options to unlock the revenue and increase cash flow.

The Wisdom of Henry Hazlitt (1894 - 1993)

The argument for parity prices ran roughly like this. Agriculture is the most basic and important of all industries. It must be preserved at all costs. Moreover, the prosperity of everybody else depends upon the prosperity of the farmer. If he does not have the purchasing power to buy the products of industry, industry languishes. This was the cause of the 1929 collapse, or at least of our failure to recover from it. For the prices of farm products dropped violently while the prices of industrial products dropped very little. The result was that the farmer could not buy industrial products; the city workers were laid off and could not buy farm products, and the depression spread in ever-widening vicious circles. There was only one cure, and it was simple. Bring back the prices of the farmer’s products to a parity with the prices of the things the farmer buys.

If there had been any sincerity or logic in the idea, it would have been universally extended. Why not preserve perpetually the price relationship of every commodity at that time to every other? The refusal to universalize the principle is not the only evidence that it is not a public-spirited economic plan but merely a device for subsidizing a special interest.

The central fallacy is the argument that if the farmer gets higher prices for his products he can buy more goods from industry and so make industry prosperous and bring full employment. However, everything depends on how these higher prices are brought about. What we are discussing is a rise in farm prices brought about by government intervention. What is the result? The farmers get higher prices for their crops. In spite of reduced production, say, their “purchasing power” is thereby increased. All this is what is seen by those who look merely at the immediate consequences of policies to the groups directly involved.

But there is another consequence, no less inevitable. Suppose the wheat which would otherwise sell at $2.50 a bushel is pushed up by this policy to $3.50. The farmer gets $1 a bushel more for wheat. But the city worker, by precisely the same change, pays $1 a bushel more for wheat in an increased price of bread. The same thing is true of any other farm product. If the farmer then has $1 more purchasing power to buy industrial products, the city worker has precisely that much less purchasing power to buy industrial products. On net balance industry in general has gained nothing. It loses in city sales precisely as much as it gains in rural sales.

Every other month, Business Mastery provides financial tools that improve bottom-line results and build business equity.

CFO-Pro can assist you in implementing these tools in your business. We specialize in identifying the causes of negative trends and ways to take corrective action.

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