Think Like a CFO: Find Your Biggest Constraint

E#60: Every growing business has a constraint—whether it's people, cash, systems, processes, or leadership. In this solo episode, Scott explains how identifying and removing the biggest bottleneck is one of the most important responsibilities of a business leader. Through real client examples, he shares a practical framework for finding constraints, measuring their impact, and building a plan to eliminate them so your business can continue to scale.

Podcast Recommendation: Think Fast, Talk Smart by Matt Abrahams (Stanford University)

Find out more about Scott N Geller: https://www.linkedin.com/in/scott-geller-cfo/

Find more episodes on Apple podcast, Spotify, Amazon Music and here: https://budgetyourbusinesspodcast.buzzsprout.com/

Fan mail or feedback on the episode? Email me at scott.geller@capitisadvisors.com 

Transcript

Constraints Limit Growth

Scott 0:01

A constraint will always exist in your business. The trick is knowing what the biggest constraint is and deciding whether that constraint is acceptable. Yes, acceptable. Because you might have a constraint that is perfectly fine.

SPEAKER_00 0:18

Welcome

Welcome And The Sales Doubling Test

SPEAKER_00 0:19

to the Budget Your Business Podcast, where small business owners go to learn how to financially plan for every aspect of their business. Let's get started with your host, Scott Geller.

Scott 0:29

Hello. And thanks for joining us on Budget Your Business. Today I'm going to run a solo episode. If I doubled your sales next month, could your business actually handle it? Most owners would say yes. But growth is usually limited by constraints, not sales. The Merriam-Webster definition for a constraint is the state of being checked, restricted, or compelled to avoid or perform some action. A constraining condition, agency or force, in the third definition is a repression of one's own feelings, behaviors, or actions. For a business, it's not far off for that definition. A constraint is anything that limits your ability to achieve your next level of growth. You're in a state of being checked. You're in a state of being restricted. You're compelled to avoid some action, like sales. You might also feel like your own feelings are being repressed in there. Every business has a constraint, always. It might be people, cash, systems, processes, or maybe even strategy. And the primary job of a CFO in a growth company is to identify that constraint, quantify its impact, develop a plan to remove it, and then repeat the process as the next constraint emerges.

A World Cup Lesson In Constraints

Scott 2:08

We recently wrapped up here in the United States the World Cup. I love the World Cup. In the title game, a lot of people say, oh, that was a boring game. And there's aspects that, yes, it was a boring game. But think about Argentina for a minute. And what was their constraint to winning that game? Shooting. They didn't have any shots on goal. In soccer, well, in any sport, if you can't shoot on goal, you're not going to score. So Spain's approach, their tactics in game, cut down any ability for Argentina to just get a shot off. Argentina had a massive constraint. Now I hope for your business, you are not operating like Argentina, where you don't get any shots. But at the same time, I guarantee there's somewhere in your business that is constraining your growth. And growth isn't about improving everything. It's really about removing the one thing that's limiting progress. Examples, sales, hiring. It could be cash. It could be something in your operations. It could be technology. Maybe you're on technology from 20 years ago, and it's really limiting what you can do. Owner bandwidth is a very common one. Over the total management team could be a constraint. And unfortunately, most businesses often improve areas that are not bottlenecks. They may look at their CRM, they may look at their website, they may look at a dashboard or even a logo and say, you know what? I'm going to change those, and that's going to be the difference. But they're really ignoring the real constraint. Does this investment remove the biggest constraint? If you're not spending money on reducing your biggest constraint, don't expect it to increase revenue or improve profitability. This is just math. If the machine is printing money, feed it. Feed it as much as you possibly can. Because your job is to remove budget constraints and fund it while also maintaining the guardrails to catch the exact moment efficiency breaks.

Therapy Practice Hiring As Bottleneck

Scott 4:36

I want to talk about a client where, so this was a therapy business. And I came on board, we started talking about the business. They have been growing for several years. I think they're in one of the Inc. 5000 lists, possibly. And they knew what their constraint was. Their constraint was hiring new therapists. They had potential clients, they had people that were coming to them. They had a waiting list for clients. They could not or weren't sure about how to hire or how many therapists to hire. We knew how many clients were on the waiting list. We also knew how many clients could each therapy handle. So we had we did the math of if I have X number of therapists working Y number of hours, and then they can take on 10 new clients, 20 new clients. We then talked about, okay, well, if we have, let's say we're gonna we agree we can we can bring on five new therapists. Well, where are those therapists gonna sit? Are they gonna be virtual? Are they gonna be in person? Are they gonna be a mix? Okay, do we have locations for that for those people? That was the next constraint is you know what, Scott? We don't have any more real estate in our existing buildings. Okay, let's find a new location. And in looking at the new locations, we started doing the math around how many therapists can we get in a location? What else do we want in a location, like a sitting area, a little kitchenette for the therapists, a bathroom? A bathroom is really important. If you can get one when you have multiple people coming in and out. So we walk through the math, starting with the clients, determining how many therapists we can hire to meet that client demand. That's our first constraint. Then a real estate constraint of where are we going to put them? The next constraint is tying. So if we're bringing these on board, how long does it take us to up to onboard a new therapist? How long, how many clients can they take on? How many people can they take on in the first month, in the second month? It was a it was a process of elimination, eliminating one constraint after another until we had a full hiring plan laid out. And you know what we did? We started hiring new therapists. We had a plan of how many to hire, how many to hire, the ratio of waiting lists of therapists. We identified the right hiring process, and then we started executing it. And we knew we put the the ROI around it as well, the return on the investment in these new therapists, so that we then knew look, we bring a therapist on, the next constraint, the lat when the last constraint is cash. So the last constraint around cash was look, this is when a new therapist is going to break even. This is when a new therapist is gonna start making money. That way we knew if we bring on too many therapists, we're gonna have a liquidity issue. So we walked through the process of eliminating one constraint after another. Now,

Solving Hiring Exposes New Limits

Scott 8:34

finding the constraints may not be as easy. This company, they knew the constraint was. We have to have more therapists. That may not always be the case. You might have to find the root cause or the cause of the constraint. So we like to put it into one way to think about it is the five IBS. Looking at your methods, looking at your machines, looking at your materials, looking at management, and looking at manpower. And keep asking why until you find the bottleneck. There's not just one. You're gonna have to keep asking why. Have you heard of Simon Sinek and the why? Ask why three times to find out the real answer. Well, guess what? You're gonna have to find ask why more than three times as you work through these root causes. You really need to think through these five M's, and it's it's you know, sometimes externally, sometimes internally, but you have to determine where that constraint is sitting.

Root Cause With The Five Ms

Scott 9:36

Another example, I worked with a technology company. They were a ticking platform for secondary education. They essentially they built a platform where they would sell tickets to high school sporting events and other sporting events in this school space. The constraint around them was interesting, like rolling out of COVID. So during that time, they had a lot of clients or schools that signed up with them because they needed a solution. But there was also a delay in time to the revenue and therefore cash. So in this case, their real constraint was cash. And the reason that there was a constraint there is because their revenue was being delayed as you know, until these schools are able to have events. If you don't have an event, you can't sell a ticket. So their sales weren't necessarily the constraint, it was the cash side. What was the solution? Well, let's determine how much of a constraint this cash is. So we quantified a cash runway. How long can we last given our existing expenses and how much cash we had in the bank? Then we started playing different scenario plans of different timing situations. Well, if we think Texas and Florida are going to allow events, okay, if those clients are selling or hosting events, we're selling tickets, we're being paid, that generates revenue. If we think Ohio, this state, that state, and we started layering on timing and different scenarios to see how that impacted our cash runway. We then identified funding sources and the speed in order to get to those funds, that the funding. And finally, what we did while we had this kind of downtime before we started really using, or before our high school started using this product, internally they started to improve systems and processes while we were delayed, so that when the clock started, we were even faster to get into that revenue. So our constraint here was speed to revenue and ultimately cash. The result? Well, we declined any outside investment because, based on our scenario, cash planning, we felt comfortable we could get through the period of time that we needed to. We hit the ground running when a school was turned on, or the clock started, if you will, because of the internal improvements we made while we're waiting. And we ramped up revenue. We we really ramped it up. We had a year or two where a year and a half where we really ramped it up. Uh, we maintained cash levels to maintain to ensure cash or sorry, we maintained expense levels to ensure that we had sufficient cash. And at the end of the day, they were able to sell the company in a very attractive multiple in price that they were looking for. But they had to understand what that constraint was. They had to understand that there is a cash constraint and what that was gonna do to them.

Cash Runway And Scenario Planning

Scott 12:47

So, some constraints are gonna cost you money, some constraints are already costing you money, some constraints are gonna cost you money to fix them. You really have to differentiate between management problems from investment problems. Examples might require investment or hiring, new software, automation. Maybe you need facilities, maybe you need a facility upgrade. Examples that might require process changes could be communication, uh, scheduling, priorities, looking at multiple internal projects. So a constraint is going to cost you money regardless of where it is. It might cost you money in the form of bringing in sales, it might cost you money in the form of inefficiency within processes, it might cost you money and requiring an investment. So we need to we need to upgrade our our software. Worked with a client that has software worked well enough for them, and they'd had it for years. However, it was no longer supported. They had one person that was the company was no longer around, they had one person that knew it and was helping them for a long time. But what happens if that person gets wins the lottery and walks away? They had no support of the system, so they had to get rid of that constraint, and it cost money, unfortunately, a lot of money, but in the long run, it allowed them to expand their business and removed a significant amount of risk from the business. Another

When Constraints Demand Investment

Scott 14:19

client where we had to address a constraint was a staffing company that plateaued in revenue and they really wanted to grow more. They thought the constraint was a sales team. However, the constraint was actually a lack of financial visibility. They knew what they made bottom line, they knew what the cash was, but beyond that, they really didn't have much of an idea of what was happening financially around the business. So as I came in, we cleaned up the accounting, we put in accounting processes, we made changes so that we had accurate accounting, number one. Two, we started performing that allowed us to perform analysis. And we started sharing that analysis. So the company was broken into three different staffing areas. We started looking at the profitability in those staffing areas, we started looking at concentrations, we started looking at how each of the seasonality in each of them. This was information that they knew, they felt they knew existed, but they didn't have numbers around that. So we generated the analysis and we gave them numbers. We started putting together individual recruiter sales forecasting, which they had never done before. We then started looking at the operating expense areas that were limiting their profitability. Their profitability bottom line was not where it should have been. They again didn't really have the visibility to truly see the impact of that. And finally, we put all that together into a financial and cash forecasting. What did that do? Well, that allowed us to create a plan to fix what we have today and then decide on a target of growth in desired areas or divide in the desired divisions of the business. They were able to put together clear directions, and that allowed them to start growing. It allowed them to target where they really wanted to grow instead of just saying, we're gonna grow, which they thought just salespeople were their limitation. It really wasn't. The limitation was the financial information on where they wanted to grow, and then giving information to the sales staff, the recruiters, so that they could start understanding what they needed to do in order to help the business.

Financial Visibility Unlocks Growth

Scott 16:45

Solving one constraint is never a one-time job. Solving one constraint simply exposes the next one. And that's where scaling really comes into play. You saw the hiring. Well, now the operations can't keep up. So you fix the operations. Now cash becomes the issue. Then you fix the cash. Now management bandwidth becomes the issue. You fix the management. Well, now you have a technology that becomes the issue in the constraint. Businesses often aren't able to visualize or see the constraints, and if they can't see them, then they can't eliminate them. Or they eliminate one and they assume they're done. You eliminate one, you move on to the next one. That's the key behind scaling. So, how

Forecasting To See The Next Constraint

Scott 17:38

do we do this? Well, it's yeah, a practical framework is looking at what's limiting your growth today. Is it the real problem, or is it simply a symptom of what the problem is? Which of the five M's causing that? Can it be solved without spending money? Maybe it's it could be simply process improvements. If investment is needed, what's the ROI? So think about if if we can generate a million dollars in revenue, but is it going to go on if we can generate, let's say, yeah, a million dollars in revenue and we have a 20% margin, that leaves us with $200,000 on it, right? However, if a software package is going to cost us half a million and another $200,000 on top of that, then we're gonna need like five years, six years to overcome that cost. Is that really an ROI that's gonna help the business enough? Whereas if you can generate a million dollars, you have 20% margin, but it only costs you a hundred grand. Well, that's a no-brainer. Let's jump in that. And then the sixth step would be what's likely to become the next constraint. Again, you always have to be looking for the next constraint. It's it is a continuum. Unfortunately, it's a constraint continuum. A budget is gonna tell you what you think is gonna happen, but a forecasting model tells you where the next constraint is going to exist. That is one of the values, huge values of a forecasting model. And I know you've heard this before from me, but I'm gonna say it again: consistent forecasting what will allow you to see where that constraint appears. Next 12 months forecasting, not just annual. So if we're in July right now, we're looking at August through the next July. When we get to September, we're gonna look at August, October through the next September. We're not just gonna look at September to December. We have, and we're not just gonna do this one time a year. We had to continually forecast the business. Because how else are you gonna know what your current constraint is? Is it changing? Is it moving? What is the next constraint? So I

The Church Volunteer Constraint Surprise

Scott 20:01

worked with a project for a not-for-profit church, and they thought church members were their constraint. And at one time it was. Now they were growing, they were able to build a new church, and as they were building out this new church, and I was talking to them about their financial, uh, their their financial condition and internal payroll and and what they call their volunteers. I started realizing that their constraint, we start talking to it, we realized the constraint were no longer church members. It was the volunteers. So they had a significant amount of volunteers in this organization, this church. And if they weren't able to continue getting those volunteers, they weren't gonna be able to run this church because they were used to having a very small paid payroll and then a significant amount of volunteers that work for free. But if that volunteer group doesn't grow with the number of members, they were gonna hit a maximum amount of services they were going to offer their members. And that's a big reason why members join. It's because some of the other services. So their constraint was something completely different than they thought. As we've said, a constraint, a constraint will always exist in your business. The trick is knowing what the biggest constraint is and deciding whether that constraint is acceptable. Yes, acceptable. You might because you might have a constraint that is perfectly fine. You may not want to hire a hundred more people to reach the next level. You may not want to buy a whole fleet of vehicles, you may not want to change that process to allow more throughput. You may not want to take on additional funding, and that is okay. A constraint in and of itself is not a bad thing necessarily. Not knowing the constraint, understanding the constraint, and making a decision about what to do with the constraint is detrimental to your business. As a CFO, my job isn't building reports, my job isn't solving every problem. As a CFO, my job is helping businesses grow by identifying the biggest constraints, addressing it, and repeating the process. I

Three Takeaways And A Recommendation

Scott 22:24

like to wrap up every show with three immediate takeaways. These are takeaways that you can put into place as soon as you you turn off the the podcast. So today, let's talk about constraints. First, ask, what is your biggest constraint? Then quantify how much of the how much the constraint is holding you back. Third, determine the cost to remove the constraint. And only then do you take step four, which is deciding on how you treat the constraint. So those are our takeaways today. The other, the other uh, as you know, as a as a comment, if you're if you're a regular listener, you also know that we like to share a podcast or a book. So today I'm gonna share Think Fast Talk Smart with Matt Abrams. He is an author and lecturer at Stanford. In the episodes, they interview experts that provide insights around communication. And there's some interesting approaches they take with it as well. Hopefully, you check it out. Think Fast Talk Smart. Hopefully, today you learned something about how to address constraints in your business. At the very least, get you thinking about constraints. And next time you join us for their next episode of Budget Your Business.

Share The Show And Closing

SPEAKER_00 23:43

If you like the show or found something useful, text someone right now and say, I have a podcast recommendation to check out, budget your business. You can also like the show or find more at your favorite podcast locations, Apple Podcasts, Spotify, and Amazon. Thank you for listening. And we hope you join us for our next guest on Budget Your Business.