There is a significant challenge in most businesses between being efficient and being resilient.
Efficiency is about delivering the output from the company using the smallest use of resources to achieve the end goal. Resources that include money, physical assets, the labour of staff, raw materials, and time. Resilience, on the other hand, is the business’s ability to recover quickly from unexpected changes and adversity, and in business, doing that without affecting your ability to deliver with the same quality of the output throughout.
In general, these two forces pull in opposite directions, and managing the balance between them is essential. For example, an entirely resilient business is unlikely to be highly efficient; resilience requires spare capacity. Conversely, a company running at its most efficient will struggle with almost any upward change in demand.
Typically, many organisations do manage this balance in one area, finance. Most keep a close eye on the company’s profitability, partly because it is a measure of efficiency. Well-run companies also look at cash flow. After all, if you run out of cash, even for short periods, the business may fail.
I recall, when advising a business a few years ago, that they rang to celebrate winning one of the most significant orders they had ever had. Looking at the contract, I became concerned that the work required a substantial purchase of raw materials and payment terms that would have delayed the income until long after they had incurred the costs. Had they gone ahead as sold, that business would have become temporarily insolvent even though the deal was highly profitable. We renegotiated the agreement and swapped some future profit for present-day cash, which meant it ended up being a great success for both the customer and the supplier. We had created resilience at a (small) cost to efficiency, but a truly worthwhile one.
Money, Resources and the unexpected
Over the years, I’ve advocated for clients to undertake three analyses to help ensure that the business balances efficiency and resilience over the medium term.
First, a cash flow analysis accurately assesses the available cash, projected income flows and cost outflows to understand the short and medium-term financial state.
Secondly, a capacity plan measures the maximum theoretical workflow you can accommodate, considering the available staff and significant resources. As well as identifying the full theoretical workflow, it will also help identify where the constraints are in the business; bottlenecks in the current business design. It should allow for all the administrative, marketing, selling, strategic planning, and other time spent on the business and delivering your product or service to customers. You need to be honest about your ability to deliver. Far too often, I’ve seen over-optimistically short estimates of the time required by each element and ignoring downtime, relaxation and so on. Masters of business know that the time things take is never the optimum time they could take, but something longer allows for the interruption and less efficient days. That shows in their (better) overall results.
Finally, a risk register looks at mitigating the variations in future work. Risk management is essential, and often in businesses, ignored activity. Looking at what the unexpected could do and planning how to address the consequences of such an unplanned change always builds resilience. Masters of business are always resilient, calm in a crisis and ready before the event.
Planning how to ensure that there will be the money needed by the business, planning to ensure that the company will have access to the required resources, and planning to ensure that a sudden unexpected change does not harm the business creates resilience. It is how the most masterful companies manage themselves all the time.