Navigating the Financial Maze: The Role of Capacity Planning in Operating Expenses
A proficient planner should not only focus on enhancing their capacity planning capabilities but also grasp how capacity plans impact a business's financial statements. This role holds significant influence over the operating expense line in the income statement and the operating cash flow line in the cash flow statement.
Here are some insights into how capacity planning affects financial statements:
1. Compensation Expenses and Their Correlation with Revenue:
- Compensation expenses in a contact center are categorized as operating expenses in the income statement.
- While not typically part of the cost of goods sold, compensation expenses often correlate with revenue.
- More revenue usually implies more customers, leading to increased support transactions.
2. The Goal: Decoupling Compensation Expense from Revenue:
- The objective is to reduce the positive correlation between compensation expense and revenue.
- Achieving this involves investments in improved systems, processes, and skills.
- For instance, technology investments can reduce transaction volume, requiring fewer frontline associates and lowering operating expenses.
3. Labor Cost Ratios and Operational Efficiency:
- When compensation expense becomes less tied to revenue, the labor cost ratio improves (total compensation expense / total revenue).
- The labor cost ratio is a component of the operating expense ratio (total operating expense / total revenue).
- A lower operating expense ratio signifies better operational efficiency, indicating that the company spends a smaller percentage of its revenue on operating expenses.
4. Managing Absolute Compensation Expenses Year Over Year:
- While absolute compensation expenses may increase yearly due to factors like cost of living adjustments and bonuses, the key is to ensure that labor and operating expense ratios remain constant or decrease.
5. The Impact of Lower Compensation Expenses on Profitability:
- Lower compensation expenses lead to higher operating income and net income.
- This allows the company flexibility to invest in technology, fund mergers and acquisitions, reward shareholders, reduce debt, or provide employee bonuses, enhancing its competitive edge.
Here is a case study of what a capacity planner will go through in their job.
- Improving service levels necessitates investing in Full-Time Equivalent Employees (FTEs), increasing operating expenses.
- To align with profitability goals and improve the operating expense ratio, the capacity planner may need to find ways to boost FTE productivity within the same budget.
- However, an overly aggressive plan can lead to employee burnout and high attrition rates, ultimately impacting productivity and service levels.
A capacity planner must navigate between various aspects of these different business goals to strike a balance. It is difficult to strike a balance but achieving improved operating expense ratios, better service levels, and a more productive staffing plan is very satisfying!