Limiting Factors: How to Keep Small Things from Becoming Big Things

In every business there are opportunities to expand and improve and optimize and it’s easy to get excited about those elements. But there are “reins” on the growth that pull back sharply if the growth starts to happen too quickly. These are called “limiting factors”. Every business has them but few businesses take the time to figure out what they are or what to do about them.

Limiting factors are like bottle necks in the “factory” of your business. They are aspects of your business that, no matter how well you do, will keep you from doing better without some kind of drastic measure.

An example of a service-based limiting factor: A freelancer, for example, only has 24 hours in a day in which to work. Time is one limiting factor, especially for someone who relies on their own skills and abilities to deliver. In order for them to break free of that limiting factor, they have to hire someone else or outsource a portion of their work and that is a relatively drastic measure (because they first need to consider the financial implications of adding someone to their business).

An example of a product-based limiting factor: If you produce a product, it’s likely that your limiting factor isn’t raw materials or labor (both of which are fairly flexible even if there are periods when they are less so). Rather, in many cases where a product is produced, the limiting factor is production capacity: At some point, your production becomes so optimized that you simply cannot produce anything else and adding another production plant would be the drastic step up.

Limiting factors are those elements that can grind everything else to a halt. Limiting factors are an accounting concept but their impact is felt far beyond the books. You want your business to grow but if you want to really break through, you need to identify and resolve your limiting factors.

So, what can you do with these limiting factors? There are several reasons why they are important to you:

1.    In your business plan, you need to account for them. Identify them (they’ve probably been mentioned in your SWOT analysis) and figure out what the drastic step is required to solve them.

2.    Make sure that every staff member is aware of what your limiting factors are and make it a priority to mitigate its impact on the business.

3.    Relate your measurement of success to your limiting factor. If time is a limiting factor, your measurement should be profit/time. If production is a limiting factor, your measurement should be profit/unit.

4.    Build a financial plan/budget that includes the solution to your limiting factor. If it requires you adding another production plant, what is the amount of money and growth rate needed in order to realistically add another plant and make it profitable?

5.    Create your monthly (or quarterly) forecasts and budgets around your limiting factors. They are “decisions makers” in your business (in that they will ultimately decide whether you can grow any more) so they should be reviewed.

6.    Focus your innovation investment on eliminating your limiting factors.

Do you know what your limiting factors are? How are they accounted for in your books? Are you building your forecasts and budgets around them? Are you putting aside money to invest in innovation to address them? If you’ve answered no to any of these questions, call a meeting of your upper management and start putting together an action plan right away.