The M.E.L.T theory of capacity management in accounting

As accounting firm owners sell services, they have to understand that capacity is all we have to make money. ‘Professional capacity’ is our inventory or our widget, as it were. 

The capacity of professionals is what we turn into revenue. When we ‘over-serve’ our clients by doing more work than they’ve paid for, or ‘over-tax’ our team with too much work that they can’t fulfill at a high level of service, then we hurt our own firm. We compromise its ability to produce sustainable, profitable revenue, and grow.

Scope is capacity’s cousin. Capacity is what is really important and how we make our money. Scope, however, is a contractual definition of our work with our clients that allows us to sell our capacity in sustainable and profitable ways. 

• Sustainable: this is a reference to being viable over time. Managing capacity in a sustainable way allows us to sell our services effectively over the long term. 

• Profitable: we are seeking to sell our team’s professional capacity for the right amount of revenue (which leads to profit). Firm owners who get this exchange right (‘exchange’ is discussed more in our third article in the series—stay tuned) can be profitable as a firm. 

Let’s stop here and formally define capacity, and then get more practical on what capacity actually means for each of the team members you care about and lead.

The definition of capacity

Here is how we define capacity as we consult and coach firms and firm owners:

Capacity is the ability of a firm to exchange the team’s limited expertise and technical abilities for future revenue in ways that balance: 

(1) a manageable work responsibility (load) for the professional team member, and 

(2) an appropriate value for the client

There are three distinct parts to this definition:

1. Exchange (vs. imbalance)

• Firm owners have purchased the capacity from their team (with payroll), and they are exchanging that capacity with their clients (in the form of revenue) over and over.

• We can be clear about the professional’s commitment of their capacity to the firm, as well as show them how to be cognizant of scope. 

2. Limited (vs. abundant)

• A team member’s expertise and technical abilities are constrained, or limited. We can not act as if we have an abundant volume of team capacity.

• We must intentionally take on revenue at the same pace that our team’s capacity can be matured, created through hiring, efficiency, supported by technology, etc.

3. Future (vs. now)

• Capacity is a resource managed in the future since capacity that has passed into history is not manageable any longer. 

• Achieving a proper balance between professional work and client value is a planning activity (as all planning is done in the future).

What constitutes capacity? The M.E.L.T theory

Let’s get more practical on what capacity is actually made up of. 

Capacity is an intimate concept in a services firm. That means each person’s capacity matters, and we manage it individually (not as a firm). 

Here are the things we count as the human components of capacity, described more practically as: M.E.L.T. 

Each of these areas impact a team member’s capacity output.

Mind

This relates to someone being able to focus and manage the distractibility of the world around them (like family, multiple projects, etc.). Employees who think they can watch a Netflix series while working on tax returns often tax their minds to do multiple things that the mind was not meant to do.

Emotions

This relates more to what hardships (or pandemics) do to people. We all feel overwhelmed at times and our emotions are taxed when we go through difficult things like moving house, births, deaths, depression, divorces, marriages, etc.

Location

It may feel odd, but as firm owners, we do have a say in where our team works. We decide if we’re virtual or if we maintain an office. So location is an understood part of the efficiency of our team. When a team member is struggling to consistently output work at a high level, then we often probe into what is happening in their lives, where they are, and how they are managing the location of their work.

Time

This is what people traditionally equate to capacity, but it is so much more. Yes, time does matter. Our calendars are the perfect reflection of what we can devote ourselves to, whether personal or professional. So the foundation of our team’s capacity is an agreement to exchange their hours for the pay we give them.

Laying the foundation of understanding human capacity

Being able to objectively understand the definition of capacity is the first step in truly managing it successfully, competitively and strategically.

This was part one of a three-part capacity series. Stay tuned for parts two and three.