The Theory of Constraints

Over the next few weeks, some of the businesses I work with will start putting their plans together for 2027.

And one of the first questions we’ll be asking is not:

What sales number do we want to hit next year?

It’s:

What is currently stopping this business from growing faster or more profitably?

Because every business has constraints.

It might be:

• not enough sales opportunities coming through

• a sales team that cannot convert enough of those opportunities

• lack of capacity in one part of operations

• too much cash tied up in stock

• difficulty recruiting the right people

• a management team where too much still depends on the owner

• poor systems that simply will not cope with another 20% growth

There can be plenty of problems in a business.

But they are not all equally important.

The idea behind the Theory of Constraints developed by Eliyahu Goldratt, in his book "The Goal", is relatively simple.

At any point in time, there is usually one constraint, or perhaps a very small number of constraints, that are limiting the performance of the overall business.

You can improve ten other areas, but if you do not deal with the binding constraint, the impact on the business may be limited.

Think about a production line.

If four stages can process 100 units an hour but one stage can only process 60, your capacity is not 100.

It is 60.

Making the other four stages faster does not solve the problem.

The same principle applies to a growing business.

So before you build the 2027 plan…

I would ask your management team four questions.

1. What is currently slowing growth?

Where do things repeatedly get stuck?

Where are customers waiting?

Where are your people frustrated?

Where are sales being lost?

Where is cash getting trapped?

2. Which of these is actually limiting the business?

This is the harder question.

You may have a list of ten issues.

But which one or two, if solved, would have the biggest impact on profit, cash or your ability to grow?

That is what I would call the binding constraint.

3. What would happen if we removed it?

Would we be able to take on more customers?

Increase margins?

Reduce stock?

Improve cash flow?

Free up the owner?

Grow without immediately adding more people?

Put a number against it where you can.

4. What needs to change in 2027 to remove or reduce that constraint?

This is where the plan starts becoming useful.

Not a long list of 30 initiatives.

A small number of actions focused on the things that are genuinely holding the business back.

And this is where I think many annual planning processes get it backwards.

Teams can spend weeks building a detailed Excel budget.

Revenue by month.

Headcount.

Overheads.

Margins.

Cash flow.

And there is absolutely a place for that.

But a budget is not the same thing as a plan.

You can have a beautifully built spreadsheet showing 15% growth next year without ever answering the most important question:

What has to change in the business for that 15% growth to actually happen?

If the constraint that stopped you reaching the number this year is still there next year, putting a bigger number into the sales line on Excel will not remove it.

So as you start thinking about 2027, perhaps start somewhere different.

Before asking:

What do we want to achieve next year?

Ask:

What is stopping us achieving more today?

And then:

Which one or two constraints should we focus on removing first?

That conversation may be far more valuable than another week spent refining the budget.