Pace & Equilibrium
Businesses are like engines
In my twenties I was fortunate enough to participate in the turnaround of a small aerospace and defense business. In my role, I used to travel around to meet customers and talk about the various programs we were supporting or quoting. Most of the time my points of contact were older engineers or technical types, and they used to love teaching me things about the various programs. I think they got a kick out of walking a kid around and teaching me a thing or two.
To avoid sounding like a complete idiot in front of these engineers, I would research the overall program or end-product. And for a period of time, I dug deep on the topic of turbine engines. I am not an engineer, so learning how a turbine engine worked was a rough learning curve (especially pre-ChatGPT or Claude).
Something I learned during my research really resonated with me, and it found its way back into my thinking over the past few months. What I learned was that turbine engines are designed and built to operate at peak efficiency at specific speeds and altitudes. Those big Rolls-Royce engines on that A350 you took to London work beautifully in the thin and dry air at 40,000 feet but, well…they kind of suck on short regional trips. This is why short regional trips use jets with smaller engines or turboprops.
You can strap the most expensive engine you want on your jet, but if the engine wasn’t designed for your specific use case, it will very likely underperform other options. Can you feel a metaphor building?
Businesses are like engines. Some small, some big. Some are built for torque, others for efficiency.
The reason this lesson on turbine engines crept back into my brain relates to the concept of ‘pace’ within a business. This is a topic that the leadership team here at Ballast has been talking about a lot recently, most especially as we build out our own 2026 plan. In our experience, the concept of pace is arguably one of the least understood and most impactful elements to consider when designing your business.
Pace (Speed & Acceleration)
Generally speaking, the term pace means the rate of movement or progress. From our perspective, in businesses there are two definitions of pace. To an operator within a business, pace is the rate at which various inputs are transformed into an output. For example,
in a professional services firm, pace is the rate at which work is performed by people on projects or engagements;
in a manufacturing setting, pace is the rate at which materials and inputs are processed by people or work centers and eventually shipped as finished product to the customer;
in a retail setting, pace is the rate at which inventory works its way through the business and out the door to customers.
To you math-inclined folks, you can think of this as the first derivative (slope) or if you’re still following the engine analogy from above, think of this definition of pace as speed. We finance nerds think of this definition when we look to gross margin, ebitda margin, or net margin – it’s the rate of conversion from revenue to various levels of earnings.
The second definition of pace, however, is the rate of change in revenue, gross profit, and net profit over time. This definition is more like the second derivative; it’s acceleration vs speed. This definition is usually what leaders and managers see and feel. Operators within a business are compensated for converting revenue into margin, or they are compensated for speed. Leaders of growth-oriented organizations, on the other hand, are compensated for growing revenue and earnings; they’re compensated for acceleration.
There are a few lessons we’ve learned here at Ballast over the years as it relates to pace in business;
know the difference between speed and acceleration and understand how various roles in the organization look to and feel the pace of the organization. Misunderstanding this can create significant communication challenges and create internal friction;
the value of a business is the combination of speed and acceleration. An organization that has lower margins can increase its value relative to its peers by growing at a faster clip. An organization that is having trouble growing revenue can continue to grow its enterprise value by focusing efforts on efficiency and growing its margins. An organization that has figured out both, a very difficult thing to do, is valued at a premium;
most businesses have seasons of speed and seasons of acceleration and it’s okay to move between the two so long as you understand this and communicate broadly to the team about which season you’re in and which season you’re heading into;
well-built businesses are thoughtful about pace: they proactively decide on desired margins and rates of growth, they understand the interplay between the two, and they map out all the tasks, efforts, barriers, and to-dos that are necessary to achieve the desired outcomes;
acceleration costs more than speed, and accelerating your business (growing revenue, growing earnings) will absolutely be felt on your P&L.
We believe, deeply and passionately, that a well-built business is a thing of beauty; it is something to be admired and studied. A well-built business is the combination of inputs, resources, people, work centers, and processes all designed to work together to produce a particular output, at a particular speed and at a particular rate of acceleration. And, as you’ll see, these concepts of speed and acceleration can and should be applied to many areas within your business.
Subassemblies
Another wonderful little lesson I learned back in my short stint in manufacturing was the concept of subassemblies. Most complex manufactured products are not built piece-by-piece from the ground-up, instead subassemblies are often manufactured independently and then combined into the final product. The oft-stated slight thrown around about Boeing or Airbus is that they are in fact NOT manufacturers, they’re just assemblers; they don’t actually cut, turn, or bend anything anymore, they simply rivet it together at the end of a long line of vendors (obviously this is an exaggeration).
I like this visual of subassemblies, and I like applying it to non-manufacturing settings. It helps my non-engineering mind to think in terms of systems. I think businesses are the aggregation of subassemblies or subsystems that are assembled together to produce the overall company.
Designing a company to function at a certain speed or acceleration (pace) requires a comprehensive understanding of how these subsystems function and interact; the pace of the overall firm is a function of the pace within each subsystem. And there are two subsystems within business that we find are of particular importance:
People (the Team) and Sales (Clients and Customers)
When we get to the section of this letter on Equilibrium, we’re going to bring all these concepts together, and you’ll see how People and Sales impact overall pace and, therefore, whether or not you reach your goals.
People (the Team)
Designing the speed and acceleration of an organization requires a comprehensive understanding of the people that function within the organization. I don’t mean an understanding of their personal lives, though that might be valuable. Instead, what I mean is that the People within your firm are a system of their own and how you design the People Operations has considerable ramifications for your ability to execute on the overall vision for your firm.
In our experience, when thinking about the People within a firm, there are two primary considerations related to pace:
the pace at which people work their way through an organization (think of this as development, promotions, etc.), and
the pace at which people enter and leave the organization (hiring and attrition respectively).
People Development and Progression
Our advice – don’t ignore people development and progression in your business. Figuring out the impact of the pace of employees is a prerequisite to increasing the overall pace of the firm (either speed or acceleration).
We find that you must be thoughtful and proactive about setting the pace at which people move through an organization. Consider the profile of the individuals you hire and consider the pace at which this type of individual would like to move through an organization. Then balance that with the requirements of roles, performance management, and the like. If you are not proactive about this, you can find yourself with significant internal tension.
If the people hired want to operate at a faster pace and speed than the infrastructure of the firm can support or perhaps the expectations (and budget) of leadership, you will find yourself with disgruntled employees and high rates of attrition.
Similarly, if the business expects a faster pace of development than that of the resources hired, then there will constant disappointment in the performance of the employees. When faced with this situation the organization, will need to hire from outside more often than not to fill the gaps in the ranks of the team. This requires an added recruitment expense (which may include signing bonuses for mid-career roles) and it also creates the risk of friction with the existing team.
Team Size – Inputs, Tenure, and Attrition
Next, consider the desired tenure of an employee and map out what growth in the organization looks like as it relates to the hiring of new resources. If development and progression relate to the titles of the folks at your firm, team size relates to the overall number of each role that are required to execute on the plan.
All organizations have a natural rate of attrition in their people. Stop thinking of attrition as always being a bad thing. Attrition is natural. Even in organizations with exceptional compensation, work-life balance, development, flexibility, etc. there exists some rate of employee attrition driven by geographic displacements (moving for a spouse’s job), change in life circumstances (having children or taking care of aging parents), or simply retirement. Now layer on top of this all the potentially undesirable factors which would increase the rate of employee attrition – lack of alignment on compensation, development opportunities, upward mobility, work life balance, etc. All of these contribute to flow of employees out of an organization.
Now consider all the inputs to employee additions over time. Consider how your firm recruits. Does it employ an outside recruiter or does it have someone filling this role internally? How many hires will you plan to make next year and the following year, and then consider how many candidates must be reviewed, interviewed, and worked through a recruitment process in order to arrive at this desired end figure.
If the inflow of employees is greater than the outflow of employees, the team size grows. If the opposite is true, then the team size shrinks. Even if your goal is not to change the overall team size, you have to do this math, as you have to recruit and hire at the same rate as the outflow of employees from the above ‘natural’ occurrences.
Now – and this is the real mind bender for most of our clients – be mindful that the rate of inflow and outflow is not the same as the amount of inflow and outflow. Rate is a function of the base amount – attrition rate is the number of employees that leave relative to the total number of employees. Most small businesses have a higher amount of inflow of employees than outflow for the first few years of operating because they are working with such a small team size. As the team size increases, the rate of attrition (the percentage) can stay the exact same while the number of employees leaving can increase.
If recruiting functions and processes were built and are managed in the context of the historical requirements of the business, and not the forecasted hiring requirements, eventually the number of employees leaving will equal the number of employees joining.
We refer to this internally as a business or a function being in equilibrium, a rather dense but incredibly important topic we address after discussing sales.
Getting the People element of your business right requires you have a handle on the pace of development of people within your business while also understanding the pace of additions and subtractions. Ignoring these two concepts will result in a failed understanding of the People element of your business.
Sales (Clients or Customers)
I will avoid an in-depth discussion of sales and sales funnels here, as you can refer to our past Ballast Letter on the topic. What I will do is outline how the sales function within an organization is its own subsystem and how the pace of the sales organization has implications for the overall company.
The concept of speed as applied here is the velocity at which deals work their way through the sales funnel, and the rate at which they close. Acceleration in this situation is the change in the number of leads or a change in the number of closed deals/clients over a period of time.
Building the right sales function or process or funnel or whatever you want to call it for a business requires a comprehensive understanding of the number of leads, the time it takes to work through the funnel (speed), the close rate, and the change in these numbers over time. Furthermore, the right sales function for a business requires an understanding of tenure of a client, or relationship, or project. Revenue is a function of the work being performed and billed. Revenue growth requires more work entering the production floor or launched or implemented by the operators within a business than the amount of work completed and taken out of the system in the same period.
This concept of tenure is a breakthrough for most of our clients, so let’s spend a little more time on this topic. Clients and contracts have an implied tenure. This tenure could be years in the case of a membership or subscription-based business, or this tenure could be weeks in the case of a project-based business, but all clients have some tenure. To calculate the tenure, you can simply take 1 / the monthly attrition rate.
For example: if a business has 100 clients on average at the start of each month, and on average they lose 2 clients / month, then the average monthly attrition is 2% and the average implied tenure of a client is 50 months.
If you consider this starting cohort of 100 clients (ignoring additions or new clients), a business will lose roughly half of them within the first thirty or so months, with the remaining fifty clients leaving (ending contracts) the following seventy or so months. If the rate of monthly attrition stays constant, as the balance of clients declines over time, the number of clients that terminate declines over time as well.
Sales organizations within these businesses work to add clients, or projects – to fill the floor or the production team with work. Building an effective sales function for a business requires a comprehensive understanding of the speed of deals and close rates. Building an effective sales function for a growth-oriented business also requires a comprehensive understanding of client tenure. In order to grow, a business must grow the client count over time (unless it is a price driven growth model alone).
Equilibrium (a rather lengthy sidebar on an admittedly dense topic)
Now, let’s talk about the concept of equilibrium in a business and how it relates to pace. Admittedly, there is a risk in me doing this. It’s kind of a heady topic. But I implore you to slow down and treat this section with particular importance. If misunderstood, it can have devastating consequences. But first, people and sales.
This concept of equilibrium is a real mind bender, so we find it’s helpful to picture a visual.
Picture a very large, very tall bucket with holes drilled throughout. Now picture a pipe above the bucket, flowing water into the bucket. The water that flows from the above pipe flows at a constant rate. Water flows out of the bucket through the drilled holes. At first, the volume of water that flows out of the bucket via those holes is less than the volume of water that flows into the bucket from the above pipe. As this happens, the water rises. As the water rises, however, it reaches new holes in the bucket, so more water flows out of the bucket. And eventually the volume of water that flows out of this bucket will match the volume of water that flows into the bucket. Eventually the level of water in the bucket will stabilize and will neither rise nor fall. This is equilibrium.
To continue with this analogy, imagine we are measuring our progress, or measuring our success, as the rise in the level of water in the bucket. First, the water rises at a rapid rate. Wahoo! Success. It’s okay that the bucket isn’t perfectly waterproof, the flow of water into the bucket is greater than the water flowing out and the bucket fills rapidly. This is like the early days of your business after finding product market fit or when you start hiring and building your team.
But then, as the level of water rises, the rate of progress of the bucket filling declines. But oh no, how can that be, we haven’t changed the pace of the input (water from the pipe)?!?! We’ve all felt this in our business, times when we keep doing what we were doing at the same rate, at the same pace, but the growth of the firm seems to have slowed down. This is what it feels like to be in equilibrium.
Equilibrium as it Relates to People
Now let’s apply it to the above example of people and your team.
At the outset of any organization the number of people additions will likely exceed the number of employee departures. Organizations usually do not have a hard time growing their employee count at the early stages.
For the first few years of operating your business you probably did not have a robust recruiting process. The inbound flow of candidates was usually the result of a natural, homegrown, or organic approach. Perhaps the founder or members of the existing team are involved in various networking organizations, or perhaps they have professional networks stemming from their time at prior companies. Either way, the inbounds of candidates exceeded the outflow from attrition – so the team grew. However, as the team grew the number of employees that left the organization grew, and assuming the business never overhauled or scaled that recruiting function, it eventually found itself unable to grow its team size. It reached equilibrium.
Now to put a bow on this topic of equilibrium as it relates to people, to achieve your goals, what is the pace at which you must recruit? What is the pace of people progressing through the organization? What is the rate of people flowing out of the firm? And when you put it all together, what is the resulting pace of change in the employee count and does that match your desired goals? In an oversimplified way, this is just an equation: starting count + (inflow of candidates * hiring rate) – (employee count * attrition rate) = ending count. Do you know your people formula, and do you have a handle on these variables?
Equilibrium as it Relates to Sales
Or consider how equilibrium might apply to sales in the context of a company’s life stage. If the amount of client inflow (think client additions) exceeds the amount of client outflow (departures or attrition), obviously the client count grows and revenue grows over time. What we typically see with small-to-medium sized enterprises (SMEs) is that most SMEs have a greater inflow than they do outflow. If the product or service is legitimate, properly priced, well executed and delivered, etc. the client attrition is rather low in earlier stage businesses.
Now remember that the number of monthly client terminations or departures is a function of the size of the overall client/contract/logo count. The result is almost always a higher inflow (new clients) than outflow (terminated clients). Naturally, when this occurs, the business is in growth mode and revenue ticks up over time. Eventually however, even if the rate of attrition stays constant, the number of client departures matches the number of client additions and the business hits equilibrium. Revenue stays flat and the business hits a ceiling.
How Leaders / Operators Respond to Equilibrium
Misunderstanding equilibrium can have very negative consequences. In our experience, leaders and operators respond to equilibrium in one of three ways:
they do nothing, and eventually the business stabilizes, and it is what it is. If the goal was to build a lifestyle business, well done. If the goal or requirement (à la tech startup) was to grow beyond this point, well then, this stabilization or equilibrium represents a failure.;
they see the declining progress (rate) of the rise of metaphorical water in the business, and they think they must be doing something wrong, so they retool various elements of their business (sales teams, product features, delivery teams, etc.) and performance declines further, because in reality what they were doing was working but they simply weren’t doing enough of it, or
they see the declining progress, understand how equilibriums work and reach up and open up the spigot (do more of what they were doing well) or learn to build a second spigot.
To reiterate and emphasize the second point – here are some very real ways we’ve seen clients make poor decisions when they misunderstand this concept of equilibrium:
If the client count simply won’t grow and they think they have an attrition issue - meaning they inadvertently think the rate of attrition or terminations is increasing as they see more and more clients depart over time, when in reality the rate of attrition has not increased, the number of client terminations has simply increased as the overall client count has increased - they might make changes to the client service side of the business, or the operations side of the business, hoping to stem what they misunderstand as an attrition issue. We have seen clients in the past begin to cut pricing, thinking mistakenly that clients were leaving at a higher rate due to pricing. None of this solves the underlying problem of course and often times leads to a worse result – a decline of revenue.
When equilibrium hits sales, we’ve seen the misdiagnosis as a performance issue. If revenue has been growing for years, and is no longer growing, then the conclusion the client draws is that the existing sales roles have stopped performing. In response they might begin to ‘over manage’ the existing sales roles (which usually results in departures or terminations). Again, this does not solve the underlying issue and instead leads to a worse result – a decline of revenue.
Being at equilibrium is not necessarily a bad thing. In fact, it can be highly profitable, so long as management and leadership understand WHY they are at equilibrium. What all too often happens in these scenarios, however, is that the leadership team does not understand what is structurally causing the equilibrium, so they burn capital trying to spend on a variety of things to improve the organization. Unless the spend is targeted at the structural factors that are limiting growth, the spend will not produce the desired result.
Bringing it On Home
Businesses are like engines. They should be designed and built for purpose.
Fundamentally, our job at Ballast is to use finance and accounting to help our clients better understand these concepts, to understand the financial implications of decisions, to make more informed decisions, and to hold ideas accountable through the reporting of results.
When planning for your business, do not make the mistake of ignoring pace. Do not make the mistake of confusing speed and acceleration. Take stock of the various subsystems within your business that are required to work in unison to produce the desired result. Map out the pace of each and understand how they interact with each other. And please, please better understand this concept of equilibrium and how it relates to the various facets within your business.
To all you entrepreneurs, founders, operators, and leaders out there, I ask you – what kind of business are you building and when you’re done, will you be proud?
Godspeed to all you builders out there.
Kyle Benusa, Jack Allen