Economically, capacity utilization is highly significant since economic analysts make use of capacity utilization indicators to predict the degree of inflation effects. Using Capacity Utilization Rate to Calculate Optimal Billing Rate. Using this utilization ratio, we can calculate her utilization rate as: Her utilization rate was 75%. A utilization rate which is consistently low means there isn’t enough work in the pipeline, too many hours are being wasted on non-billable administrative functions, or it might indicate that your company has too many freelancers on projects. Target utilization rates vary from person to person and between positions. See why Smartsheet is the platform you need to drive achievement, no matter the scale of your ambition. But the actual output is often less than that. While utilization rate is generally applied to people, not objects, you get the idea. Now let's say she bills 1,500 hours to various client projects throughout the year. Ideally, your employees should see target utilization rates as an exciting challenge, not a weight on their shoulders. And she takes time for lunch and (much-needed) coffee breaks. She's responsible for helping with project estimates. What if Leslie's company's capacity utilization rate were 50% instead of 74%? Assuming she takes two weeks of vacation, her total available hours for the year is 2,000. Capacity utilization is a percentage measure or KPI which indicates the amount of available capacity that is being used to supply current demand. Learn how the flexible, extensible Smartsheet platform can help your organization achieve more. On the other hand, Capacity Utilization Rate, CUR = {(Actual Output - Potential Output) / Potential Output} * 100. In this article, we'll cover the definition of resource utilization, the utilization rate formula, what we can learn from utilization rates, what an ideal utilization rate is and how you calculate it, and how to raise utilization rates. It's a simple measurement that has powerful effects on how your business runs. As we said, every company needs some non-billable time built into its schedule, but too much non-billable time is an indication of waste. It’s a measure of billing efficiency that helps the company understand if it's billing enough to cover its cost plus overhead. Let’s say we want to target an $80 hourly billable rate. The following is the formula for Capacity Utilization: Capacity Utilization, CU = {(Actual Output - Potential Output) / Potential Output}. Free your team from content sprawl with Brandfolder, an intuitive digital asset management platform. Let’s say we want to find the utilization rate for Leslie, a front-end developer at a web design firm. Formula. For this reason, most organizations set target utilization rates for their employees that factor in how many of their available hours they need to spend doing non-billable work and how many hours they need to bill for the company to maintain profitability. However, this formula assumes every employee has a 100% utilization rate, and we've already talked about how this is unrealistic and undesirable. That's the machine’s total available capacity. Had she billed all 2,000 of her available hours to billable client work, her utilization rate would have been 100%, but that almost never happens and it isn't desirable. This helps identify opportunities to grow the company, and where you may want to consider adding staff. Let’s say the average labor cost at Leslie’s company is $100,000, per employee overhead is $20,000, and their goal is a 20% profit margin ($120,000 x .20 = $24,000). In Leslie's case, her target utilization rate is 75%. To understand utilization and utilization rates, let’s imagine we have a widget-making machine. Capacity Utilization. But of course, it can't run non-stop, every day, all day. Both of these insights help salespeople. 10,000ft by Smartsheet offers powerful reporting tools to help make sense of your organization's resource utilization and get a firm handle on actionable steps you can take to increase (or decrease) your utilization rates. Our world-class consulting team is here to help your organization realize the lasting advantage of Smartsheet. So, the formula for ideal utilization rate is: (Resource costs + overhead + profit margin) / Total available hours x Target billable rate. Once your employees start accurately recording their hours in a timely fashion, you may discover that your organization is doing better than you thought. It's probably not their fault if there isn't enough billable work to charge for. Free your team from content sprawl with Brandfolder, an intuitive digital asset management platform. To raise an organization's capacity utilization rate, you need to increase all of its employee utilization rates, since capacity is an average of the individuals. So if we imagine that Leslie works for a very small company with five billable employees, we can calculate their capacity utilization rate as: (The first five percentages in this formula represent the five employees’ utilization rates). ©2020. Leslie is the head of her department, so she's tasked with training junior department members. Because realistically, employees have other job responsibilities that aren't billable to clients, and optimal utilization rates need to account for non-billable time. Festival of Sacrifice: The Past and Present of the Islamic Holiday of Eid al-Adha. Using the total costs from earlier, we get: This tells us that for Leslie’s company to be able to cover all of their expenses, plus make a 20% profit, they would need a capacity utilization rate of 80% if they wanted to charge their clients $80 an hour. That would give an optimal hourly billing rate of $144 instead of $97, and that might be more than the company's clients want to pay per hour. This rate is higher because it has to account for the other 26% of the company’s available hours that are non-billable, thus generating no revenue. The capacity utilization rate is the average utilization rate for every employee in the organization, which can be calculated using this utilization formula: Total of all employee utilization rates / Total number of employees. It's vital that you share these target utilization rates with each employee and their managers. Allow employees to take ownership of their utilization rate, and don't punish employees who don't hit their target rate (unless it's because of negligence). Capacity utilization rate = (Actual output / Output potential) x 100%. Now we're ready to understand the ideal utilization rate. There are plenty of benefits to using time tracking software to track billable hours, as long as the tool is easy to use. Managers generally have lower target utilization rates, while front-line personnel have higher rates. Utilization rates that are consistently too high or too low aren’t good for your organization and typically indicate future risks. Or perhaps some of their hours are getting miscategorized because of poor software design and implementation. But we're getting a bit ahead of ourselves. A utilization rate which consistently approaches 100% indicates that you’re overworking your staff, and it may be time to expand. How to calculate it. This can be an indication that: We already know that available time is a finite resource. The capacity utilization rate is the average utilization rate for every employee in the organization, which can be calculated using this utilization formula: Total of all employee utilization rates / Total number of employees. Utilization is defined as the amount of an employee's available time that's used for productive, billable work, expressed as a percentage. Employees who are positively motivated to hit their goals will take a more active role in the company. Instead, reward employees who manage to hit or exceed their utilization targets. Assuming everyone has 2,000 available hours, you can calculate their billing rate like this: Leslie's company would need to charge $72 an hour to cover their expenses and realize a 20% profit. These insights can then be used to forecast utilization more accurately, so you can plan ahead and make smarter decisions about your business pipeline. Soon to be by Smartsheet. What Can You Learn from Utilization Rates? Ideally, the company produces at its potential output (100% capacity utilization). It's impossible to hit a target if you don't know what you're shooting for. ), The Secret Science of Solving Crossword Puzzles, Racist Phrases to Remove From Your Mental Lexicon. But what’s too high? Capacity can be defined as “the amount that can be produced”. By knowing which types of projects are most profitable, and which play to the company's unique strengths, they don't need to waste valuable time on leads that don’t align with the organization’s business strategy. Why not? The capacity utilization measure is vital both for measuring a company’s efficiency in terms of using its resources, and in planning for the future. Capacity-utilization rate is a measure of what percentage of capacity a business is currently performing at. Now you might be wondering, how do they go about raising their utilization rates? Get up and running fast with streamlined implementation and solution building to address your immediate business needs. This means that at least 75% of her available time should be spent on billable work, while no more than 25% should be non-billable administrative, unbillable revisions, or pro bono work. The machine has a maximum number of widgets it can produce in a day, because it takes a certain amount of time for the machine to manufacture one widget. Jump-start new projects and processes with our pre-built sets of templates, add-ons, and services. Is the Coronavirus Crisis Increasing America's Drug Overdoses? On the other hand, Capacity Utilization Rate, CUR = {(Actual Output - Potential Output) / Potential Output} * 100. Capacity Utilization Rate. Including the capacity utilization rate in this equation gives a much more realistic billable figure: (144,000 / 2,000) / Capacity utilization rate (which was 74% for Leslie’s company, or .74). In a given week, she has 40 available hours. Here’s the formula to calculate utilization: Total Billable Hours / Total Hours Available. First, we need to talk about organizational utilization rates, or capacity utilization rates. On one hand, using capacity utilization in your manufacturing analytics can pinpoint areas where your production line is being wasteful or inefficient by not maximizing the potential output. Join us for a re-imagined, innovative virtual experience to get inspired, get connected, and see what's possible.
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