So what does good capacity utilization look like? Ultimately, it depends on the company; There`s no specific number that works for everyone, and it`s certainly not that the higher the utilization rate, the better. A utilization rate that is consistently close to 100% suggests that employees are overworked and may be on the verge of burnout. If that`s the case for you, it`s an indication that it may be time to hire new people. If you have a utilization rate above 100%, this usually indicates too much out of reach work or poor planning. PSOs should set rates for employees who are reachable. You want to determine the actual supply of what you have and how to meet the demand in a cost-effective way. So, while you want to establish a baseline to ensure employees are profitable, it shouldn`t be an attempt to achieve an inflated revenue goal. This could lead to employee burnout, which research says leads to high job turnover, increased absenteeism and decreased productivity, costing U.S. companies $300 billion a year.
However, before you can start working on utilization rates, you need to be able to gather accurate information about where your time is actually going and how much of your billable work is going. Understanding your utilization rate is crucial if you want to successfully assess the profitability of your employees, team, and business – and while it`s a simple metric, it can have far-reaching implications for how your business operates. The fact is, if you don`t have target utilization rates, you`re probably not deploying your workforce properly. This means that Leslie`s average business utilization rate is 74%. Ask yourself if you would benefit from regular monitoring of usage rates to assess trends in your employees` performance. Utilization rates can help you make informed decisions about employee assignments. When it comes to resource management, utilization rates help with forecasting, resource optimization, and many other important business functions. It`s a simple measure that has a big impact on how your business is doing. If we look at it from a different angle, we will find that this utilization rate shows how underutilized a company is in production at any given time.
Usage is an important figure because it shows how effectively the entire company is using the available hours. It is important to know these numbers so that you can make better hiring decisions and increase profitability. Does an employee have a high utilization rate and should they be rewarded? Which employees have a lower workload and need improvement plans? There are many moving parts, and careful planning is especially important when teams are working on multiple tasks at once. This act of juggling requires project managers to be on their A-game because they need to know how productive their team is, what jobs they are working on, and whether or not they are using their time effectively. A good first step is to establish baselines for each employee, as we have already mentioned. If you remember, Leslie`s usage is 75%, which gives her some time for non-billable administrative work. And while careful resource planning and resource planning are essential to the success of a project, so is another of the often forgotten part of the process: resource utilization. We are now ready to understand the ideal utilization rate.
While it is acceptable to use a company`s capacity utilization rate to determine an optimal hourly rate, it assumes that the capacity utilization rate is healthy. The problem is that not enough teams know where they stand in terms of their percentage of resource utilization. HubSpot`s 2018 Marketing Agency Growth Report found that only 58% of agencies track their team`s usage rates! From the example above, it is clear that capacity utilization speaks to operational efficiency. The higher the utilization rate, the higher the operational efficiency of the company would be. If you look at employee utilization rates by department or function, you can see where demand is highest (they have the highest utilization rates). This helps identify opportunities for business growth and where you may want to consider hiring employees. Let`s say the average labor cost in Leslie`s business is $100,000, the overhead per employee is $20,000, and their goal is a 20% profit margin ($120,000 x $0.20 = $24,000). Assuming everyone has 2,000 hours available, you can calculate their billing rate as follows: To increase an organization`s capacity utilization rate, you need to increase all employee utilization rates because capacity is an average of people. It`s best to start with a target hourly rate and then return to an ideal utilization rate, which allows the billable target rate to reach the desired profit margin of 20%. Now, you may be wondering how they can increase their utilization rates. Talk to our resource management team to find out how 10,000 feet of Smartsheet can help you manage your resources more efficiently and maximize your team`s utilization.
In business, the utilization rate is an important figure for companies that charge customers for their time and for those that need to maximize the productive time of their employees. It may reflect the efficiency of billing or the overall productive use of an individual or business. To calculate your enterprise-level utilization rate, simply divide the sum of all employee utilization rates by the total number of employees. The most robust time tracking solutions can provide you with this information at the employee and company level. For example, if we find that the capacity utilization rate in a given fiscal year is 75% for a company, we could also find out how much the company could not use in that particular fiscal year. The percentage of capacity that the company was unable to use during the period is called “Slack”. In the example above, the company`s lull during the fiscal year = (100% – 75%) = 25%. So if we imagine Leslie working for a very small company with five billable employees, we can calculate their capacity utilization rate as follows: If you charge customers for your time in your small business, you can easily see how productive and efficient your employees are based on utilization rates….