What Is Utilization Rate and how to Calculate That?

You cannot lead a successful business without understanding its performance. Simply put, you can only improve a business if you know its strengths and weaknesses. There are many metrics business owners and managers track in order to detect improvement possibilities. They can be related to the employees, clients, resources and budgeting, etc. However, one of the most important ones in all cases is definitely the utilization rate.

This metric is tightly connected to an organization’s efficiency and productivity. In other words, it is a crucial metric for determining the profitability of the business. That is why businesses from all industries – different professional service companies, law, HR, and architecture firms, as well as accounting and consulting businesses, keep a close eye on their utilization rate.

If you are only starting your business, there are many different metrics and KPIs to understand and track. The sheer volume of information can be frightening. That is why Time Analytics is here to show you the ropes of successful utilization rate tracking. So, let’s start from the very basics.

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Utilization Rate – What Is It?

Utilization rate is the amount of time (expressed in percentages) an employee spends on tasks and activities that can be charged to a client within that employee’s total working time. In other words, it is the ratio of billable and non-billable hours for a specific employee. Time is a limiting factor for all of us, no matter how motivated we are, or how much effort we put into our work.

That is to say, even though all companies strive toward the highest possible utilization rate, it can never be 100%. The time we spend at work includes different breaks and non-billable, yet necessary, activities. These include meetings, administrative work, phone calls, training, conferences, etc. All of these activities are essential to any business.

In other words, an extremely high utilization rate means you are lacking in internal work that is as important as external for any company looking to develop both its culture, a positive working environment, and happy and healthy staff with a high retention rate.

Why Track Utilization Rate?

As we have previously stated, the utilization rate can be too high. It can also be too low for a company in your niche. Remaining between these two extremes enables you to run a successful and profitable business.

Any company that charges its clients on an hourly basis needs to cover its expenses. These expenses include wages, overhead costs, and resources. Additionally, the goal of any company is to bring in profit. That is to say, you should make sure to charge your clients enough to do both. A good utilization rate makes sure all your expenses are covered and the profit comes in as well.

Additionally, utilization rate helps you determine other key performance indicators and overall company health. If you have a firm grasp on your utilization rate, you will be able to make more accurate estimates and allocate resources more efficiently.

The estimates you’ll be able to make don’t only concern resources in the material sense. You will also be able to understand whether you can take on new clients and projects with your current workload, or even handle your work without hiring new people.

Utilization Rate Formula

Calculating the utilization rate isn’t difficult. You can do it by dividing the number of billable hours by the number of billable hours and multiplying by 100.

If, for example, an employee charges for 36 hours of their 40-hour workweek, they have a utilization rate of 90%. This is considered very high. You can calculate the utilization rate on individual employee, team/department, or company level. as companies have positions, or even entire departments that don’t directly contribute to company profit but are still crucial for the functioning of the organization (i.e. HR), you should only calculate the utilization rate for the employees who bring in profit.

There are other formulas you can use for specific utilization rates regarding hiring, company well-being, need for hiring, etc.

Optimal Utilization Rates

There is no universal one-size-fits-all utilization rate. The rates depend on the business, size of the company, the number of departments, etc. You can rely on some rules, though.

If the utilization rate is over 90% most of the time, you can deduce your profit-bringing employees are most likely overworked and burdened with more than they can carry. There are two possible solutions to this issue. The first one is delegating the tasks more evenly. However, if all employees have a high utilization rate, your team may be nearing burnout caused by overworking. In this case, you should consider hiring more people.

in some extreme cases, the utilization rate can be over 100%. This is a clear indicator of poor planning and too many tasks for the size and capabilities of your team.

On the other hand, the utilization rate can be too low. While there isn’t an exact number you can rely on, you can notice the difference between utilization and realization rates. This gap indicates your employees are focusing on non-billable tasks, such as meetings.

Ideal Utilization Rate

If you are still unsure whether your utilization rate is good or not, you can use the following formula:

(expenses + profit)/potential capacity*billable rate)*100

The expenses include both overhead and salary costs. This formula is only applicable if you have analyzed the amount of billable work you can get done (hence the potential capacity).

Increasing the Utilization Rate

If you have noticed that your utilization rates could be higher than they currently are, you can start finding ways to improve them.

This means analyzing the ways your employees are using their time. Simply put, some employees need time for administrative tasks. Others, on the other hand, don’t account for the utilization rate, so you should use other employee performance metrics. For example, you should focus on the number of resolved disputes and customer satisfaction when it comes to the customer service department.

Once you’ve figured out who needs to step up their game, you can focus on optimizing their utilization rates.

Track Employee Time

Employees can make mistakes and waste their valuable time unknowingly. Most often, these mistakes are accidental, as distractions (especially those related to social media) tend to be insidious. This means most employees don’t realize just how much time they spend on these distractions.

Tracking time and conducting time audits can resolve these problems in a relatively short time, as the workforce will become more aware of their time and reduce the time spent on distractions.

Reduce Non-billable activities

The time audit will probably show that some activities eat up time in the organization as well. This most often includes in-company meetings. Hence, you can reduce the number or length of the meetings.

Another notorious time-wasting activity is replying to lengthy email threads. Hence, you should strive to shorten them. A direct communication tool can be a great solution to this problem.

Redefine Your Fees

Many clients expect your staff to have meetings and lengthy phone calls with them. they, however, do not want to be charged for the time it takes to make those calls. You can fix this by determining a special fee for these cases. The other way to go about this is by informing your clients how many calls and meetings are accounted for for their initial fee.

Conclusion

A high utilization rate can help most businesses improve their efficiency and productivity. However, understanding the ins and outs of this metric and when to use it is more important for leading a successful organization than simply aiming for the highest possible number of billable hours.

We hope our article has helped you get more in tune with the utilization rate and understand when to use this metric as opposed to other key performance indicators that are better suited for different positions or even entire companies.

 

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