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Most businesses regularly measure various metrics — such as customer engagement, click-through rates, lead generation and lead conversion — to understand performance and drive profitability. However, a highly universal metric for any business is the utilization rate.
If you’re a small business owner and you bill clients per hour for your services, you might want to calculate your capacity utilization with the utilization rate formula. It shows you how productively your employees use the amount of time available.
You can pool the numbers into a resource utilization chart to give you an overview of your company’s efficiency and help you make better staffing decisions. The information will also help you decide if an employee needs to be rewarded based on their excellent utilization rate or if you should implement improvement plans for employees with lower rates.
So, what is capacity utilization? By definition, it is the percentage of a person’s available working hours spent doing billable work. What does that mean? If an employee works 40 hours a week, their billable work will be less than 40 hours. The reason is that no person — regardless of motivation or enthusiasm — can remain perpetually switched on and productive. Lunch breaks, coffee breaks, meetings and phone calls, among other things, all eat into that time.
Utilization rate is all about getting the balance right; it should neither be too high nor too low. Instead, you want to maintain an optimal range somewhere in-between.
Keep reading to learn about the utilization rate formula, how to calculate utilization and optimal billing rates, whether you have an ideal utilization rate and how to raise it if it is low.
How To Calculate Resource Utilization in Excel
To calculate utilization rate in Excel, you first need to create sample data. Assume you have a simple time tracking sheet with entries like the date, employee names, tasks and the number of hours worked.
Here’s how to calculate utilization rate in excel using the PivotTable option. First, create a pivot table and arrange your data into the various fields: Columns, Rows and Values. Next, set both target and billable utilization to be averages and the numbers to percentages. That’s it.
That’s how to calculate utilization in excel — but you can tell that it’s a bit cumbersome. Several resource utilization charts are available to make it easier, but the overall process is just far from efficient.
If you want to gather sound, accurate information and get a firm grasp on your utilization, you need to invest in a more sophisticated solution. This will help you understand past trends and forecast utilization more accurately so you can plan better.
The BigTime utilization report covers time, staff members and budgets and gives you or your project manager real-time visibility on your staff’s availability. That way, you know who needs to take on more or less work, and you can better plan and allocate your staff hours to projects.
BigTime’s capacity planning tools allows you to manage your resources better, view employees by unique skills and match them with suitable projects while commanding a broad view into your operational insights. It’s an all-in-one solution.
What’s more, if you’re already keeping track of any of these parameters elsewhere, you can simply import them using our CSV template.
Utilization Rate Calculator
You can use a utilization rate calculator to figure out your utilization rate. The utilization calculation formula method is pretty simple. Utilization rate equals the number of billable hours divided by the total number of available hours, with the resulting answer multiplied by 100.
Here’s an example. Let’s say we wanted to find the utilization rate for John, an SEO specialist at a company that sells medical devices. He has 40 available hours in a week. That would equate to 2,080 hours per year. If he takes a month of vacation, his total available hours for the year becomes 1,920.
Let’s assume he bills 1,600 hours for various client projects throughout the year. Using the average utilization formula, we can calculate his utilization rate as:
(1,600 / 1,920) × 100 = 83%
This means that John was 83% billable out of the possible 1,920 hours. If he billed all his available hours, his utilization rate would have been 100%. However, that rarely happens, and here’s why.
Employees typically have other responsibilities that aren’t billable. John, for example, being a senior SEO, has to train recruits and get them up to speed with company processes. He has to take breaks, too, whether that’s for lunch, coffee or otherwise.
An optimal utilization rate needs to account for all of this non-billable time for the company to profit. Hence, most firms set employee target utilization rates considering how much of their available time they need to spend on non-billable work.
So, now you know how to calculate the utilization rates of each employee. How do you do the same for your entire firm? Simply divide the sum of all employee utilization rates by the number of employees. You can also use a resource utilization calculator. Robust time tracking solutions like BigTime monitor your utilization rate automatically and in real time, both at employee and business levels.
What Is a Good Employee Utilization Rate
What is a good employee utilization rate? There is no specific number that suits all firms. Utilization rates vary between people and from position to position. Generally, managers have lower target utilization rates, while front-line personnel tends to have higher ones. Ultimately, every company decides what it considers a reasonable rate. That said, a higher utilization is usually better, though there’s a point of diminishing returns.
A utilization rate that’s perpetually close to 100% is not a good sign. More often than not, it suggests that your staff are overworked and close to burnout, so you might want to bring in some recruits.
Suppose you’re recording considerably high utilization and relatively low realization rates. In that case, your team is probably spending too much time on non-billable tasks, or you have too many freelancers undertaking projects — another sign of potential trouble.
What if you had a utilization of resources example with a rate above 100%? That isn’t too good either and usually indicates poor planning or too many out-of-scope activities.
So what is a good capacity utilization rate? Most consider 65% to 85% or slightly higher a good capacity utilization in the service industry. However, the goal is to increase your utilization rate as much as possible without drowning your employees in work. In other words, don’t go too high that you suffer potential attrition problems and don’t allow underperformance such that you experience serious financial woes.
So, set target utilization rates that satisfy two things: the desire to bill time and the need to keep employees healthy and happy. Then, the remaining time should be spent on non-billable activities like holidays, paid time off, education, business development, administrative tasks and professional activities.
Capacity Utilization Formula
Capacity utilization rate is the mean utilization rate for every employee in an organization. It can be calculated this way:
If we assume for a moment that John works for a small company with only five billable employees, we can calculate the utilization like this:
Utilization percentage formula = (83 + 75 + 62 + 80 + 60)% / 5 = 360% / 5 = 72%
Here, the five percentages represent the utilization rates of the five employees in the company. This would mean that the average utilization rate at John’s company is 72%.
The figure is important because it highlights the company’s efficiency at utilizing its available hours. A company with a low capacity utilization rate is not taking advantage of the billable value of all of its available hours and missing out on a lot of money.
Calculating Optimal Billing Rate Using Capacity Utilization Rate
The ideal utilization rate for any firm balances the desired billable rate with the company’s staffing expenses, overhead and profit margin. To find out what your company should charge per hour for its labor, use the following formula:
(Cost of resources + Overhead + Profit margin) / Total average labor hours
Assume the average labor cost at John’s company was $150,000, overhead per employee was $25,000, and their desired profit margin was $15,000. If everyone has 1,920 available hours, you can calculate the billing rate thus:
$(150,000 + 25,000 + 15,000) / 1,920 =
$190,000 / 1,920 = $99 / hr
This means that John’s company would have to charge $99 an hour to cover all their expenses and return the desired profit. However, this figure would only stand if every employee had a 100% utilization rate, which is not the case. Therefore, we need to include the capacity utilization rate to get a more realistic billable figure. We would then divide the amount we got above by the capacity utilization rate, as follows:
$99 / .72 (72% for John’s company) = $137.5
Hence, the company would have to charge $138 to account for its available but non-billable hours.
Now that’s a small company of five billable employees in a hypothetical situation. Real life is different, and calculating utilization rates on paper is hardly feasible. Mistakes are bound to occur, and you might even fail to capture some data. You may go the route of using a capacity utilization formula excel template, but even this has proven to be far from efficient.
BigTime Offers Your Company a Better Solution
BigTime’s software solution gives you insights into your employee utilization, resource projections and helps you set goals. It helps you easily find areas to improve your team’s productivity, compare estimated and actual resources to increase billable time and project ROI. Plus, it integrates seamlessly with the tech you already use.
If you’re still unsure about a paid solution, try out a free demo to discover how BigTime can help you better manage your resources and maximize your team’s utilization.