The success of your business is driven by a lot of things. But the most important is profit. Because no matter how many customers you have or how wonderful your company culture is, if you’re earning less than you’re spending, you’re in trouble.
While many Utilization formulas reveal important insights into the efficiency of your company, there are a few formulas that are crucial to understanding your financial performance. And when employed together, can help you make the right decisions for your organization’s future.
Here are three Utilization formulas that you should be using to keep a pulse on your financial health.
When it comes to calculating Utilization, this is as simple as it gets. Your Headcount Utilization looks like this:
Headcount Utilization = Number of Billable Employees / Number of Total Employees
While it’s almost basic math for smaller teams, it does get a little more involved for larger agencies. But it’s equally as important for both. Understanding what percentage of your team is actually producing billable work is key to understanding how to best structure your team and leverage certain roles to maximize profits.
For example, if you have two billable developers, a sales person, a VP, and a CEO, your number of internal employees is outweighing your billable employees. Could this become a problem? It might. But when measured alongside other important Utilization metrics, you may discover it’s not. The real answer will come down to how your salaries and rates are measuring up. But more on that later.
This Utilization Rate is by far the most important for obvious reasons — you’re calculating your ability and potential to make money.
Revenue Utilization = Earned Revenue / Revenue Capacity
Your Revenue Capacity reflects the most ideal circumstances; if every hour was billed to the client, no missed deadlines, no late payments, no holidays, etc. By comparing how much you’re actually earning compared to your max earning capacity, you can grasp how much of your potential you’re actually achieving.
But there’s a lot to this. For example, you could be charging different clients different rates based on your employees’ experience level.
This is why Revenue Utilization is an important piece in untapping the value of Headcount Utilization. Take that same example from above: the team of two billable developers, salesperson, VP, and CEO. If one of those billable developers is a senior level who charges 3x more than industry standard, his Utilization is far more important than developer #2 (his junior level counterpart caring 3x less). If you’re utilizing your higher earning employees efficiently enough, then it will balance out those extra internal employees.
But we understand that keeping track of what rates and formulas are most valuable to your agency and how to use them together is no easy task — not to mention actually calculating them on an on-going basis. That’s where Metric.ai comes in.
But hold on, we have one more.
We hate to say it, but this one is even less straightforward. But also very important.
Cost Utilization = Billable Employees Cost / All Employee Cost
So this Utilization formula compares the cost spent working on billable projects to the cost spent on the entire organization — basically, how much you’re paying the people who actually make the money versus how much you’re paying everyone to do their jobs. Of course, those employees not bringing in earnings are likely vital to your team in other ways. After all, without that salesperson, you wouldn’t be bringing in new clients.
But depending on how much you’re paying that salesperson (and that VP. Oh, and yourself as CEO), you may be preventing your own growth. Let’s look at it on a larger scale.
Let’s say your internal employees consist of two executives, one salesperson, and one manager; altogether making a collective $750,000. Then you have 10 developers, each making $50,000 ($500,000 total). So your Cost Utilization is 40% ($500,000 / [$750,000 + $500,000]). Now, while there is no magic percentage here to give you all the answers, what we do know is the higher your Utilization, the better. But like we said before, measuring these metrics against other Utilization outputs is the best way to understand how you’re really performing financially.
No matter what system you’re using to measure your team’s efficiency or what formulas are best for your organization’s financial planning, you don’t want these numbers to ever surprise you. The more you understand your agency’s Utilization over time, the better you can plan for a successful future. To learn more about the best tool for measuring Utilization and other key performance metrics, contact Metric.ai today.