If you're a digital agency owner and want to increase profitability, it's helpful to have a high employee utilization rate. This is a crucial metric to measure your team's productivity and the reality of your profitability. By knowing this essential information, you'll be able to make adjustments to improve profitability.
This article will tell you what employee utilization is and how it impacts your agency's growth. Why it's important and what tools you need to use to track utilization rate accurately. It's a simple process, but it makes a big difference. You may lose profits if you have yet to implement this measurement into your business.
What is the employee utilization rate?
The employee utilization rate is the ratio between your employee's billable working hours and the total number of available hours they work for your company. The rate is most commonly used in service-based professional services and businesses. Digital agencies fall into this category.
You'll calculate the utilization rate for a week, month, or year. To do the calculations, you need to know how many hours an employee worked and what hours were billable. In most job roles, employees spend less than 100% of their time on billable work in a project. This is because there are internal tasks on their workload, such as calls, team meetings, training sessions, and more.
Why utilization rate is essential for your agency's growth
The employee utilization rate is going to have a positive effect on how employees engage at work. By measuring the agency utilization, productivity levels increase as you start to see where it's low and make changes. You will be better able to set profitable service rates when you know how much it costs your business to offer them.
Also, you can compensate your employees fairly and figure out if they're being overworked, which is essential because employee burnout can be costly in the future.
Employee utilization allows you to measure your business's current capabilities while forecasting revenue. When there is a lack of profitability in one area, you can optimize the internal processes based on the measurements you find.
You can see what employees are effectively working and who is helping your business to see consistent revenue increases. You will be able to find out how many hours of each employee's work need to be billed to keep your business profitable.
This simple process allows you to streamline your business with a clear picture of where money and resources are going.
How to calculate the employee utilization rate?
The easiest way to calculate the employee utilization rate is to use time-tracking software. This allows you to track billable hours accurately. After that, you need to calculate the total available hours of each employee, including their time off, such as vacation time and sick leave. Then you can compare it with their billable hours.
Just use the following calculation formula:
Utilization Rate (%) = Billable Time / Gross Capacity of your team
What is the Ideal Utilization Rate Digital Agencies Should Have?
The accepted utilization rate may differ between each company since each digital agency runs its business differently and has different needs.
Your utilization rate should ideally sit at 75%. This percentage level will help you gain enough revenue to cover your agency cost and get some profit based on the resources you have allocated to a project. Of course, targeting a more significant number is always safer to have it as a buffer for any unexpected situation.
Why should you not target the 100% rate or above?
If you have close to 100%, this can indicate that the work quality being delivered could be better. You may not allow employees to brainstorm or enhance their skills and creativity by doing extra training. This may prevent them from being the best at their job and delivering high-quality outcomes. If your rate is over 100%, this can indicate that employees are working too much and may succumb to burnout.
What if your utilization rate is too low?
If your labor utilization is low, this can indicate that employees have more free time. You don't want to be paying people not to be productive. When consistently seeing a low employee utilization rate, you should look for new ways to generate revenue using your resources. This might include creating a new product to offer or finding new clients for your digital agency.
How to improve utilization in your agency
You may make changes that decrease profitability and miss out on growth opportunities at your digital agency. You want to know that the agency utilization is accurate, or you could take steps backward.
Here are a few ways to improve the employee utilization rate.
- Make sure that the data you're getting is accurate. One of the most effective ways to do this is by having your employees constantly track their working time with time-tracking software without forgetting to add their time logs.
- Track the utilization rate across the entire organization. This will allow you to optimize your processes, like effectively implementing employee allocation or hiring new talent if you find skill gaps.
- Focus on reducing non-billable hours for more employee efficiency and profitability. For example, you should only do internal meetings with a specific agenda to minimize working time wasted on a generic discussion.
- If you understand that you have more available resources for your current needs, you should start thinking of new ways to generate revenue, such as getting new clients or launching a new service.
It's essential to keep track of where operating costs are going and optimize employee efficiency. When you have the information you need, you can incorporate solutions. You can make positive changes to your digital agency by measuring employee utilization rate. You will be able to create a more cohesive, streamlined digital agency that leads to more profitability and tremendous success.