What is capacity?

Definition

Capacity is how much work the people and equipment already in place can finish in a period. On the books, this is a throughput reading, not a ledger account.

A consulting firm usually states it in available hours. Those hours are what the team can take on before the next hire or the next late night.

This figure is the ceiling, not the hours already sold. Backlog is signed work still waiting; this number is how much work the team can actually finish.

It is not a line on the Income Statement. It helps explain how much revenue the period can hold.

Accrual books record the fees when the work is delivered. This reading only says how much work the current team can deliver.

Where it shows up

P&L: Related to how much revenue the current team can actually earn.

Balance Sheet: Related to the people and equipment already on the books.

See also: Utilization Rate · Headcount Plan · Billable Hours

When you look at your Income Statement, you will not see a printed hours ceiling. You see revenue, direct labor, and what is left after those costs.

If revenue sits near the ceiling, the firm is using most of what the team can deliver. If revenue sits well below it, hours are open, or the work is taking longer than the available-hours math assumed.

The Balance Sheet does not list this ceiling. Related amounts are the people already on payroll and any equipment already recorded as assets.

On the Statement of Cash Flows, collecting fees and paying wages are the cash events. This reading does not move cash by itself.

A break-even point in hours is one use of the same ceiling. The firm still has to cover its period costs from the hours it can actually deliver.

How it works

The firm starts with people on staff and the hours each person can work in the period. Vacation, holidays, and required internal time come out, and what remains is this ceiling.

Ten consultants at 160 hours a month is 1,600 raw hours. If 200 of those hours are vacation and internal meetings, available capacity is 1,400 hours.

Sold work consumes that ceiling. Hours already promised to clients reduce what can still be accepted this month.

Stay with the deliverable hours when you read this number. A higher billing rate raises revenue without raising the hours the team can finish.

A new hire raises the ceiling from the start date forward. A resignation drops it as soon as that person's hours are gone.

Utilization is the share of this ceiling that was actually billed. The ceiling is the denominator; billed hours are the numerator.

Do not treat overtime as a permanent raise in this figure. Extra Saturday hours can finish a project, but they are not the steady ceiling the plan should assume.

After the month closes, actual billed hours are compared to this ceiling. The leftover hours are unused capacity, not a credit you post.

Equipment that is down for a week lowers the ceiling the same way a missing consultant does. The work that cannot be finished this month has to wait or go to someone else.

Example

Northline Advisory has 8 consultants. Each can work 160 hours in September, which is 1,280 raw hours.

Vacation and internal time take 160 hours. Available capacity for September is 1,120 hours.

The firm has already promised 900 hours to current clients. That leaves 220 hours it can still accept before the month is full.

September billing is $180 an hour. If the team delivers all 1,120 available hours, the revenue ceiling is about $201,600.

The books do not post a line that says 1,120 hours. They post the fees earned and the wages paid; the hours ceiling sits next to those dollars as the staffing limit.

If two consultants leave on September 16, the remaining ceiling drops by about 140 hours. Work already promised then sits closer to the new limit.

A project that overruns its estimate eats the leftover 220 hours without adding new signed work. The ceiling did not grow; the work just took more of it.

Common mix-ups

Capacity is not the same as billed hours. The ceiling is what the team can deliver; billed hours are what was actually charged.

Capacity is not the same as backlog. Backlog is signed work waiting; this figure is how much work the team can finish in the period.

Capacity is not the same as the headcount plan. The plan is how many people you intend to have; this reading is the work those people can deliver.

Related terms

• Utilization Rate: The share of available hours that are billable.
• Headcount Plan: The staffing plan behind budgeted payroll cost by period.
• Billable Hours: Hours worked that can be charged to a client.
• Backlog: Signed work that has not yet been delivered or recognized as revenue.
• Break-Even Point: The sales level at which total revenue exactly covers total costs.
• Direct Labor: Wages for the people who directly make the product or deliver the service.
• Forecast: An updated projection of where the numbers are actually heading.
• Revenue Per Employee: Revenue divided by total headcount.