What is a utilization rate?

Definition

A utilization rate is billable hours divided by available hours for the period. On the books, this is a staffing metric, not a ledger account and not the fees already earned.

A four-person bookkeeping shop uses it to ask how much of paid time turned into client work. The answer is a percent built from hours tagged to clients over the hours the team had available.

It is a period reading of time use. It is not the share of billed value that later collected.

Stay with that share of hours when you read it. Whether those hours were billed at full rate is a later question.

Where it shows up

P&L: Related to how much of paid time turns into billable work.

Cash flow: Related to whether those hours get invoiced and collected.

See also: Billable Hours · Realization Rate · Capacity

When you look at your Income Statement, you will not see a printed utilization line. You see revenue and direct labor; this percent explains how much paid time those fees came from.

When the figure is high, most available hours were client work. When it is low, a large share of paid time was admin, training, or open.

The Balance Sheet does not hold this metric. Related amounts are the people already on payroll, not a utilization account.

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

Capacity is the hours ceiling the shop can deliver. This page is the share of that ceiling that was billable.

How it works

The shop starts with available hours for the period. Vacation, holidays, and required internal time come out, and what remains is the denominator.

It then counts hours tagged to client work. Those hours are the numerator.

Divide billed hours by available hours. One hundred twenty divided by one hundred sixty is 75 percent.

Stay with the hours when you read this percent. A higher billing rate raises revenue without raising this share.

The timesheet is the record behind both numbers. Missing time or hours dumped into a catch-all code makes the percent lie.

Payroll expense still posts for every paid hour. This reading only says how much of that paid time was client work.

Do not treat overtime as a permanent raise in the denominator. Extra Saturday hours can lift the numerator this week, but they are not the available hours the plan should assume.

After the month closes, actual billed hours are compared with available hours. The leftover hours are unused time, not a credit you post.

Cost of services still holds the labor that delivered the work. A high percent means more of that labor sat on client files; a low percent means more of it sat on the office.

Headcount raises the available-hours pool from the start date forward. A resignation drops the pool as soon as that person's hours are gone.

A new hire who spends the first month in training will pull the shop's percent down. Available hours rose immediately; billed hours did not.

Example

Ledger Lane is a four-person bookkeeping shop. Each person has 160 available hours in the month after vacation and internal time.

One person is a simple illustration. That person billed 120 hours of the 160 available.

Divide: 120 divided by 160. The utilization rate is 75 percent.

That 75 percent is not the fees collected. It is only the share of available time that was client work.

If the same person billed 140 hours, the percent would be 87.5 percent. Available hours did not change; more of them were tagged to clients.

If available hours were 160 and billed hours stayed 120 after a week of training, the percent would stay 75 percent. Training used the other 40 hours; it did not change the math already done.

The shop does not post a line that says 75 percent. The books already hold the wages and the fees; you divide the hours.

Common mix-ups

Utilization rate is not the same as realization rate. Realization asks how much of the billed value actually invoiced and collected; this page asks how much of available time was billable.

Utilization rate is not the same as capacity. Capacity is the hours ceiling; this page is the share of that ceiling that was client work.

Utilization rate is not revenue per employee. Revenue per employee divides sales by headcount; this page divides billed hours by available hours.

Related terms

• Billable Hours: Hours worked that can be charged to a client.
• Timesheet: The record of hours worked, used to drive payroll and job costing.
• Realization Rate: The share of billable value that actually gets invoiced and collected.
• Capacity: The volume of work the current team or equipment can deliver.
• Effective Hourly Rate: Revenue collected divided by total hours worked.
• Cost Of Services: The direct cost of delivering services, used in place of cost of goods sold.
• Direct Labor: Wages for the people who directly make the product or deliver the service.
• Revenue Per Employee: Revenue divided by total headcount.