Capacity utilisation

Capacity utilisation is a key business metric that measures the extent to which a company is using its production potential or capacity. It's expressed as a percentage and shows how much of the maximum possible output is actually being produced over a specific period.

In simple terms, it means how busy your production facilities (factories, machines, staff time, etc.) are compared to their full potential. A high percentage means you are operating close to your maximum output, while a low percentage indicates you have significant idle capacity.

The basic formula is:

Capacity Utilisation (%) = (Actual Output ÷ Maximum Possible Output) × 100

Both "Actual Output" and "Maximum Possible Output" need to be measured in the same units (e.g., units produced, hours operated, revenue generated under full capacity).

Monitoring capacity utilisation is important because it:

• **Impacts Costs:** Higher utilisation spreads fixed costs (like rent, machinery depreciation, permanent staff salaries) over more units, reducing the cost per unit and potentially increasing profitability.
• **Indicates Efficiency:** Reflects how efficiently the business is using its assets and resources.
• **Aids Planning:** Helps in deciding whether to increase capacity (if demand exceeds current capacity), reduce capacity (if utilisation is consistently low), or focus on increasing sales to meet existing capacity.
• **Reveals Bottlenecks:** Operating near 100% can highlight potential bottlenecks or indicate a need for maintenance or upgrades.

There's no single ideal percentage. It varies by industry, technology, and business strategy.

• **High utilisation (e.g., 80-90%+):** Often indicates efficient operations and strong demand, but might leave little room for unexpected orders, machine breakdowns, or maintenance without causing delays or requiring overtime. Can also lead to employee burnout.
• **Low utilisation (e.g., below 70%):** Suggests idle resources, higher cost per unit, and potentially weak demand or inefficient processes.

Many businesses aim for a balance – high enough to be efficient and profitable, but with enough buffer capacity to handle variations in demand, maintenance needs, and potential growth.