As a service-based business owner, you know you must use your hours wisely in order to make money. However, it’s quite common for an owner like you who is growing their business to be scratching their head after they have hired their first three or four staff. You’re wondering why the business is actually making less money than it did when it was running as a sole-trader.
The first one or two staff tend to be a breath of fresh air for many reasons (not least the fact that the owner simply gets some help). Yet, if there are underlying issues, these really show themselves in the next few hires. Simply, if the extra work hours now added to the business’s “inventory” are not adding up to extra profit, something is going wrong.
In our work, we’ve addressed this situation with countless business owners. The problem is usually fixed by a combination of the following:
- Increasing the percentage of each day that your staff are working on client jobs
- Improving the effectiveness of your staff so that jobs don’t run into overtime
- Fixing the pricing of your staff’s time.
Together, these three factors improve staff utilisation. To start making better use of — aka utilising — your staff’s time, it’s important for you to understand the concept of staff utilisation. It is a key factor to your success.
This article is all about utilisation and is the first of three articles that address this topic more broadly. In parts 2 and 3, we will cover the relationship between profit and staff effectiveness and then we’ll move onto accurate pricing. So, let’s dive in…
What is staff utilisation and how is it calculated?
Simply put, your staff utilisation rate is a measure of how much time your employees actually spend delivering work to clients.
As a service-based business, your success hinges on the proportion of your staff’s working time that you can bill to your customers. The more hours you can bill, the more revenue you will earn. If you cannot bill for enough hours, you’ll earn insufficient revenue.
With good management, structuring and task allocation, your staff will be performing work for your clients much of the time, but not necessarily all day, every day. Let’s look at an example in a plumbing business to illustrate some staff-utilisation calculations:
- Bruce is a full-time plumber who performs household maintenance work. He spends 6 hours of his day working on job sites, and 2 hours driving between jobs.
- One day, Bruce made a mistake on a job, resulting in it taking 1.5 hours instead of an expected 45 minutes. It was clearly Bruce’s fault, so the client could only be charged for 45 minutes of labour time.
- This means that the business is able to charge 5.25 hours to clients that day. But it needs to pay wages for 8 hours.
- Therefore only 65% of Bruce’s day was utilised (calculated by 5.25 divided by 8).
If your team operates at a utilisation rate of 75% then you might be okay. If they have a utilisation rate of 30%, it’s likely your business is in deep trouble. Different businesses will want and need to target different staff utilisation rates, of course. Talk to us to discuss the optimal goal for your business and how to achieve it.
Wait, I don’t charge my clients by the hour – does this still matter?
Yes! It doesn’t matter whether you charge hourly rates or you charge fixed fees based on upfront quotes. Either way, you must ensure sufficient staff utilisation rates.
Whenever you provide fixed quotes, you’ll inherently be factoring in an expected number of hours per staff member. For instance, you might have allowed for 10 hours on a job. If it takes longer than 15 hours, then your staff have not been utilised effectively, and you’re likely to make less profit (or even a loss) on that job.
What can affect my staff’s utilisation?
Depending on the industry you’re in, there’s a range of things that can prevent your staff from being utilised optimally. These include your staff:
- Attending training
- Waiting for equipment to be fixed
- Needing to redo work or fix mistakes (that the client won’t be paying for)
- Quoting new work
- Doing various administrative tasks (e.g. organising workflow, attending meetings, training other team members)
- Travelling during work hours
- Being prevented from working due to the weather.
Many of these things cannot be avoided, but it’s very important that we recognise their importance and ensure they don’t get out of control.
How do I monitor staff utilisation?
The answer often depends on the type of software you’re using for your job/client management and staff timesheets. It’s best that we work through this with you to find a solution for your specific circumstances. Regardless of the solution, it’s vital that you measure utilisation. If you don’t measure it, you can’t manage it.
What staff utilisation metrics are worth tracking?
If you’re able to get the necessary data, it’s a good idea to track:
- The number of hours per week that each staff member has worked on client work
- Write-ups and write-offs:
- For jobs with hourly prices: if you were unable to charge the client the entire number of hours worked, what amount was written-off?
- For fixed-price jobs: did the number of staff hours required go over or come under what was outlined in the quote?
What if the data suggests I have a problem?
Most business owners are shocked when they start to track this data. It almost always suggests room for improvement. This is actually good news: your utilisation rate is a great guide for what steps you can take to improve profit.
- If your utilisation rate is too high, you may need to consider growing your team so your people are not overworked and you have capacity to take on even more work.
- If your rate is too low, you may need to focus on bringing in new business and reviewing your processes to ensure the non-billable aspects in your business are as efficient as possible.
When we take clients through this analysis, these are some of the things they realise:
- They need to stop sending multiple people on a job, which they were doing just because they had no other work that day.
- Their quiet achievers were generating most of the profits.
- Travel time hadn’t been adequately factored into the pricing of jobs.
- Many of the staff appeared busy, but it was largely non-billable work – meaning they had too many staff.
- The pricing of their staff to clients was below where it needed to be.
- Some clients were profitable (their ideal clients) and others were loss-making.
Sobering stuff. The good news is that staff utilisation is within your control. There is a range of steps you can take to maximise your staff utilisation and ensure your employees are using their hours wisely and generating profit for you. Once you measure the separate elements, devise a game plan to work on each and then review periodically, your profits will take care of themselves.
So, talk to us today to devise a game plan just for you, and ensure your staff are working at an optimal level to drive profit into your business.