What it means
Owning an asset has a cost whether it is used or not. Rent, depreciation, insurance and finance charges continue even when machines stand idle.
Utilisation shows the share of that cost that is being turned into output. The term is used in two related ways.
At the operating level it compares actual use with maximum capacity, such as machine hours, seats filled or storage space occupied. At the financial level it describes how efficiently the whole asset base produces revenue, which is closely linked to asset turnover.
A higher utilisation rate usually lowers the cost per unit, because fixed costs, meaning costs that do not change with output, are spread over more units. A factory that runs at 90% of capacity will normally have a lower unit cost than one running at 50%.
However, pushing to 100% is rarely sensible, since there is no slack for maintenance, breakdowns or rush orders, and quality may suffer. The right target depends on the business, the asset and the cost of being short of capacity.
Airlines and hotels monitor load factors and occupancy daily, while professional firms measure staff utilisation as billable hours divided by available hours. Managers set targets that balance efficiency with the flexibility needed to serve customers.
Low utilisation raises important questions. It may mean demand has fallen, the asset was bought too large, or work is poorly scheduled.
The response could be to find new customers, share the asset, sell it or lease it out. Utilisation is also closely tied to operating leverage, the degree to which a business has fixed costs.
A business with high fixed costs and low utilisation is vulnerable, because a small fall in demand turns profit into loss. By contrast, once utilisation passes the break-even level, each extra unit of output adds a large share of its price to profit.
In practice
Real-world examples
Example 1
A courier company has 40 vans but only 30 are on the road on an average day. The operations manager calculates utilisation at 75% and considers selling five vans to save financing and insurance costs. She first checks that peak days, such as the weeks before holidays, can still be covered by hired vehicles.
Example 2
A consulting firm has 20 consultants with 1,600 available hours each per year. They bill 25,600 hours in total, so staff utilisation is 25,600 / 32,000 = 80%, which meets the target the partners set.
Example 3
A hotel with 200 rooms sells an average of 130 rooms a night. Its occupancy is 65%, and the revenue manager tests lower weekday prices to fill rooms that would otherwise stay empty. The revenue manager also tracks the average room rate, so that filling rooms does not simply give away revenue.
Think of it
Asset utilization shows how hard your assets are working-productivity of what you own.
Formula
Calculation
Asset utilisation rate = (Actual output / Maximum capacity) x 100
Suppose a bottling machine can fill 10,000 bottles a month at full capacity, and it actually filled 7,500 bottles in March. Utilisation = (7,500 / 10,000) x 100 = 75%.
If the machine costs $20,000 a month to own and run, the cost per bottle is 20,000 / 7,500 = $2.67. At 90% utilisation, producing 9,000 bottles, the cost per bottle would be 20,000 / 9,000 = $2.22, a saving of $0.45 per bottle.Case study
Seen in the real world
Brightwater Printing is an illustrative, fictional company with a large digital press that cost $1,200,000. The press could print 400,000 pages a day, but it averaged only 160,000, a utilisation of 40%.
The owner considered buying a second press to meet growing demand. The finance manager showed that the existing machine had 240,000 pages a day of spare capacity, and that the real problem was that jobs were scheduled on a single day shift.
By adding an evening shift and offering discounts for flexible delivery dates, utilisation rose to 70% without any new equipment. The illustrative case avoided roughly $1,200,000 of capital spending on a second press that the company would otherwise have committed. The evening shift also gave the printer a new source of revenue, because rush jobs for local businesses were charged at a premium that day-time customers had not been paying.
Watch out
Common mistakes
- Aiming for 100% utilisation, which leaves no room for maintenance, breakdowns or urgent orders.
- Measuring utilisation against the wrong capacity, such as theoretical maximum hours when the plant only operates one shift.
- Focusing only on utilisation and ignoring profitability, when a busy asset making low-margin products may not add value.
Questions
People also ask
What is the difference between asset utilisation and asset turnover?
Utilisation usually compares actual use with capacity in physical terms, while asset turnover compares sales with the value of assets in financial terms.
What is a good utilisation rate?
It depends on the industry and asset, with many manufacturers targeting 80% to 90% and service firms setting targets for staff time.
How can utilisation be improved?
By increasing demand, scheduling work better, running more shifts, sharing assets or disposing of those that are surplus, with the choice depending on whether the cause is weak demand or poor planning.
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