Overview - Capacity
What is Capacity?
Many organisations derive their income directly from employees. This typically represents Service Based organisations including Accountants, Engineers, Doctors, Lawyers etc. This is different to a Retail organisation which will derive it's income from the sale of products.
Capacity refers to the income earning potential ($) of the employee, which is calculated in Magnifi based on certain metrics.
How is Capacity Calculated?
There are the 4 key components;
- Available Hours; the hours the employee is available for work (ie excl leave).
- Total Hours; Available Hours + Overtime.
- Billable Hours
- Sell Rate; The rate the employee is expected to generate per hour (eg charge rate)
The detailed calculation is;
Available Hours;
Total Hours p.a.
Less Leave Hours;
- Public Holidays
- Annual Leave
- Personal Leave
- Long Service Leave
= Available Hours
Total Hours;
Available Hours
x (1 + Overtime %)
= Total Hours
Billable Hours;
Total Hours
x Productivity %
x Recovery %
= Billable Hours
Capacity = Projected Billable Hours x Sell Rate
What is Productivity?
Productivity represents the amount of time an employee spends on client related activities. This doesn't necessarily convert to billable time. You can have an employee that is very productive who is also very inefficient, resulting in less billable time.
You update the Productivity % in Magnifi under Employee Capacity.
What is Recovery?
The Recovery represents the % of productive time that is billed. An employee will spend time on client related activities, resulting in productive time. The total time may not be billable if the quote or estimated time was less than the time incurred. We apply a Recovery% to the Productive time to calculate the Billable time.
You update the Recovery % in Magnifi under Employee Capacity.
Some industries will report the Recovery % as a Write-off % which has an inverse relationship. Eg a 90% recovery% is equivalent to a 10% write-off.
Why is it important to measure Capacity?
By calculating the total capacity (ie income earning potential) of your employees, you can assess whether you have enough employees to meet client demand. This facilitates importance decisions including;
- Staff planning; ensure adequate staff resources to meet demand.
- Client growth; project income targets and identify if additional staff are required to meet the targets
- What-if scenarios; understand the financial impact of changes to staffing, productivity, recoveryand hourly rates.
- KPI targets; confirm and communicate KPI targets including productivity and recovery.
What is Demand?
Demand refers to the projected client income as per the Profit & Loss Projection. Magnifi will compare the Capacity to Demand under Capacity Summary (annual capacity summary) and also Capacity v Demand (monthly capacity planning).
Not all income will relate to Capacity and you therefore need to specify which income is "capacity building" income". You can specify the Capacity Building income accounts under Chart of Accounts.
How do I use the Magnifi Capacity features?
Capacity Summary
The features you use will depend on how much detail you require. All organisations will use the Capacity Summary feature which shows the projected annual capacity v demand. This is where you enter the employees Productivity %, Sell Rate and Recovery %. Under Capacity Summary you can change the Start Month to continually assess the Capacity v Demand based on changes to employees and income projection throughout the year.
Capacity Drivers
Some organisations will want a more detailed monthly Capacity plan which can be done using Capacity Drivers. Using this feature, you can project the available hours per employee based on their scheduled leave (which can be imported from Xero) and you can change productivity, recovery and sell rate on a monthly basis. For example, you may have a new employee and their productivity % may gradually increase during the start of their employment and you want to see what impact that has on their monthly capacity.
How do I use Capacity for organisations that don't report labour inome separately?
Some businesses will have material and labour income and may not report the income separately. For example, manufacturing and construction type businesses. When this occurs, you can specify all material and labour accounts as Capacity Building accounts and apply an overall sell rate to the employee.
You can calculate the overall sell rate by dividing the total income by the total billable hours. The sell rate is entered under Capacity Summary to calculate the projected capacity per employee which is useful for staff planning.