Understanding how utilization affects profitability is a key to business success. Utilization refers to how effectively a company uses its resources—such as equipment and personnel—to generate revenue. Higher utilization often leads to increased profits, and the extent to which this occurs can be profound.
Illustrative Example:
Consider a transportation company with a single truck providing pick-up and delivery services.
Scenario 1: Single Shift Operation
Operations: The truck operates from 7 AM to 3 PM, totaling 8 hours daily.
Driver Compensation: The driver earns $30 per hour, amounting to $240 per day.
Revenue: Clients are billed $100 per hour, leading to $800 in daily revenue.
Costs: All-inclusive operating costs—the total costs to run the truck—are $65 per hour, totaling $520 daily.
These costs include:
Variable Costs: Fuel, maintenance, and driver pay at $30 per hour.
Overhead (Fixed) Costs: Truck payments, insurance, office rent, and administrative salaries.
Profit: Daily profit is $280 ($800 revenue - $520 costs).
Annually, assuming 5 operating days per week over 52 weeks, the profit is $72,800.
Scenario 2: Double Shift Operation
Operations: The truck runs two shifts—7 AM to 3 PM and 3 PM to 11 PM—totaling 16 hours daily.
Driver Compensation: Two drivers work 8 hours each and are paid $30 per hour, totaling $480 daily.
Revenue: Clients are billed $100 per hour, resulting in $1,600 daily revenue (16 hours × $100/hour).
Costs: All-inclusive operating costs in this scenario are $60 per hour, totaling $960 daily (16 hours × $60/hour). This lower per-hour operating cost, compared to the $65 per hour in Scenario 1, is due to better utilization of resources. Keep in mind
Overhead (fixed) costs remain unchanged even when the truck operates for longer hours.
By spreading fixed costs over 16 hours per day instead of 8 hours, the average hourly cost is reduced, resulting in improved profitability.
Profit: Daily profit is $640 ($1,600 revenue - $960 costs).
Annually, this equates to $166,400 in profit, a $93,600 increase compared to the single shift operation.
These two scenarios are a simple example. The actual situation would likely involve some additional considerations, such as:
The truck would have to be replaced more frequently due to the higher utilization (which would result in higher capital costs over time – but not enough to offset the total benefits).
Fluctuations in the fuel costs due to different traffic patterns during the second shift (though this could have a net positive impact on the profit per hour in Scenario #2).
Driver availability – finding drivers willing to work the second shift might require higher pay.
Key Takeaways:
Enhanced Utilization: Extending operating hours maximizes asset use, leading to higher revenue and profit.
Cost Efficiency: Spreading fixed costs over more operating hours reduces per-hour expenses.
Strategic Planning: Analyzing utilization rates helps identify opportunities for growth and efficiency.
By optimizing resource utilization, businesses can significantly boost profitability. Regularly assessing and adjusting operations to improve utilization is essential for sustained financial health.
Part of what a fractional CFO can do is help you project and affect future profits in different scenarios, considering factors like utilization. If you'd like to find out how a fractional CFO can help you analyze the impact of different decisions on your business's finances, contact us to schedule a free initial consultation. We'd love to chat with you.
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