The capacity cushion is the amount of spare capacity a business has expressed as a percentage of the total capacity. The capacity can refer to any business activity such as production capacity, staff capacity planning, web hosting etc.
It is important that a business has a capacity cushion in order to be able to deal with peak demands for the activity, if the cushion gets too low then it indicates to the business that additional capacity is required.
What is Capacity Cushion Formula?
The capacity cushion can be defined in terms of the spare capacity or alternatively in terms of the capacity utilized as follows:
As the spare capacity is the total capacity less the capacity utilized, the capacity cushion formula is often restated as:
Since the term Capacity utilized/Total capacity is referred to as the capacity utilization we have:
Capacity Cushion Example
Suppose a business operates a call center for customer service, and employs customer service staff working 5 hours each day. If each employee needs to handle 120 telephone calls each day and each call takes 1.50 minutes, then the cushion is calculated as follows:
Total capacity = 5 hours x 60 = 300 minutes Utilized capacity = 120 x 1.50 = 180 minutes Capacity utilization = Capacity utilized / Total capacity Capacity utilization = 180 / 300 = 60% Capacity cushion = 100% - Capacity utilization Capacity cushion = 100% - 60% = 40%
The same answer can be obtained by looking at the spare capacity
Total capacity = 5 hours x 60 = 300 minutes Utilized capacity = 120 x 1.50 = 180 minutes Spare capacity = 300-180 = 120 minutes Capacity cushion = Spare capacity / Total capacity Capacity cushion = 120 / 300 = 40%
Negative Capacity Cushion
If the demand for the activity becomes greater than the total capacity available, then the business can experience a negative capacity cushion.
Suppose in the above example the demand for handling calls was 180 calls each day and each call takes 1.9 minutes, then the capacity planning cushion is calculated as follows:
Total capacity = 5 hours x 60 = 300 minutes Utilized capacity = 180 x 1.90 = 342 minutes Capacity utilization = Capacity utilized / Total capacity Capacity utilization = 342 / 300 = 114% Capacity cushion = 100% - Capacity utilization Capacity cushion = 100% - 114% = -14%
In this case there is a negative capacity cushion of -14%, indicating that the demand to handle calls is greater than the available capacity.
The capacity cushion is one of many accounting ratios.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.