An operating rate is an identified percentage of the total production capacity of a business or nation that is in active use within a specified period of time. The rate helps to identify just how well the entity is using available resources to produce goods and services, based on estimates of maximum output. One of the benefits of calculating this type of rate is that the figure can help set reasonable expectations for profit growth in upcoming periods, based on the portion or amount of capacity that is already in active use.
When the operating rate of a business is higher, this means that the company is making use of current resources to produce products at a rate that results in profits that is very close to the best that the company can hope to manage under its present circumstances. On the one hand, this indicates that the business is making the most of what it has to work with, and is receiving the benefits from that usage. At the same time, a higher operating rate also indicates that there is not much potential for increasing future profits, unless there is some change in the amount and type of resources used in the production process.
When the operating rate is determined to be below fifty percent, this is a sign that the resources in the control of the business or country are not being utilized to best advantage. The origins of the lower rate may be due to inefficient production processes, aging equipment, or an unusually high amount of wasted raw materials within the creation of the products manufactured. As a result, action should be taken to identify why those resources are being used with so little efficiency, and take steps to correct those situations. Doing so will result in a significant increase in profitability, as the effects of that increased efficiency results in the creation of more products that in turn are consumed by customers.
The operating rate associated with any type of entity can change from one period to the next. For this reason, companies tend to monitor the rate on a regular basis. It is not unusual for a business to calculate the rate for each business month, or at least each business quarter. Doing so makes it possible to identify processes and procedures that are having a negative impact on the profit growth of the company, and correct those issues before they have significant impact on the profits generated for an entire business year.
