Velocity and Capacity are two terms commonly used for determining how much work a team can perform in a given amount of time. Agile development is customer-focused development, and as such it is important to know for small periods of time how much a team can achieve.
A teams velocity is an estimate of how much work it usually completes in a given time period. The figure is based on how much work a team has completed recently. Velocity is usually measured in either hours of points. Agile teams determine how they will be measuring the time and difficulty of tasks, whether they use a point system or a number of hours is up to them.
A teams capacity is an estimate of how much work it can complete in a given time period. The figure is based on the ideal amount of time available within the team. This number is created by adding together the sum total of ideal hours each developer has for the project in the given time period. If there are two developers each working 24 hours/week then the weekly capacity is 48 hours. If you’re using points and not hours you can convert that into points.
An iteration is a period of time where an agile team is going to move through every stage of the development process all the way from planning to deploying an update. Agile teams tend to do one or two week long iterations. Velocity and capacity are used to help teams commit to a certain amount of work to be accomplished during an iteration. Since the team knows how much they’ve completed previously and their potential capacity for work, they are able to determine if the workload they’re agreeing to is reasonable.
Author’s Note: It is important to customize agile development based or your team and the needs of your team. The content here is a suggestion based on what has worked well for in the past.