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Anyone have recommendations, best practices on how to budget and plan headcount growth?

Headcount Planning Best Practices

Looking to revamp how we plan and forecast our FTE headcount. Looking for ideas on how you do this in your shops, specifically: - Do you use any planning software besides Excel to accomplish this? - How do you incorporate salary ranges and expected start dates into your forecasts? - How do you interface with HR to get an outlook on new personnel requisitions? - Is there a headcount committee and how involved is Finance in this process? - How you use your payroll system in the process. We're growing pretty rapidly so it's essential we get a robust process in place sooner rather than later. Really appreciate the help and advice in advance

Answers

Michael Filiatrault
Title: Associate Director, Financial Planning a..
Company: Merck
(Associate Director, Financial Planning and Analysis - US Market, Merck) |

Hi James,
Here are my thoughts:
Forecast FTE headcount by salary range using an assumed average compensation. Do not try to forecast by individual person. You'll introduce more error into your forecast.

The people managers should own the headcount and timing of position changes.

To fine-tune your Payroll and Benefits forecast use a series of adjustment factors:
1. vacancy rate: ~6% (your company may differ); remove the vacancy rate for the immediate near term month, but keep for all future months.
2. Average payroll to actual payroll variance (this should be a small consistent factor month to month)
3. Expected overtime
4. Timing adjustments (i.e. if paid on a 2-wk cycle, you'l have months with 2 or 3 paychecks).

This is fairly simple to set up in excel and can be largely automated where you have a one time investment to set up the forecast and then maintenance is updating the FTE headcount by salary grade.

I hope that helps,
Mike

james Morales
Title: Manager, Business Integration
Company: Kohl\'s Department Stores
LinkedIn Profile
(Manager, Business Integration, Kohl\'s Department Stores) |

Thanks Mike, that does help. How do you guys stay in alignment with personnel requisitions from the various departments? Is there a headcount committee you are a part of and/or do you have any driver based FTE headcount calculations you use(i.e for every 1000 customers, we need 1 call center agent, etc)?

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

I especially like Malak's suggestion about promoting from within.

Speaking of planning, check out these two free white papers here at Proformative:

"Five Best Practices for Labor and Expense Planning"
https://www.proformative.com/whitepapers/five-best-practices-labor-expense-planning

You might also want to take a look at this whitepaper:
"5 Must-Have Metrics to Create an HR Value Center"

https://www.proformative.com/whitepapers/5-must-have-metrics-create-hr-value-center

It has some good insights on keeping a lid on headcount via technology. The session featured presentations from Jim Cook, CFO at Mozilla.

I hope it helps.

Best... Sarah

Topic Expert
Malak Kazan
Title: VP, Special Projects
Company: ERI Economic Research Institute
(VP, Special Projects, ERI Economic Research Institute) |

I would add pose these questions to HR and Business Managers: Can anyone be promoted to the "bigger job" to accommodate some of this growth? Is there any human capital "capacity" for this? This way you back fill with lower level positions and promote career growth.

Bill Aiken
Title: Principal & CEO
Company: Abacist Group
(Principal & CEO, Abacist Group) |

Hello James,

When we build a financial Budgeting, Planning, Forecasting model for our clients, we almost always have a Personnel Planning module be part of that model.

We will load key employee level data from the HRIS/Payroll system into the Personnel Planning module such as:
* Name
* Cost Center
* Pay Rates including OT rates if applicable
* Start Date and End Date of employment
* Bonus/Incentive Details when applicable
* Benefit Selections
* Proposed or Forecasted Raises
* Commission Rates (for Sales personnel)

We will combine this data with other global assumptions/inputs regarding payroll tax rates and benefit costs to drive a forecast or budget for existing employees.

We will then create a similar module for proposed new hires but we might replace certain elements of the module/sheet: for example replace name with job requisition number and perhaps add a trigger so that once the headcount is approved, it will impact the broader cost center expense forecast downstream.

From all this data, we can easily calculate various metrics like Headcount or Full-Time Equivalents planned by Dept and Cost Center, and these metrics when combined with other assumptions can drive expenses (e.g., we might know that there are certain IT costs per head, but this cost might vary by employee classification, so we can model all of this).

All of these inputs + various calculations that occur in the background can drive a quality financial forecast for personnel related expenses including salary, benefits and related costs.

Around this modeling, we have helped clients create various processes for approving personnel plans.

For example, in the health care field, we have created a standard staffing model that looks a patient volume and then based on the forecasted patient volume, the model produces a recommended standard staffing plan by position. If the cost center/profit center owner follows the recommended staffing plan, then they don't need to seek special approval for their personnel plan. But if they vary from the standard staffing plan (e.g., replace 1 full-time nurse with 2 part-time nurses), then they must go through a approval process which varies depending on the nature and size of the exception.

You can create this sort of model in Excel, but we have found that it is more efficient to do so in a purpose built Budgeting/Planning/Forecasting application particularly if budgeting responsibility is distributed throughout a broad team. We have found that Adaptive Planning in particular works very well for building models where personnel planning is a key driver to the overall budget.

Jagadeesh Sagayaraj
Title: Mr
Company: test
(Mr, test) |

Hi Bill, Will there be any chance in receiving the template for Headcount forecast, Planning and budget

Carrie Roesner
Title: Controller and VP
Company: Centro
(Controller and VP, Centro) |

I would say that the need to budget/forecast at the individual personnel level depends on how sensitive your budget is to hiring plans and timing. We do budget and forecast at this level as our compensation expense is by far our largest expense in our P&L and really the only item that can move the dial in terms of profitability (besides gross margin). We are also a high growth company so we're hiring a lot which makes our P&L that much more sensitive to hiring and timing.

We use Adaptive Planning and it has a great model that makes it easy to budget by person/hire; you can build something similar in Excel but this module is easier to maintain and it's done for you. Our HR department uses this hiring plan along with discussions with the hiring managers to plan for recruiting as well. We're starting to incorporate hiring/workload metrics to have a better indication of when an hire is actually needed (vs. the manager's gut feeling or purely driven from revenue growth). We also used headcount to budget for benefits, office and IT expenses as well as T&E which can easily be done at this level.

John Argo
Title: Consultant
Company: Independent Advisory Services
(Consultant, Independent Advisory Services) |

When forecasting out a ways, I also like to track expected (company) revenue per employee ratios and benchmark against the industry. This depends somewhat on realistic revenue targets. In small and quickly growing companies, it's easy for this to drift the wrong direction. It helps to set budgeting limits.

Patrick Fleck
Title: CFO
Company: AnswerLab, LLC
(CFO, AnswerLab, LLC) |

If you're growing rapidly, then you need a really solid foundation for your headcount plan. It needs to tie into your key business volume metrics. For example, if we do $X in sales, how many salespeople will be need? Does that jive with a realistic hiring plan and method for assimilating them into the organization? How many service delivery people does that then require? What ratio of supervisory people to staff workers do you then need? What impact will those headcounts then have on your administrative (i.e., overhead) headcounts (e.g., I.T. support, billing, HR, etc.). Sometimes its helpful to mock-up some org charts based on different revenue volumes and go through them with your management team. In theory, they should be leading the way with the growth plan. Unfortunately, however, a lot of people just don't have much experience with fast growth, so you may need to help them visualize it.

Ideally, from a planning perspective, you want to be able to drive your headcounts off of your assumed volumes using ratios, as discussed above. That may be more trouble than its worth in a smaller organization, though. In any event, once you are able to build your headcount levels under a few different growth assumptions, then you need a tool for modeling the multiple scenarios. I will back Carrie up in her advocacy of Adaptive Planning. It allows you to very easily maintain multiple scenarios and it gets you out of the problem of managing multiple spreadsheets (sometimes hundreds!) with their broken links, incorrect formulas, clunky reporting, and so forth.

Good luck!

Alan Lester
Title: Principal
Company: R. Ellis Advisors
LinkedIn Profile
(Principal, R. Ellis Advisors) |

If your processes, systems, activity and people are properly aligned, then when you budget for growth, you know where the headcount will increase.

Topic Expert
Brenda Morris
Title: Board of Directors, Audit Committee Chai..
Company: Boot Barn
(Board of Directors, Audit Committee Chair, Boot Barn) |

James,
We recently implemented Host Analytics Planning & Reporting tool (my second time with this tool). It moves out of excel these processes and allows dynamic and very user friendly budgeting. It includes headcount planning, revenue planning, OPEX, capital budgets and initiative planning. I think it could be a great fit based on what you are looking for. It addresses your headcount planning questions perfectly. Brenda

Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |

James,

Slightly echoing Patrick's input:
I do like to do a bottom-up (ask the managers for a plan, consider turnover, keep the intern-to-hire pipe full just in case), however;
When dealing with complex and rapid growth situations, I also like to have a straight-up metrics based top down. I did $X in revenue with A employees. Next year I will do $Y in revenue, so I expect about B employees.

This isn't my target, as much as it is a very simple planning metric and gives me a sanity check on the proposals for hiring that come in. Oddly, except in sales*, I am seldom hit by managers asking for too many people (none of my current companies have any "empire builders", happily). I'm hit with knowing that we are going to triple revenue in the coming year, and I need some metrics around what that *should* take. We then have a filter to look at the budgets and understand if any of the managers has under-estimated the coming tsunami.

Cheers,

KP

*My sales VPs have always been pretty distinctly aware of the relationship between headcount and revenue, along with diminishing returns.

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