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How To Forecast Headcount & Salary

Wanted to get your thoughts on how your company approaches budgeting and forecasting for headcount/salary planning. At our company we forecast Authorized headcount, attrition/vacancy and calculate a net headcount for each department in each month of the forecast. We have 65 departments, 980 net heads, about $150M in revenue. The process can be laborious, inefficient and inaccurate. Budget meetings often result in a debate about division heads being very conservative with their assumptions on vacancy so that the net headcount and salary are conservative. We're considering having the divisions just budget the Authorized headcount and associated salary. Corporately we would assume a vacancy/attrition headcount and salary rate. Overall corporate would net to the realistic forecast of headcount and salary. We could also allocate on a monthly basis the corporate assumption of vacancy to the divisions that actually realize vacancies. Any other approaches?

Answers

Topic Expert
Alan Hart
Title: Consultant
Company: Pacific Shine Group
(Consultant, Pacific Shine Group) |

Depending on the industry you’re in and the software solution you use for planning and budgeting, you can plan and budget forecasted headcount using system drivers which works especially well in manufacturing but I was also successful in implementing it in service organizations, and even software publishers where sales and marketing cost is a large percentage of the total budget.

The idea is to have key components of the budget, like sales, drive the forecasted employee headcount in certain departments. This becomes an integral part of the approved budget in that department (or any other business unit or reporting entity). Finance, then, can assign the forecasted payroll and payroll related costs via existing approved rates for the various positions. This works particularly well in systems where there is a dedicated personnel module where all forecasted departmental headcounts plus individual employees’ (or groups of employees) payroll and related costs are present. The headcounts in certain department may be linked (via system drivers) to forecasted sales or any other meaningful driver, and with the associated costs you get the total budgeted payroll and payroll related costs which will then roll up the organization hierarchy.

With a dedicated personnel module as part of your overall budget solution, you decide which employees or employee groups should have their headcounts derived from these drivers. Other employees or group of employees can be entered as a standalone number (or varying numbers throughout the budget period). This approach helps streamline the personnel budget, including less review / approval cycles.

The forecasted headcount in each reporting unit will be net of attrition during the budget period, a factor that HR must be well informed of when planning recruiting activities.

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

Proformative has a free whitepaper titled,

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

It has some great insights on this very topic.

Best... Sarah

Didier Jupillat
Title: CFO
Company: Atlantic.net
(CFO, Atlantic.net) |

I agree with Alan: headcount is best projected based on external and internal drivers.
A typical driver is Sales:
- In terms of dollars, projected sales will tell you the # of sales reps needed to achieve those numbers. Larger volumes or product variations may also bring the need for more suppliers and vendors, an therefore for an additional A/P specialist or dedicated purchaser.
- In terms of # of customers, twice as many customers will require anywhere between 1.25 and 1.75 times as many support employees in a software company for example. More customers will also mean more invoices to process, so at some point an additional A/R specialist.
Another driver will be the headcount for those departments requiring administrative support: HR will need more people to manage more employees, and an office manager may need to be added. Same thing for IT, as they will have to support more users.
Now of course you will need to talk with each department head to get an idea of their respective "multipliers". And once the budget is put together, the executive team will probably tell you it's too high and each department will still have to fight for their respective headcounts! But at least your drivers will be in place and it will be easier for you to "tweak" the multipliers.

Anders Liu-Lindberg
Title: Regional Finance Business Partner
Company: Maersk Line Northern Europe
LinkedIn Profile
(Regional Finance Business Partner, Maersk Line Northern Europe) |

I would say the most important thing is not to overcomplicate it. Ask your divisions to forecast what they have approved of headcounts and if anything a wishlist for new headcount. Then you can add assumptions on vacancies etc on top. Budget meetings about headcount or other resource allocation topics are never productive and the budget you end up with will not be very useful for anything.

Harold Torman
Title: Director Financial Planning & Analysis
Company: Sekisui Diagnostics
(Director Financial Planning & Analysis, Sekisui Diagnostics) |

What we have done is to hold HR accountable for the headcount forecast. The HR Business Partners work with their clients each month to determine short-term and long-term hiring needs. HR consolidates the information, reviews it with senior management and provides FP&A the authorized headcount to use for forecasting/budgeting purposes. FP&A adds a high level attrition estimate. With HR now in the loop, we've experienced much higher accuracy in our headcount and salary forecast.

Ben Murray
Title: Vice President and CFO
Company: Cartegraph
(Vice President and CFO, Cartegraph) |

Do you budget by head or aggregate the labor pools?

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