For a software company, personnel-related expenses are usually the largest operating expense by far on the P&L (Profit and Loss Statement). As a large expense, you’ll want to forecast this as accurately as possible. I’ll walk you through how I create detailed headcount forecasts.
You can download the Excel model I used in this example at the bottom of this post.
When forecasting operating expenses, I follow the 80/20 rule on where I spend my forecast energy. If it is a large expense item, I’ll spend 80% of my time on those expenses or expense categories. When setting up my model, I’ll take the time to build forecast automation and detailed calculations into my spreadsheet model.
Small or Large Company?
I forecast headcount by position and name. We are still of the size where this makes sense and it is not tedious to maintain. However, if you have large labor pools, say Pilots or Mechanics in my former life or several hundred sales representatives, you’ll obviously not want to forecast at the named person level. You would be in tears trying to track this.
Rather, you will forecast this labor in aggregate using average wage rates, headcount levels, productivity, and so on. And you’ll want to include an open headcount assumption so that you don’t overstate your forecasted labor expenses.
Headcount Model Setup
I use one tab in my spreadsheet where I forecast all named positions by department. This tab is my labor “HQ” and all wage and medical changes in this tab flow out through the entire forecast model. I group each department together on rows for ease of use. On the left side of the tab, I have my inputs. On the right side, my outputs (wages & taxes, benefits, FTE’s physicals).
Headcount Model Inputs
My columns on the left include Department, Roster (Name), Title, Full/Part-time, Wage Rate, Hours, Tax Rate, Benefits Rate, Start Date, and End Date. I’ll explain these in detail below.
Department – the employee’s department
Roster – obviously, the name of your staff
Title – again, just their title
FT or PT – this field is in calculating the correctly monthly wage expense
Hours – number of hours worked per month for part-time employees
Payroll Taxes – current employer’s wage tax rate
Medical Rate – I forecast medical expenses by head. Often, you see medical expense as a percent of wages which is not really accurate. It usually doesn’t matter if that staff is earning 200K or 20K, your medical premiums are set under a fully-insured plan. If self-insured, I take total medical expenses and the number of participants to determine an average rate per head.
Start Date – start date of the position.
End Date – end date of the position
The only required fields are Wage Rate, PT/FT, Hours, Taxes, Medical Rate, and Start and End Date. I’ve built date logic into my model so that if an employee starts on the 17th of the month, for example, the model calculates the wages for the remaining days in the month. Same goes for the end date.
Also, aggregate merit and wage inflation increases can be easily forecasted on its own row.
Headcount Model Output
With my inputs complete, my headcount model will forecast my monthly wages, physical headcount, FTE’s (full-time equivalent), and medical expenses. FTE’s are determined by how many days in the month the employee worked.
At the very bottom of the model, I have a total row and use the SUMIF Excel function to sum these outputs by department.
Excel Formulas Used
SUMIF, IF, AND, EOMONTH
Headcount expenses often represent the largest expense on a software company’s P&L. It’s important to spend the time to develop a detailed headcount forecast model so that not only your wage forecast is accurate but also your cash flow forecast.
In any software company, there are always new hires, terminations, and transfers so make your forecast life easier with an automated Excel model. I can literally update wage expenses in ten minutes or less and be accurate to the day (assuming our hiring managers are not too optimistic!).
Please let me know if you have any questions or comments. I would love to hear feedback? How do you forecast headcount or personnel-related expenses? Comment below.
UPDATE (Dec-16) – I added flexibility to the model so that you can forecast the same position multiple times on the same row. Instead of a row for each hire, you can enter the number of positions for that role. Much easier to scale.
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