How to forecast headcount accurately?
Forecasting headcount is easily one of the most important areas of your financial model to get right...
as it will often times be your largest expense, accounting for 50-80% of your expenses.
Getting this calculation right isn't too difficult...once you have the right inputs in place.
Let's go over my preferred method for forecasting headcount accurately.
Method 1: the detailed method - Forecast headcount accurately
This method allows you to get as precise as possible with your headcount projections, as it focuses on forecasting your hires & costs on a hire by hire basis
Start by logging into your payroll software / HRIS, and exporting the details on your existing hires. Be sure to include fields like title, name, start date, salary, department, and employment type
Once you have your existing hires, it’s time to enter in your projected hires. If you don't have this information, this would be a good time to sync with your department heads to understand their plans
Once you have your hires entered, it’s time to calculate your first cost - gross salary. This is the best place to start since many incidental costs rely on this figure (see next section). A simple calc will be to take the full salary and divide by 12… but it’s important to also factor in edge cases, such as if a hire starts / is terminated mid month, or if there is a raise
Gross salary is just one component of a full time hire’s cost… there’s also payroll taxes, health benefits, and payroll admin fees These usually come out to an additional 20% for full time hires, and is null for consultants
Method 2: the simple method - Forecast headcount accurately
This method is more simplistic, and allows you to come up with a rough estimate of what your headcount costs will be.
You can either base this on the historical costs per department (total costs / total hires), or estimate what you feel this will be in the future.
This is fairly simple - you can just enter in when you plan on making a hire in which department, and when. From there, you can simply multiple the costs in step 1 by the new hires in step 2 to get your rough estimate of headcount projections
➡️ Which method is the BEST to use?
I would suggest using both…here’s why. In the first 12-18 months of your forecast, you want to be as detailed as possible. You don’t want to take any chances that what you are forecasting is incorrect, as that can mean a short term impact on your strategy & operations. Anything past that though, is a bit tough to predict… as the future is filled with uncertainties. That’s where I enjoy factoring in headcount in the future years using the simple method