Startup Headcount Budgeting
Your startup's biggest asset is its people. For that reason, it's no wonder that its also often times the biggest expense on your Profit and Loss.
Most of the time, over 50% of your operating expenses are attributed to your headcount.
That's why it's so crucial to understand how to forecast your headcount spend properly.
Forecasting your headcount expense will allow you to make better informed decisions as you plan for your cash burn for the next 12 - 18 months.
Let's cover the best practices to set up a proper headcount forecast.
The first thing to do is to under your current headcount expense. This information can be pulled directly from your payroll software, like Gusto, Justworks or Rippling.
As shown in the example above, once you get an export, start with the most important fields like title, first name, last name, department, start date, salary, and type (the difference between a full-time employee and a consultant). Employees typically cost 20% more than a consultant due to payroll taxes, health benefit, and payroll processing fees.
Once you have a list of employees, you can understand the departments that make up your payroll. The most common ones are general administrative, tech and sales & marketing, but you could have more, like research and development or sales, and marketing as two different entities. Once you have all the information populated for your current hires, you could start adding in your projected hires.
For the projected hires, start by entering the title, department, salary, and start date. You can add new fields like termination date, bonus date, or scheduling a raise
Once you have this information populated, it's time to have some fun. Here is a calculation that shows how much per month you're expecting to pay this employee in gross salaries.
Now, there are a few things to keep in mind. First, if someone starts in the middle of the month, you want to prorate their salary based off their start date. Second, if you terminate
someone, you should apply that same prorating, but for the reverse.
Once you have this information outlined, it's time to zoom out and review how the data looks. Start by understanding how many hires you have per department, then move on to the expenses that you have per department.
Remember what we said about full-time employees? They get paid benefits, taxes, and payroll processing fees.
These calculations should also be done at a departmental level, so you can easily aggregate the data. When you're done, view the information as a whole. How much are you paying your employees as a whole?
So far, we've only been discussing how to project out your headcount expense for the short range.
What if you're developing a budget for five years or 10 years down the line? It's going to become a very tedious and cumbersome to outline every single hire and every single detail.
This is where we come to the next tool which is a way to add employees and consultants in a bulk fashion.
In this example, we outline all the different roles that we plan on hiring on a long-term basis. And then instead of assigning hire dates, we could just punch in dates in which we want these employees to join.
So far, we've only discussed how to put this information in a table view, but tables are not the most visually appealing way to understand data. We could also use different types of views to represent this data. Here is a bar chart showing total hires per month.
Another bar chart may be broken out by quarter. And in this example, we're also showing hiring costs instead of just the amount of hires.
Another example that I like is to understand what the split between each of the departments is.
Lastly, you could even combine these by showing the total cost and the total of number of hires per department.
Startup Headcount Budgeting