Headcount accounts for 70-80% of the operating budget at most companies. How this spend actually manifests month by month and quarter by quarter is really important for companies of any size.
While most Finance teams can forecast headcount accurately, it isn't an easy process.
Because it isn’t easy, companies don’t spend time doing it more than once a month or once a quarter.
But it’s a crucial element of managing burn in the overall budget forecast.
Companies with under 150 employees need to manage burn extremely closely. Larger companies that cross the 500/600/1000 employee mark are looking at tens of millions of dollars in headcount spend.
Finance leaders need the capability to forecast headcount in real-time so they can guide business decisions more effectively.
In this blog, we’ll take a look at how to do a headcount forecast, why this process can be problematic, and how to solve it.
What is a headcount forecast
A headcount forecast is a detailed and informed estimate of the future headcount and headcount spend of your company. It is a calculation based on your current butts-in-seats, hiring plan, attrition rate, and compensation that tells you what your headcount and spend will be in the future. Typically, that future date is the end of the fiscal year.
Before getting a detailed headcount forecast, you first need to determine your current effective headcount.
For example, you may have 400 existing headcount in seat, plus 35 pending starts and 10 future terminations. This gives you an effective current headcount of 425 (400 + 35 = 435 – 10 = 425).
Depending on the start dates and the termination dates of the respective employees, you can also calculate burn.
To get your headcount forecast, you’ll need to add in the approved headcount that are yet to be hired and work in your expected future terminations using historical attrition data.
Using our example, let’s say there are 50 additional open roles that haven’t been filled yet and you expect 15 more people to turn over by the end of the year. That gives you a headcount forecast of 460, and you can calculate the burn using compensation, expected start dates, and expected termination dates.
Many companies and Finance teams find that it’s valuable to understand headcount forecasts at more granular levels, like by department, team, or objective.
These two calculations – effective current and future headcount – are critically important to managing burn, which is one of the most important jobs for Finance leaders today.
The components of a headcount forecast
To run an accurate headcount forecast, you’ll need the following data.
- Accurate employee roster - including compensation, department, job details, and other relevant headcount info
- Up-to-date hiring plan - including who’s already been hired, pending starts, open reqs, and all associated compensation and job info for them
- Known termination information
- Attrition rate
- Information on backfills, promotions, and internal transfers - crucial to have for the most accurate financial models
All of the data that you need is accessible, but you’ll likely have to pull it from a variety of sources. That’s where the headcount forecasting process starts to break down.
Why the headcount forecasting process is important… and broken
Headcount forecasting is important because it enables you to join together business objectives, budgets, and hiring plans in a seamless way.
It empowers your leaders to make better decisions about their teams and how to spend resources intelligently. It gives you better insights into the health of the business so you can make adjustments before it’s too late.
An accurate headcount forecast is important because the stakes are high. Poor forecasting leads to missed business goals and delayed revenue. That’s downright scary for growing companies.
In fact, it often leads to the grim reality of increased cash burn and, ultimately, layoffs. When layoffs happen, it’s not simply canceling a software contract or pulling back on ad spend. It affects real lives and real people.
Despite how critical it is to business success and growth, getting a handle on headcount can be a significant challenge. While Finance can plan and manage all the non-people spend with pinpoint accuracy, headcount management tends to be a mess.
Why you need a headcount model
A headcount model is a management tool used to plan, monitor, and analyze the number of employees within an organization. It helps in forecasting and budgeting for staffing needs based on various operational and strategic requirements.
How it can help
The headcount model assists organizations in making informed decisions about recruitment, layoffs, and other HR activities. It quantifies staffing needs to match the operational and strategic goals, ensuring the right number of employees in each department or project. This model is integral for financial planning as it directly affects payroll and other related expenses. It also plays a crucial role in compliance and risk management, helping adhere to labor regulations and avoiding risks associated with improper staffing levels. Through effective use of a headcount model, organizations can optimize their workforce efficiency and maintain financial stability.
It’s hard to pull the data you need
In order to get the effective headcount and spend, you’ll likely need to export data from a variety of systems. One is the applicant tracking system (ATS), where most of your current hiring plan information lives.
Another is the human resources information system (HRIS). All the info about current butts-in-seats exists there.
Naturally, if your team is using financial planning tools, you’ll need to utilize those as well.
The last place where a lot of this data lives is in spreadsheets. Everything that’s not in the ATS or HRIS will likely live in a spreadsheet, or multiple spreadsheets used by various teams. Sometimes Finance manages the spreadsheets, sometimes Talent or HR does.
Decisions happen in different channels without audit trails
Sometimes, these various systems and spreadsheets don’t reflect the most up to date information. In that case, you’ll need to partner closely with Talent, HR, hiring managers, and executives to get the data that you need to forecast headcount.
The problem is that people communicate in different ways. Some prefer Slack, others like email, and still others excel at face-to-face (or Zoom) conversations. Capturing information across these channels is challenging enough, but the underlying issue is that there is no reliable audit trail for any given decision.
For example, the compensation for a particular candidate may change based on market data and negotiations. This obviously impacts the forecast. There may be plenty of communication about this change between the various stakeholders, but it starts in Slack, picks up on Zoom, and finishes in an email to Finance. For the Finance leader trying to track the decision, it’s very challenging.
It’s a heavy lift to reconcile the data and decisions into one source of truth
Even if you have airtight processes around pulling accurate data and communicating efficiently about headcount, joining all of that information together into a single source of truth is still going to be a significant time commitment.
One of our customers used to spend roughly five hours every Friday reconciling headcount data into a master spreadsheet. Five hours every week! Imagine if it were only once a month – it’d be a week’s worth of work.
Not to mention, even the most detail-oriented people are going to make mistakes. But when it comes to the biggest line item on the P&L, little mistakes can equate to big misses in the forecast.
Headcount forecasting with TeamOhana
TeamOhana was designed to simplify headcount forecasting for Finance teams.
Our strategic headcount management platform pulls headcount data from your ATS, HRIS, and hiring plan and joins it together in real-time. This way, you have one source of truth for all of the data you need to do a detailed headcount forecast.
- Accurate employee roster
- Hiring tracker
- Known termination information
- Attrition rate
- Information on backfills, promotions, and internal transfers
Instead of visiting multiple data sources, you can simply login to TeamOhana, review the forecast, and export data as needed. As other folks from Talent and HR update their respective systems, the TeamOhana data automatically updates as well.
You can also set up approval workflows to make sure that any plan changes are approved by Finance before taking effect. The changes are tracked for easy review and auditing.
Overall, forecasting headcount and spend becomes more of a review process than a data gathering and reconciliation process. Our customers are saving up to 250 hours now that they don't have to perform the manual spreadsheets updates.
They’re also able to have more productive conversations across teams, make responsible headcount decisions, and reduce budget variance in forecasted spend.
To learn more about how TeamOhana can help you improve your headcount forecasts, schedule a demo.
Headcount forecasts are important for responsible growth
With uncertainty in the economy and changes happening fast inside your business, it’s critical to be able to forecast headcount accurately and quickly.
It will allow you to make better decisions and serve as the headlights for your company: always looking forward and enabling informed decision-making as changes happen.
