Headcount is the largest and most important expense for most companies. On average, headcount makes up ~70% a business’ total operating expense (OpEx) and as Walt Disney famously said, “You can dream, create, design, and build the most wonderful place in the world, but it takes people to make the dream a reality.”
Unfortunately, workforce planning is not only one of the most important undertakings for a business, it’s also one of the hardest to get right. Inaccurate headcount forecasts and models built on unreliable or incomplete data can lead to bad hiring timelines or resourcing decisions and have catastrophic ripple effects.
So how do you ensure you’re forecasting and modeling headcount accurately when your business and staffing needs are constantly evolving? You make sure you’re working with accurate real-time data and use a tool that was purpose-built to unite Finance, HR, and Talent teams.
What is a headcount forecast?
A headcount forecast is a detailed and informed estimate of your company's future headcount and headcount spend. It is a calculation that tells you what your headcount and spend will be in the future based on your current employees (butts-in-seats), future hiring plan, attrition rate, and compensation.
Forecasting headcount is essential for monitoring business cash flow and burn rate. It’s typically done as part of the headcount planning cycle either through the end of the current fiscal year, for the next 12 months, or for the next 24 months.
As Krishna Vallabhaneni, CFO of ProcessMaker and former VP of Finance at GRIN, explained on our podcast, many companies “have an annual planning process, but then they will refresh it either monthly or quarterly.”
What is a headcount model?
A headcount model is essentially a more flexible version of a headcount forecast. Where forecasting is done to try to predict what will actually happen in the future based on your current data and headcount plan, a headcount model is used to assess the impact of different scenarios. Headcount modeling helps Finance, HR, and Talent Ops teams make better strategic decisions and is an essential step in the headcount planning process.
How to forecast headcount with formulas and examples
In order to accurately forecast headcount you first need to ensure you have up-to-date current headcount and hiring data. The easiest way to do this is to use a headcount management platform that integrates with your Human Resources Information System (HRIS), Financial Planning and Analysis (FP&A), and Applicant Tracking System (ATS). Once you have all of your data laid out, you can calculate your current headcount and burn and create an accurate headcount forecast.
Gather data
Compile the following information and company metrics:
- An accurate employee roster including compensation, department, job details, and other relevant headcount information
- An up-to-date hiring plan including who has already been hired, pending starts, open reqs, and all associated compensation and job information for each position
- All known upcoming terminations
- The average attrition rate for your company or if you’re doing a department-level forecast, the average attrition rate for that department
- All upcoming backfills, promotions, and internal transfers
If you aren’t using a headcount management platform like TeamOhana, you’ll likely need to gather this data from your FP&A, ATS, and HRIS or other software and manually enter it into a spreadsheet.
Calculate your current headcount
To get your current headcount you take the current number of butts-in-seats, add pending hires and subtract terminations.
For example, let’s say you currently have 400 active team members, or existing headcount. You have 35 pending new hire starts and 10 future anticipated terminations. This gives you an effective current headcount of 425 (400 + 35 – 10 = 425).
Calculate your burn
Depending on the start dates and the termination dates of the respective employees, you can also calculate burn. To calculate gross burn rate, simply add up all of your operating expenses, including salaries, software, utilities, rent, etc. When calculating gross burn for future months, it’s best to factor in start dates for pending new hires and end dates for terminations because this will significantly impact your cash flow.
You can also take this one step further and calculate your net burn by subtracting your monthly operating expenses from your revenue for a given period.
Create your forecast
There are different types of forecasts, and the precise formulas for these can vary depending on the size and type of business you’re in. But here is a basic formula for forecasting future headcount spend.
Add approved headcount that are yet to be hired (not pending starts, but new approved hires) and anticipated terminations or churn (you can use historical employee turnover rates) to your current headcount. Going back to our example above, let’s say we have an effective current headcount of 425. We have 30 additional open roles that have not yet been filled and based on our historical attrition rate, we expect 15 employees to turnover by the end of the year. This would give us a headcount forecast of 440 (425+30-15=440) at the end of the year.
Many companies and Finance teams find that it’s valuable to understand headcount forecasts at more granular levels, like by department, team, or objective.
Types of headcount forecasting models
There are six major types of headcount models, including as-is, what-if, supply, demand, sales capacity, and succession planning models.
1. As-is headcount model
The as-is headcount model is a detailed analysis of your current headcount, pending or planned hires, terminations, churn, and org structure. The as-is headcount model is the foundational model. You need this before you can conduct forecasting and model future scenarios.
2. Headcount supply model
The goal of headcount supply modeling is to determine what your current workforce (your supply) is capable of and when you will need to hire new employees or contractors. A supply forecasting model can be tied to revenue or production output.
For example, a service business such as an ad agency could use a headcount supply model to ensure they had enough designers, writers, etc. to fulfill all of their current clients needs. The model could be adjusted to determine how many new clients the agency could bring on if they increase their number of employees within different departments.
3. Headcount demand model
Headcount demand modeling works backwards from high-level business goals or revenue to determine if, when, and how you’ll need to increase your workforce to meet demand over time.
For example, if you know your company wants to close $300k in new MRR in Q2, you’d use a headcount demand model to figure out how many more people you need to hire to achieve that goal. You might need to hire an additional marketing team member to increase lead generation, or you might need to simply increase your ad budget. You may also need to hire an additional sales rep or even a customer success rep.
Companies also consider the general market and availability of new hires when doing demand modeling. If you know you need to hire a new engineer and have them start by June 15th, you’ll need to factor in average time to hire for engineers at your company and in your market to determine when to open the role and post the job notice.
Krishna Vallabhaneni shared how the headcount forecasting process worked while he was the VP of Finance at GRIN on our podcast. Vallabhaneni told us, “What we do is we actually start with planning revenue. Like with many subscription businesses, especially startups that are not cash flow positive, you need to really understand what your revenue growth is gonna be in the next quarter, next six months, and even probably two or three years down the line. And getting a refreshed view of that every month, every quarter is really important because the way I think about it is, the more revenue you have, the more cash you're gonna generate, and therefore, the more people you can hire, right?
…You have to get the pieces to kind of fit together so you understand if I add 20 new roles next year or next quarter, how does that impact our cash runway? And what is the sensitivity of sales needing to hit their number?”
4. Sales capacity model
Sales capacity modeling is a type of demand modeling specific to your sales function. Finance, Sales, and Talent teams rely on a sales capacity model for top-line planning and to determine when and how to grow the sales team.
A good sales capacity model factors in historical data, including typical sales rep ramp rate, average number of closed won deals per rep, and anticipated demand to determine future headcount needs. For large companies with spread out sales teams, it’s also important to factor in geolocation. For example, average closed won deals (both dollar value and number of closed deals), revenue quotas, and even ramp time can vary greatly in different markets.
5. What-if scenario analysis
What-if scenario models help companies assess the potential impacts of different business decisions. These are one of the most open-ended types of headcount models, where you take your as-is or current workforce model and use historical data to project the impact of different potential future scenarios—commonly a best case, worst case, and most likely case.
Leadership teams, hiring managers, and department heads can use what-if scenario models to inform strategic decision-making. For example, you could use scenario models to project the impact of an org restructure or the creation of a new department. An example of a worst-case scenario would be assessing the impacts of layoffs on profitability.
6. Succession planning model
The goal of succession plan modeling is to ensure leadership and key roles within a company can be filled quickly. If a C-Suite executive or VP leaves your company, how will you quickly backfill their role? Succession planning helps companies identify current team members who could grow into more senior roles and even identify opportunities for the company to invest in those candidates’ growth.
Succession models can also help companies determine when to create or hire for brand-new leadership positions. For example, a 50 person company might have one or two account executives who report directly to the CEO, but a 500 person company will likely need some combination of a Head of Sales, VP, Sales, and/or Chief Revenue Officer. Succession planning models can help businesses determine the best timeline and path for filling those senior positions, especially when those roles will be filled by a promotion or internal transfer.
Common challenges of headcount forecasting and modeling
Teams typically face three major challenges when forecasting and modeling headcount—unreliable data, inefficiency, and lack of control.
We’ve talked to a lot of companies about the challenges of headcount forecasting here at TeamOhana, and unreliable data is almost always one of the first pain points people mention if they aren’t using a purpose-built headcount management software. If the data you need to even get started building a headcount forecast is siloed in multiple systems like your FP&A, HRIS, and ATS software, you’re going to have to pull that data into a spreadsheet. And the minute you do that, the data is no longer 100% reliable. How can you create an accurate forecast when you’re not even sure the data you exported a few hours ago matches what’s currently in your HRIS or ATS?
Using spreadsheets breeds inefficiency. Spreadsheets don’t support easy collaboration, especially when you have multiple teams or departments involved. And as anyone who has ever done headcount planning or forecasting in GSheets or Excel knows, it requires a ton of manual work on both ends—first, to extract the data and format it without making any mistakes, and then to reconcile the data when you’re done.
Control is another major challenge when it comes to headcount forecasting, where confidential and sensitive personnel information is necessary for certain people to access but not others. You need to be able to restrict visibility and access while still making it easy to collaborate.
The easiest and fastest way to forecast and model headcount
The easiest way to forecast and model headcount is using TeamOhana. We’re biased, of course, but it’s because we created the only headcount management solution purpose-built to unite Finance, Talent, and HR teams and truly simplify headcount forecasting. We’re passionate about ending the headcount headache once and for all.
Here’s a quick peek at how easy headcount forecasting is with TeamOhana:
TeamOhana integrates directly with your FP&A, ATS, and HRIS software to ensure you’re always working with accurate real-time data and you don’t have to spend hours reconciling data.
Our enterprise-grade security features and customizable access controls ensure everyone on your team can access the information they need without exposing data they shouldn’t see. These are just a few of reasons best-in-class companies including SeatGeek, Postman, and Docker are using TeamOhana.
Daniel Fulmer, Director of Finance at FusionAuth, started using TeamOhana in his previous role as Finance Director at Invoca. He said this of TeamOhana on our podcast, “The fact that it [TeamOhana] could integrate with our HRIS and Greenhouse and give us forecast information was a huge win. And something that we would spend hours and hours a month managing and still not even quite getting right….
We can get real-time information now without needing to check Greenhouse and see if an offer has been sent and add that into a spreadsheet has been great… It made our planning process a lot smoother and we were able to get TeamOhana up and running in a couple weeks and fully linked to Namely and Greenhouse. So we're basically using it to get all the right information and it added a lot of confidence going into our plan that we weren't missing anything.”
We’d love to show you how TeamOhana can simplify your headcount forecasting, modeling, and planning. Request a demo today!
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