Jan 2023

3 Best Financial Practices for Continuous Headcount Planning

Your company's employees are the single greatest resource for company profitability. After all, even the best products or services with excellent finances cannot survive employee mismanagement.

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Ignacio Gassó
Co-founder & Chief Operation Officer
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Improper hiring practices lead to mismatched talent, unbalanced teams, increased errors, and poor-quality control and customer service. And an essential piece of your hiring practices includes proper headcount planning methodologies. And with hiring and compensation costs rising at a staggering rate, it’s never been more essential to nail down headcount forecasts.

This eBook is divided into two parts; the first section will discuss hidden hiring factors that significantly impact profitability. The second section will explain three of the best practices for quality headcount planning.

Section One: Underlying Headcount Planning Factors that Determine Company Profitability

●      Accurately Estimating Proper Staffing Needs

●      The Cost of Experience

●      Inclusion Ratio and Legal Fees

●      The Impact of Culture Fits on Your Bottom Line

Section Two: 3 Best Practices for Headcount Planning

●      Creating a Clear, Informed Goal

●      Building a Balanced Plan

●      Planning for Success After Launch

Section One: Underlying Headcount Planning Factors that Determine Company Profitability

Headcount planning is the detailed and nuanced practice determining how many employees are required to sustain profitability. And since employee compensation and hiring costs are often the highest expense of any business, it's an essential financial practice to master.

The implications of your hiring practices are far-reaching, so here are a few common examples to show the scope of company success.

Accurately Estimating Proper Staffing Needs

Companies must accurately predict the required talent and working hours for smooth operations.We'll cover the cost of experience later on and focus on the cost of over- or understaffing here.

Many companies suffer from understaffing, causing project delays or even full stops. Understaffing is also a top contributor to employee burnout, increasing employee turnover, which is a massive cost to company profitability.

Overstaffing can include hiring more people than required for a job. But in today's economy, strategic lay off shave much more to do with navigating an unpredictable environment than meeting best-case-scenario staffing requirements.

As a result, companies must understand the difference between the staffing requirements for growth during economic highs and surviving economic downturns.

The Cost of Experience

Bodycount is one aspect of headcount planning, but experience is equally important. For example, a seasoned developer or marketer can significantly reduce the time and person-hours to meet sales targets. However, senior talent can cost several times the salary of a junior or intermediate employee.

HR and finance departments must work together to balance the need for experienced talent and the cost of hiring them. In some cases, it may make more sense to hire additional, less-experienced talent to cover the workload of one highly-experienced pro, especially during difficult economic times.

In other cases, it is a necessary investment to maintain top talent and ensure your hold on marketshare and future development.

Inclusion Ratios and Legal Fees

As discussions around gender and race equality continue, the cost of hiring a disproportionate amount of minorities cannot be understated. Some costs of an unbalanced staff are indirect, such as loss of reputation and brand value.

Others are more easily measured in real dollars, like legal fees in discrimination or harassment lawsuits. Headcount planning includes factoring in comparable compensation, so ensure you know how gender and race factor into natural raise structures.

The Impact of Culture Fit son Your Bottom Line

Company culture has proven to massively impact survival and profitability, with strong company cultures increasing profitability by 4x. While this has more to do with company leadership andHR than the finance department, the financial implications of a culture mishire need to be understood.  

Advocate for a profitable company culture to ensure that your forecasts maintain accuracy.Without the right individuals, the numbers will not add up.

Section One Key Points and Questions:

●     Accurate headcount planning is a nuanced process requiring an understanding of hidden and trickle-down effects.

●     Proper staffing: How many people per task, team, or department do you need to avoid burnout without overstaffing?

●     Cost of experience: What level of experience do you need to maintain profitability? When is a more expensive experience worth the investment, and when can you cut costs with a less experienced employee?

●     Inclusion ratios: Are you hiring inclusively?Are you vulnerable to loss of reputation, brand image, or lawsuits based on your hiring practices?

●     Culture fit: Are your hires empowering or inhibiting your company culture? Great talent that creates a countercurrent to culture can cost more money than they generate.

Section Two: 3 Best Practices for Smooth Headcount Planning

With the foundational implications of proper headcount planning, let's move on to three best practices for quality headcount management.

Creating a Clear, Informed Goal

Communication is critical for hiring goals, particularly when successful hiring requires buy-in from multiple departments. The department taking on the new hire, HR, and finance departments are all essential contributors.

For an annual headcount projection, the finance department needs to understand which teams need additional talent. Discussions will require an in-depth view of department performance and coming performance goals.

These discussions will inform department priorities, the required talent level, and a prioritized list of hires. You will also need to determine when the hires will occur, with some teams prioritizing hiring immediate hires over others.

Building a Balanced Plan

After collecting data and needs from your departments, you can create an integrated plan. Start with the best-case-scenario wishlist, then measure against revenue forecasts and other reports to determine the priority list.

Some helpful methods to balance your priorities include top-down and bottom-up approaches.

Top-down headcount planning starts with leadership's prerogatives and works through middle management and team leads. Top-down methods are often easier and faster but use less employee buy-in. However, buy-in is essential for all hiring, so carefully manage efficiency with communication.

Bottom-up headcount planning uses the opposite approach, beginning with team leads or unit managers' input. Your discussions will continue up the leadership hierarchy, trimming or adjusting requests as you go. While more time-consuming, it may increase employee satisfaction, and address needs not easily noticed by upper management.

Planning for Success After Launch

Your work isn't done after finalizing your annual headcount forecast. A successful headcount forecast maintains flexibility, continuously balances the quality of hires based on actual applicants, and leverages new economic information.

An inflexible headcount forecast leaves your company vulnerable to market change and loss of talent.You must be prepared to handle common but unpredictable events, like top talent leaving the company.

You must also maintain a financial culture that even the best methods and reliable data cannot master individual human choices. For example, you can budget for a job offer, but the actual applicants can dramatically impact your estimates.

Finally, the current economic situation requires financial departments and company leadership to consider benchmarks for strategic layoffs and hires. Companies that do not watch for early signs of trouble or opportunity may not have sufficient time to react with minimal consequence.

Section Two Key Points and Questions:

●     The guiding principles behind your headcount methodology significantly impact the functionality of your end report.

●     Creating a clear, informed goal: Headcount planning is an all-hands exercise across department leadership. Without buy-in, nuanced evaluations of productivity, and accurate assessments of future needs, your headcount will not be accurate.

●     Building a balanced plan: Balance requires a birds-eye view combined with a boots-on-the-ground perspective. Combining top-down and bottom-up methodologies will give you the most helpful headcount estimate.

●     Planning for success after launch: The best plans create contingencies and budget for flexibility. Companies that remain true to their goals while rolling with new challenges and opportunities are most likely to succeed long term.

Use the Best Tools to Empower Your Financial Forecasting

While understanding correct principles and methodologies is essential to valuable forecasts and reports, using the best tools will vastly improve your success rates. Great financial analysis software will use robust reporting, real-time updates, quality and access controls, and clear reports for empowered decision-making.

At Cofi, we provide high-quality headcount planning with live integrations, forecasting abilities, and meaningful dash boarding.  

Request a demo today!


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