Headcount Modeling: Template Must-Haves and the Best Tool
Headcount makes up anywhere from 70% to 80% of a SaaS startup’s total expenses. Even a slight mistake in headcount modeling for your business can drastically reduce the accuracy of your overall forecasts — and set you up for poor decision-making. Here’s what you need to know to get headcount modeling right.
If you’re a SaaS company, getting headcount right can make or break your company — it’s your largest expense, after all.
But balancing out rapid growth, potentially high turnover, and slow onboarding times is no easy task. The only way to make it feasible is by building a headcount model. And not just any headcount model, but one that’s unique to your company – a model that understands how fast you intend to grow, how many people you need to hit certain revenue targets, and what skillsets are required to roll out new features.
As tight as you make your model, though, no plan is foolproof – especially when we’re talking about the uncertain world of startups. To account for unexpected circumstances, you’ll need scenario planning. When combined with scenario planning, headcount models provide solid targets to follow, while also remaining flexible enough to pivot if things don’t go according to plan.
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Understanding Headcount Modeling
Headcount modeling — also referred to as workforce modeling — provides a comprehensive view of your current and future personnel structure down to role, salary, age groups, and time spent with the company. How does it tell you about the future? By aligning with your roadmap.
Your company’s roadmap is built around specific milestones. An effective headcount model works with your roadmap, asking and answering what your headcount needs will be to reach those milestones at the indicated times. Known as headcount forecasting, it’s best done when you combine your model with tailored workforce metrics and ratios.
The ultimate goal of headcount planning and forecasting is to help you hire the right number of people in the right roles at the right rate. That means balancing out open heads, succession planning, monitoring turnover rates, and implementing new hiring plans. There’s a lot to it, but headcount modeling is essential to protect your people from unnecessary cuts and your company’s cash runway from unnecessary burn.
Types of Headcount Forecasting
Headcount Supply Forecasting
Headcount supply forecasting is all about assessing the availability of talent, whether that’s your current workforce or on the job market.
Headcount Demand Forecasting
Demand forecasting involves 1) determining what tasks are necessary to achieve goals and 2) translating those tasks into hours or specific skill sets.
Obviously, your goal will be to line up headcount supply and demand. Using internal and external data to line up headcount supply with demand is another way we could define headcount modeling.
This is exactly what it sounds like — where you assess your current headcount. You get an understanding of organizational structure — how different departments relate to each other. As-is analysis gives you an idea of what roles you can move and how you can move them without jeopardizing your ability to achieve objectives.
The Importance of Scenario Planning in Headcount Modeling
Since headcount will be your largest expense, it’s important to get it right. If headcount models depended only on numbers, they’d never be wrong. But things aren’t that simple — they’re based partly on assumptions, too. What if your assumptions turn out to be wrong? You’re suddenly scrambling to extend your cash runway, and you run the risk of having to plan for layoffs.
How can you prevent that? With scenario planning. Scenario planning involves asking “what if” questions about market changes, new technologies, and, yes, flawed assumptions.
Say you assumed a revenue growth rate of 15% over the next few months — if your growth rate is actually 5%, would the hires you made based on that false assumption be sustainable?
What if the market completely changes, and a recession hits? What if you misunderstood customer preferences and needed to pivot? Would you have the resources to do that?
The goal of scenario planning is to stress test and intuit the significance of different levers within your business. You find which assumptions would be most devastating to your plan if they turned out false, which can prompt you to base less on those assumptions.
How do you scenario plan? First, you’ll need a baseline – that real-time view of your headcount situation and trajectory, which you get from Mosaic. You’d then apply a specific scenario — say, 15 extra heads by end of year — and see how that affects your business outputs in the model summary tab.
The real power of scenario planning comes in when you can compare the effects of multiple scenarios. You do this by first publishing the scenarios and then navigating to the analysis tab. Add any metrics you want to compare, like expenses or cash balances, and you get a clear basis for decision-making, with obvious indicators of how each scenario will affect your business in the long- and short-term.
Best Practices for Building an Effective Headcount Model
Building a headcount model isn’t necessarily easy. But there are certain things you can do to enhance the accuracy and usefulness of your model.
Start with Your Goals
At the end of the day, your headcount needs are tied directly to your goals. Whether those are specific revenue targets or steps on your product development roadmap, you’ll need a certain headcount for each. That’s why, when projecting headcount, it makes sense to work backwards from your goals. We call this backcasting.
When will you roll out a certain feature? When do you aim to hit a specific revenue target, or make it to that next round of funding? Think to the end of the year, or over a three year timeframe. Get everyone involved – while you in finance may not understand the exact capacity requirements for that new feature, for instance, the engineering team will.
Your goal-directed model can be top-down, or bottom-up.
A top-down approach would be where management sets the business goals – your overarching objectives.
Bottom-up would be where individual departments express their needs to reach these objectives. An argument can be made that individual departments understand their employees better, and have a better idea of the capacity required to hit those goals.
Of course, you can use a combination of both methods. Map your department-level growth plans to fit with the overarching, company-wide goals.
Don't Neglect Metrics
Exact headcount needs aren’t the only thing to keep tabs on – HR needs to contextualize them by keeping track of workforce ratios and headcount metrics. Workforce ratios include metrics like revenue per employee, retention percentage, and ramp rate.
Revenue per employee, for instance, can show you how many employees you actually need to achieve specific revenue targets.
It’s also important to remember that it takes time to onboard new hires. Ramp rate shows how long it takes for new employees to reach full productivity – in other words, to reach that revenue per employee metric. Finally, consider how many employees will actually stay on with the company — your attrition rate.
When you look at ramp rate and attrition, you might realize you need to bring on more heads than you thought earlier than you thought.
Most of us are stuck in the mentality that headcount forecasting is something we only need to do once a year. But that’s not the case — especially in startups, things are moving fast. You should continuously reevaluate your headcount needs based on the latest data. Software that connects with your HRIS provides this.
Account for Full Employee Costs
What about payroll forecasting? Just project salaries and benefits and you’re good, right? Not quite.Think about the fully loaded cost of employees. Consider things like taxes and supplies, commissions and signing bonuses.
You’ll also want to consider attrition rates here, and the costs of hiring new employees. Both will give you a fuller picture of your employee costs, and help you balance out hiring against revenue growth and funding rounds.
Think Beyond Headcount
Consider headcount in the context of other parts of your business plan like your budgeting process and revenue targets. The scenario planning tool can be very useful here. First, you determine how many heads you need, perhaps using a sales capacity model. Then, you put in that number and see the effects on each.
The right software will build a top-level financial model that examines revenue, working capital, expenses, and headcount. The other metrics will update based on your headcount projections, so you can see how those plans affect other aspects of the company.
Be sure to involve departments outside of finance in your headcount planning process. Collaboration helps you get those numbers and skill sets right. Consider leveraging software that establishes a single, centralized source of truth that everyone can refer to, rather than trying to communicate solely through spreadsheets.
This also helps clear up open headcount questions – everyone can go right there to the software and see forecasted new hires and their positions.
Perform Skill Gap Analysis
Headcount is about much more than capacity — it’s also about skills. Perform a skill gap analysis and see what’s lacking. Of course, you also need to think down the road. Are there any skills you don’t need right now, but will need a few months or quarters down the road? Project those hires into your forecast and see how they’ll affect your headcount spend.
It’s important to prioritize hires — which are most important for achieving your goals? If a downturn hits, or growth slows down for any reason, you don’t want to be in a situation where you end up cutting high-priority roles because you made too many lower-priority hires. Things can change very quickly (another reason scenario planning is so important).
Of course, priorities can change over time, so keep that in mind, too.
Prioritizing hires will help you make a more convincing case to the board and other stakeholders why these hires are important if the economic situation is rough — you have the data to back it up.
Headcount Modeling with Mosaic
Like most finance processes, the typical way to generate headcount models is with spreadsheets in Excel. But spreadsheets can lead to all sorts of difficulties: wasted time aggregating data from your source systems, poor collaboration with non-finance stakeholders, version control issues, and more.
The right headcount planning software can make what’s otherwise a difficult balancing act much, much easier by giving you a clear view of financial health. As the situation changes, you can then readjust your plans in line with constantly updating, accurate headcount forecasts.
Instead of forcing you to manually aggregate and clean data your CRM and HRIS, Mosaic goes integrates directly with your source systems. This ensures you always have a real-time view of expenses, headcount, revenue, and working capital — what we call your baseline.
Once you connect with Mosaic, building a model is as simple as going to the canvas, clicking models on your left-hand nav, then clicking generate new model.
Set your actuals through date, which is when your actuals will end and your forecast will begin (for example, if you set your actuals through date to December, your forecast will begin in January).
Once you have your baseline model, click on the Headcount Planner section. You’ll see your current employee layout sourced right from your HRIS.
You can then add new hires to the forecast, with department, role, start date, and salary. You can do this by downloading a template, filling in the relevant details, then importing it back into the model. Or, you can simply click Add New, then hire, and fill out the details within the app.
Any roles you just created can be duplicated, too, so you don’t have to create similar roles from scratch. You then might stagger the start dates to accurately reflect your hiring process.
The final component is the existing employee change forecast. So, if you’re planning to give someone a promotion or a new role, you enter the salary changes and the start date. Or, you could model a departure with that employee’s end date.
Once you’ve done that, you can expand the View Impact tab to quickly see the effects of all the changes you just made over time. On the right dashboard, you can see the headcount breakdown by department.
If you want to see the Headcount Planner in action, request a demo of Mosaic and learn how we can automate some of your most complicated finance workflows.
Headcount Modeling FAQs
What are some of the limitations of using a headcount model for forecasting?
When you’re dealing with people, number-based predictions can only get so far. People may leave for reasons unrelated to job quality, for example.
Of course, headcount modeling on its own can’t predict large-scale economic trends — a downturn could lead to less funding, less ability to hire. That’s one reason it’s important to add context to your headcount models by using scenario planning.