For many companies, employees are their most valuable and most expensive asset. Labor costs often make up a large portion of a company’s expenses, so it’s important to spend time working on this part of the forecast.
But if you’ve just started a business or are working on a business plan for a new idea, chances are that no one is on the payroll yet and probably doesn’t even know what your staffing plan is. No problem. Exactly why you should be working on personnel forecasts. We walk you through the process so you know what your labor costs will be and how it will affect your business bottom line.
What you need to know to predict labor costs
Workforce forecasting is about planning for people to hire to help run your business. Your goal is to figure out what your monthly salary will be and how it will change over time.
To create a good HR forecast, there are a few things to consider.
your team composition
If you’re already up and running, we need to know your current team and the positions you plan to fill. Thinking about the different teams that make up your business can be beneficial and grow over time.
If you don’t have a team yet, think about the key positions and teams you need to run your business. Need marketing, customer service, or service staff? Think about your business. Who will help you run your business?
employee benefits
For most companies, employee costs are more than salaries. If you offer perks, you’ll want to know what they are and the approximate cost of those perks.
payroll tax obligation
Payroll tax varies by location. If you’re not sure what your payroll tax obligations are, it’s helpful to do a little research or ask your accountant about typical payroll tax rates and requirements in your area.
Other necessary expenses
Many cities and states require additional spending for their employees, such as funding workers’ compensation insurance programs. If you have (or plan to have) employees, it’s important to know what these additional costs will be for your area.
How to forecast labor costs
With the above information in mind, you can start forecasting employee costs and expenses in a few simple steps.
1. List key roles and teams
For small teams, it’s easy to list employees and their salaries.
Companies with teams of people doing similar jobs should consider creating a forecast for the entire team rather than listing individual employees. For example, if your business has a customer service team, you don’t need to list all your customer service employees. Instead, include an entry in the “customer service team” headcount forecast and include the gross salary for that team.
A mix of teams and individuals is fine for workforce forecasting. For example, management team members must be listed individually, but teams can be used to forecast salaries for customer service, manufacturing, engineering, and so on. Importantly, the mix you arrive at accurately reflects your business and helps you easily track and analyze employee costs over time.
If the personnel forecast spans several years, future salary increases and bonuses that may be issued at the appropriate time in the forecast should be considered and included. For example, if an employee made $50,000 the first year she worked with you, and you plan to give her a 7% raise, that employee’s new salary will be $53,500 the next year. increase.
If you are a startup or growing business, you may have plans to hire employees in the future. Be sure to list those future positions and add salaries for the months or years you plan to hold those positions.
2. Definition and separation of direct, indirect and contract labor
There are three types of costs in personnel forecasts: direct labor costs, indirect (or full-time) labor costs, and contract labor costs. Each type affects financial forecasts in different ways. That’s why it’s important to understand how they work and predict each type separately.
Direct labor is related to your sales. Labor is required to produce and sell products. As sales increase, direct labor costs increase. If sales fall, direct labor costs will fall. Direct labor is most common in manufacturing, but can also be used in consulting and other service-based organizations.direct labor is direct cost Influence financial forecast gross margin.
Indirect labor, also known as “regular” labor, includes all salaries paid by a business, regardless of business sales. For example, a company pays its management, marketing, and product development teams regardless of sales. These are the salaries required to run the business on a day-to-day basis. In many companies, all salaries are classified as indirect (or “regular”) work. These salaries are normal expenses and appear on the income statement.
Contract Labor is used to project the costs of people who perform contract labor for your business and are not employees. The reason you want to separate contract workers from direct and indirect workers is so you don’t pay payroll taxes, benefits, or other costs to contractors. Contractors are often their own independent businesses and your business is not responsible for paying additional taxes on contract labor. Contract labor is also an expense and included in the income statement.
3. Calculate the burden rate
In addition to salaries, personnel planning includes forecasting other employee expenses such as taxes, benefits, health insurance, and workers’ compensation insurance. This section of the personnel plan is often referred to as “Other Employee Expenses,” “Employee Overheads,” or “Employee Burdens.”
Know the exact cost of each employee. However, when making forecasts, it is often easier to figure out what percentage of salaries to pay to typical employees. This is called the “burden rate”.
For example, if an employee makes $50,000 a year, they can pay an additional 15% to cover taxes, insurance, benefits, and more. This 15% is the burden rate. Because taxes and other employee expenses often increase with salaries, using percentages automatically increases employee costs when you project salary changes.
A contribution rate of 15% to 25% is considered normal for most companies, but it all depends on the type of benefits you plan to offer and the amount of your local payroll tax.
Completion of personnel forecast
To complete the workforce forecast, add up all labor costs (direct, indirect, and contract) to get the gross salary.
Then use the defined burden rate to calculate the burden. Multiply the direct and indirect labor costs by the burden rate to calculate the employee overhead (burden) cost. Add this number to your total salary to get your total labor cost.
Labor costs appear on the income statement and affect profitability.
headcount budget tips
Budgeting for labor costs may seem complicated, but it’s much easier when you think of it as calculating payroll. All you need is to know who your employees are, what they are paid and what benefits they offer. Here are some other tips to help you predict.
Finding the right mix of individuals and groups
Personnel plans can list both individuals and groups. Perhaps you should list key people and other highly paid employees, but group other departments or groups of people who do similar jobs and have similar salaries. For example, you can list your management team and then group departments such as Marketing, Customer Service, and Manufacturing.
don’t forget to pay yourself
The main mistake many entrepreneurs make is not paying themselves. Don’t forget to include your salary in your forecast. While you don’t have to actually withdraw money from the business in the early stages, it’s important to keep track of any compensation you’re deferring.
Employee Gap Prediction
If you anticipate increasing revenue, you may need to expand your team at the same time. Remember to forecast this growth.
Also, in the early days of a business, a few people often do a lot of work. You could put on his CEO hat and be a marketing director as well as a VP of sales. But it will grow eventually, so you should include your hiring plans for these positions in your forecast.
Part of a larger financial plan
Headcount forecasts are reflected in profit and loss forecasts and directly impact profitability. Labor costs are the largest expense for many businesses, so consider forecasts and adjust timing of planned hires based on revenue projections, profitability, and cash available to meet payroll obligations is important.
Of course, you’ll also want to think about how your business will be organized and what your management structure will be. You can use tools like org charts to capture your workforce plan and add it to your business plan. You can also use the “Team” section of your business plan to discuss any gaps you currently have in your organization with key employees you plan to hire in the future.
The management and organizational structure section of the completed business plan includes information from personnel forecasts and a description of the organization. Along with a complete forecast, readers will have a complete understanding of where the business is today and how they plan to grow their team in the future.
