How To Forecast Personnel Costs

How to forecast personnel costs for your startup?

Personnel costs can be one of the most substantial expenses for all businesses. It can be a major factor for startups who are trying to get off the ground, push growth, and hit key milestones.

Budgeting and being able to forecast this category of expenses is vital for your venture’s financial health, ensuring you really have a commercially viable business and fundraising.

So, where do you begin? What should be included? What expenses might you be overlooking in these calculations? How can you keep your costs down?

You Are Going To Need A Team

According to many successful entrepreneurs, companies are really just teams of people.

You are not going to succeed at building a big company, not going fast, on your own.

You may be able to create a nice side hustle or little lifestyle job on your own. Though, if you want to build a true hypergrowth startup that has the potential to go really big, then you need people. Not just customers, investors, and advisors, but employees and contractors too.

Forecasting Personnel Costs

How do you determine your and forecast personnel costs?

There are several key moments that require founders to give attention to creating forecasts for personnel costs. Below are some of the most common.

Determining Your Startup Cost

This involves determining your immediate or initial personnel needs to get your company set up and off the ground.

Who do you need to bring in to get started and begin operating?

Startup Fundraising

You’ll need to revisit your personnel costs when calculating and planning your fundraising ask and specifically for formulating financial forecasts for pitch decks.

Here the focus is on the personnel you will need to get to the next milestone or fundraising event, typically six to 18 months from closing this round.

This is often one of the main categories of spending when raising capital. Be sure you can cover these financial needs. As well as being able to forecast your costs for the next one to three years.

Business Planning

Your initial and long-term business planning should include strategies to forecast personnel costs. You know how big you want and need to go. You know at least some of the roles and the size of the team you will need to get your product developed, in play, and to the scale, you envision for your company.

Resizing Your Business

Whether it is due to industry changes, macroeconomic changes, technology, and consumer behavior trends, arcs in your business growth, or crisis and cycles like pandemic lockdowns or depressions, there is often a need to reevaluate and recast your personnel costs.

You may need to scale back your team substantially temporarily or for a long period. You may need to shift your headcount to different types of roles and departments, i.e., from development to sales to customer support. Or from on-premises staff to remote teams, and teams in new geographic locations.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Two Ways To Forecast Personnel Costs

There can be two approaches to determining your personnel costs.

Reverse Engineering Your Goals

One way to determine your overall personnel costs is to reverse engineer them according to your end vision and big goals.

For example, if you want to build a $10B company, with X sales units and customers each year, how many people will you need to achieve that and service that?

You can go further and be more detailed by reverse engineering how many employees and other people you will need at each major stage along the journey.

This is especially useful when you know you want to raise outside capital and are determining how much new money you will need at each round.

Current Needs & Budget

The other way to approach this is to look at what current budget you have available, and your immediate needs.

If you are not in a fundable state or do not want to take on debt or equity investors, then you have to work within the budget you have.

What roles must you fill to get to the next stage, to break even, or to be in a position where you can better attract outside money?

Another factor here can be whether you are taking a top-down or bottom-up approach to hiring and recruiting.

Some entrepreneurs start out trying to do everything themselves. Then slowly begin hiring and delegating from the bottom up. Beginning by letting go of small tasks, and bringing in assistants and others that are essential to free up their time.

More experienced founders and repeat entrepreneurs, take a top-down approach. They hire executives and department heads first. Then empower those leaders to determine the team they need underneath them.

Some have even said that in addition to a CMO or CRO, one of their first hires may be an HR manager. This can help streamline and delegate the process of determining and forecasting your personnel needs as well.

What Are Personnel Costs?

There are two ways to forecast personnel costs.

There are both direct and indirect expenses associated with bringing in any type of team member.

Direct costs may be the actual salary and other direct compensation paid to your employees and contractors.

Then there can be many indirect costs associated with recruiting, managing, and letting people go. These can often be overlooked, which becomes a big problem when it comes to making ends meet and staying on budget.

What May Be Included In Personnel Costs

Among your direct and indirect personnel costs may be the following.

Recruiting

Recruiting can be extremely expensive. If you are still using headhunters and recruiting companies, the costs can be high. Incentives and interests are not always aligned between the various stakeholders.

This also happens to be an area where you can achieve significant savings if you are smart about it.

Interviewing & Hiring Processes

This can be far more expensive than most new founders realize.

Some companies create extensive interview and hiring processes. This can include multiple interviews in multiple locations with different team members. There may be several rounds of hoops to get through. As well as compensation negotiations.

Onboarding and initial training may fall into this bucket as well.

Hiring the right people for the right roles is important. Finding good culture fit is important. Yet, overdoing it can be an expensive drain on your business, and you.

Do not just follow outdated tradition and the status quo, just because others have done it that way in the past.

You may find attracting and securing the best talent requires a very different approach today. You may need to make it much easier and pull them to you, versus trying to put them through bootcamp to get in.

This is especially true for hiring online and remote team members, where you can simply do a paid test run up front instead.

However you decide to do it, be sure that you are accounting for all the labor and expenses involved in this stage, including your own time.

Training

Training can be a substantial expense.

This can range from initial onboarding and testing to ongoing training, keeping up with new software being implemented, ongoing personal development opportunities, and formal education. This can range from sponsoring and attending weekend seminars to MBA programs.

Sign On Bonuses

Trends, expectations, and what’s enough change over time as the employment market and economy do.

However, attracting the best talent can require significant sign-on bonuses, even for contractors and commissioned staff. It’s not just about competing for them, but also covering their real expenses, risk, and time to catch up with income in the move.

If you are asking employees to relocate, then that is also a commonly covered expense, including actual moving costs, temporary corporate housing, and a down payment on a new home. In down real estate markets, this may also require helping to bail them out of their old house.

Salaries

This is one of the most obvious personnel costs. It may be annual, hourly, monthly, per diem, or on some other basis.

Even as you’re learning more about how to forecast personnel costs, you’ll also want to know how to hire the right team and position it in the pitch deck. Check out this video, where I have explained in detailed how that’s done. You’re sure to find it helpful.

Benefits

Benefits can be a huge expense. This can run the gamut from healthcare to paid time off, bonuses, office perks (and office space), performance-based pay, and more.

Payroll Tax

You may also have payroll taxes to pay. Often due quarterly, in lieu of your annual filing and payments due with the IRS.

Workers Comp

Will you need to contribute to a workers comp plan to pay unemployment for any salaried workers you have to fire or let go?

Legal Liability

Are you creating a budget and reserve account for all the potential legal risks of hiring in-house employees? Which can range from slip-and-fail accidents to malicious discrimination complaints. Remember to forecast personnel costs like these.

Equipment

In the old days, employers used to have to pay for office space, computers, and phone lines for staff. However, most of this can be skipped with a remote team unless you need them to have specific subscriptions or software access.

Overlooked Personnel-Related Costs

Commonly overlooked personnel expenses can also include:

• Self-improvement and leadership training
• Coaching
• Team building retreats
• Travel, accommodation, or just labor hours for meetings and all-hands events
• Budgeting for wage inflation
• Your time managing these people

These are all very important things. Do not think you can just scrap them to save the money. It may be better to have less staff, but invest more in these things, rather than more hands that are weaker. And less connected because you over-extended, without a sufficient budget for them.

How To Reduce Personnel Costs

Here are some quick tips and alternatives for reducing personnel costs.

Freelance & On Demand Contractors

It should now be obvious, that in most cases today, it is far more cost-effective and efficient to use remote contract teams, rather than in-house employees.

There may be rare cases in which you need people in a lab or manufacturing facility. Outside of that, it is probably just a luxury. One you may not be able to afford if you want to remain competitive. Though some large incumbents are also dealing with the fact that they have a lot of empty real estate, can’t attract team members strong enough to work on their own, or are afraid of losing legacy tax breaks.

Combine Roles

Combining roles, or taking a top-down approach where jobs are broken out as you grow can also save a lot. Too many early-stage startups end up with three or five employees or agencies doing what one strong team member could, at a fraction of the cost and time spent on management and coordination.

Use Your Data To Optimize

Track and analyze your data. This way, you can constantly, accurately determine your personnel needs and optimize. For example, contracting and expanding phone reps based on when there is the most activity.

Alternative Compensation

Can you offer equity and stock options as part of your compensation? Strategies like these can help you forecast personnel costs and work out how to lower them.

You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.