For many businesses, the people you employ are your most valuable—and most expensive—asset. Payroll often makes up a large portion of a business’s expenses, so it’s important to spend some time working on this portion of your forecast.
But, if you’re just starting out or are working on a business plan for a new idea, you probably don’t have anyone on the payroll yet and maybe don’t even know what your staffing plans are. That’s OK and the exact reason why you should work on a personnel forecast. We’ll take you step-by-step through the process so you can figure out what your payroll costs are going to be and how that will impact the bottom line of your business.
What you need to know to forecast personnel costs
A personnel forecast is all about planning for the people you employ to help run your business. Your goal is to figure out what your monthly payroll will be and how that may change over time.
To create a good personnel forecast, you’ll need to have thought about a few things:
Your team makeup
You’ll need to know your current team, if you’re already up and running, and the positions that you plan on hiring for. It’s helpful to think about the different teams that make up your business and they may grow over time.
Now, if you don’t have a team yet, think about the key positions and teams you will need to run your business. Will you need marketing, customer service, or service staff? Think about your business, who will help you operate it, and when you’ll likely hire them.
For most businesses, the cost of employees is more than just salaries. If you offer any benefits, you’ll want to know what those are and what the rough costs of those benefits are.
Payroll tax obligations
Payroll taxes vary by location. If you don’t know what your payroll tax obligations are, it’s useful to do a little research or ask an accountant about the typical payroll tax rates and requirements for your region.
Any other required costs
Many cities and states require additional spending for employees, such as funding a workers compensation insurance program. If you have (or are planning on having) employees, it’s important to have a sense of what these additional costs might be for your region.
How to forecast personnel costs
With the information above in mind, you can begin forecasting employee costs & expenses in just a few simple steps.
1. List out key roles and teams
If you have a small team, you can simply list out your employees and their salaries.
For companies with teams that are made up of people who do a similar job, you should think about creating a forecast for that entire team, instead of listing out each individual employee. For example, if your business has a customer service team, you don’t need to list out every single customer service employee. Instead, just include an entry on your personnel forecast for the “customer service team” and then include the total salaries for that team.
It’s OK for your personnel forecast to have a mix of teams and individuals. For example, you should list out the members of your management team individually, but then you could use teams to forecast payroll for customer service, manufacturing, design, etc. The important thing is that the mix you land on accurately reflects your business and is useful for you to easily track and analyze employee costs over time.
If your personnel forecast covers several years, you’ll want to think about and include future raises and bonuses that may be issued at the appropriate points of your forecast. For example, if an employee is making $50,000 in the first year that they work with you and you plan on giving a 7% raise, then their new salary would be $53,500 the following year.
If you’re a startup or a growing business, you may have plans to hire employees in the future. Be sure to list those future positions and add their salaries in the month or year that you plan on filling those roles.
2. Define and separate direct, indirect labor, and contract labor
In a personnel forecast, there are three different types of expenses: direct labor, indirect (or regular) labor, and contract labor. Each type impacts your financial forecast in different ways. So, it’s important that you understand how they function and forecast each type separately.
Direct labor is associated with your sales. It’s labor that is required to produce your product or make your sale. If sales go up, your direct labor costs go up. If sales go down, your direct labor costs go down. Direct labor is most common in manufacturing businesses, but can also be used in consulting and other service-based organizations. Direct labor is part of your direct costs and impacts your gross margin in your financial forecast.
Indirect labor is also called “regular” labor and includes any salaries that your business will pay regardless of what sales your business makes. For example, a business will pay the salaries of its management team, marketing team, and product development team regardless of what is going on in sales. These are salaries that are needed to run the business on a day-to-day basis. For many businesses, all of their salaries are classified as indirect (or “regular) labor. These salaries are regular expenses and will show up on your profit and loss statement.
Contract labor is used to forecast expenses for people who do contract work for your business and who are not employees. The reason you want to separate out contract labor from direct and indirect labor is that you don’t pay payroll taxes, benefits, or other expenses for contractors. Contractors are often independent businesses of their own and your business is not responsible for paying additional taxes for contract labor. Contract labor is also an expense and will be included in your profit and loss statement.
3. Find your burden rate
In addition to salaries, your personnel plan will include a forecast for other employee expenses such as taxes, benefits, health insurance, worker’s compensation insurance, and more. This section of your personnel plan is often called “other employee expenses”, “employee overhead” or “employee burden”.
You could figure out what the exact costs are for each employee. But, when forecasting, it’s often easier to figure out a percentage of salaries you’ll pay for the typical employee—this is called the “burden rate”.
For example, if an employee’s salary is $50,000 per year, you might pay an additional 15% to cover taxes, insurance, benefits, etc. That 15% is the burden rate. Because taxes and other employee expenses often grow with salaries, it’s useful to use a percentage so that as you forecast salary changes, your employee burden expenses will automatically rise accordingly.
For most businesses, a burden rate of 15% to 25% is considered normal, but it all depends on what kinds of benefits you plan on offering and what your local payroll taxes are.
Completing your personnel forecast
To complete your personnel forecast, you’ll add all of your labor costs together (direct, indirect, and contract) to get your total salaries.
You’ll then calculate your burden using the burden rate that you defined. Multiply your direct and indirect labor costs by your burden rate to figure out what your employee overhead (burden) costs are. Add this number to your total salaries, and you’ll know your total personnel costs.
Your personnel costs will show up in your profit & loss statement and impact your profitability.
Tips to budget for personnel
Personnel budgeting might seem complicated, but it’s much easier when you just think of it as calculating your payroll. You just need to know who your employees are, what you pay them, and what kinds of benefits you provide. Here are a few other tips to help you with your forecast:
Find the right mix of individuals and groups
In your personnel plan, you can list both individual people as well as groups. You’ll probably want to list out key people and other highly paid employees, but group together other departments or groups of people that do similar jobs and have similar salaries. For example, you might list out your management team, but then group together departments like Marketing, Customer Service, and Manufacturing.
Don’t forget to pay yourself
A key mistake many entrepreneurs make is not paying themselves. In your forecast, don’t forget to include a salary for yourself. You don’t need to actually take the money out of the business in the early days, but it’s important to keep a record of the compensation that you are deferring.
Forecast for employee gaps
If you are forecasting revenue growth, it’s likely that you’ll need to expand your team at the same time. Don’t forget to forecast for this growth.
It’s also common in the early days of a business for a few people to do many jobs. You might wear the CEO hat, and be the director of marketing, and also the VP of sales. But, eventually, you’ll grow and you should include plans to hire for these positions in your forecast.
A part of your larger financial plan
Your personnel forecast feeds into your profit and loss projections and has a direct impact on your profitability. For many businesses, personnel is the largest expense, so it’s important to think through the forecast and make adjustments to the timing of planned hiring based on your revenue projections, profitability, and the cash you have available to meet payroll obligations.
Of course, you’ll also want to think about how your business is organized and what the management structure will look like. You can use tools such as an organizational chart to help figure out your personnel plan and then add that to your business plan. You can also use the “team” section of your business plan to discuss key employees that you plan to hire in the future and any gaps that your organization currently has.
Your completed Management and Organizational Structure section of your business plan will include info from your personnel forecast as well as descriptions of your organization. Along with your full forecast, it gives readers a full understanding of where your business is today and how you plan to grow your team in the future.