The process of developing a financial prediction for a period of five years, or any long-term financial forecast for a period of more than two years, is one that requires a significant investment of time. You need to hire an additional X number of managers for every staff member; you need sufficient sales representatives to handle bookings; you need more technical support experts as your client base increases; etc. The template for my five-year financial forecast is available for download below.
This continues on and on and on forever. A few hours have passed, and you are now tearing your hair out while staring even more intently at the screen of your computer. Modeling the hundreds of alternative revenue and spending assumptions may get extremely tiresome very quickly, and this is true even if you are an expert in finance.
The Concept: Adjusting the Headcount Automatically
Following the thousands of downloads of my free SaaS Financial Plan and the hours that I spent creating long-term Financial Projections
, I came to the conclusion that it would be beneficial to create a forecast model that would assist SaaS founders and finance professionals in reducing the amount of time spent on Excel modeling.
This Excel model is based on my previous SaaS financial plan, although there is a significant difference between the two plans. One of its tabs is used to automatically scale the majority of your headcount costs, and this feature is included.
It does this by adjusting the number of employees assigned to a project depending on certain revenue, headcount, or expenditure factors. In the next few sentences, I’ll discuss the most significant aspects of the forecast model.
A new tab has been added for Scale Ops.
This is a new tab that takes care of the grunt work for you when estimating new headcount, wages, taxes, and benefits, among other things. You will manage the headcount for support, services, customer success, research and development, sales, marketing, and general and administrative functions using this tab. The following is an example of a section from the new tab. Some departments, like services or support, are fairly simple to expand, whilst others, like research and development (R & D), might be a bit more challenging to drive by metrics.
For example, you should direct research and development based on your product roadmap. In my model, however, I direct research and development based on annual recurring revenue (ARR) to scale R&D as your company grows. I’m aware that it’s not ideal, but you can always get around this limitation.
An Approach to Headcount Forecasting Based on the Bottom Up
Excel’s approach determines headcount by starting at the lowest possible place and moving up the hierarchy. For example, the need for a technical support analyst comes first, and then managers are hired based on the number of analyst roles that have already been set.
It is true that occasionally the Vice President of a department is the first person to be hired for that department before any other staff members are added, but in this particular scenario, it was simpler and more natural to begin at the staff level and then expand from there. You are always able to make adjustments as necessary.
Roster and Headcount tabs
You always have the option to add headcount “manually” via the Headcount Roster panel, so don’t worry about missing out on that feature. For the sake of this illustration, I will begin with four founders, and then I will let the model fill up the remainder of the team from there.
If you are making important hires that won’t show up in the “Scale” column of your hiring spreadsheet, you can enter the individual heads on this page.
Tab Total Operating Expenses
The “Total OpEx” tab automatically receives all of the salary information from the other tabs, Headcount Roster and Scale. You’ll see rows of gray in the forecast for each individual department. Do not make any changes to the rows that are highlighted in gray since they are using the headcount tabs to bring in the wage data. Under the gray rows, you are at liberty to enter the prediction for your department in the customary manner.
I will get you started with some miscellaneous expenditure drivers to assist with filling in common charges like travel, software for internal usage, and other costs that are not specifically addressed elsewhere. When it becomes necessary, add costs to the spending projection for each department.
As the template for the Five-Year Financial Projection is a novel methodology for forecasting, I would appreciate it if you could let me know if any of the formulae “blow up.” I will address those issues and continue to roll out updated versions. I have every confidence that this model will help you save a significant amount of time.
Alternatively, you could include some of the reasoning into the models that you currently use to generate financial projections. The Download option may be found below. I’m using a new plugin to handle the process of downloading, so please let me know if you have any problems.