Staff costs – the biggest element in your financial reporting and forecasting

A financial model without accurate staff analytics and forecasting doesn’t tell you very much. Here’s why:

Niko Laine

October 13, 2021

Staff costs – the biggest element in your financial reporting and forecasting

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Unless you’re in the hardware business, staff costs are the single biggest expenditure in every startup and growth company’s operations. 

Engineers write codes. Sales and marketing acquire customers. Customer success ensures happy customers. Software companies are typically very labor-intense until they: 

  • Scale operations; 
  • Have a fully automated sales process; and 
  • Have a self-serve customer onboarding process.

Until you have all of the above in place, it means that your cash burn is high, and expenses are upfront as compared to your revenue – especially in the early days. 

That is okay. It’s all part of building a business. 


Why is your staff analytics so important? 

Your staff costs have a significant impact on your: 

However, most companies don’t pay enough attention to staff analytics or utilize them enough in their financial reporting and expense analytics. If staff costs are your biggest expenditure, your headcount forecasting should be directly linked to your sales forecasting and cashflow forecasting. 


Staff headcount is more than just an expenditure

You may think that staff costs and headcount planning mean only expenses and cash outflow. That’s not true. Let’s take a look at the following departments: 

Sales and marketing

Your sales and marketing headcount planning is also linked to your expense forecasting and revenue forecasting. It’s because these teams are in charge of customer acquisition and, therefore, generate future revenues. As a result, they have a direct impact on your company’s cash inflows, revenue growth, and valuation calculations. 

Does your sales staff have quotas for closed sales and sales activities? If yes, then you’re able to automate sales forecasting, Monthly Recurring Revenue (MRR) forecasting and cashflow forecasting based on your sales team headcount. Usually, a company’s sales results grow linearly with headcount. 


Customer Success

The customer success team is directly linked to customer retention, increasing Average Revenue Per Account (ARPA) and Net Revenue Retention (NRR). Their job is to renew contracts and get the customer to pay more during the lifetime of the customer relationship. In addition, your customer success team makes sure customers are happy and churn is kept on a low level – happy customers and low churn equal more revenue. 

Investments in Customer Success also translates to a more automated customer onboarding process and a more comprehensive knowledge base library, which will reduce onboarding costs later on. 


Quality Assurance (QA)

Equally, your QA team is linked to customer happiness and retention. How so? Customers won’t stick around if you have a buggy product. Your QA team is responsible for setting a high bar for quality so that you have a stable and bug-free software.


Headcount planning and analysis

Before a startup gets to Series B-C and scales its operations, it’s normal for headcount to be linear compared to the increase in revenue. The reasons are relatively straightforward: 

  1. There is a need for sales and customer success personnel to close deals with customers and onboard them. However, not everything needs to scale on Day 1.
  2. The product is still under the intensive development phase before it becomes mature. 
  3. You need to burn cash. But cash is limited. 


Expense analytics and % of revenue

Cash is one of the biggest things that deprive founders of sleep. You can’t sustain a startup without cash. But you need to spend money to make more money. It feels like a Catch-22, doesn’t it? 

If you have the knowledge of a CFO, financial forecasting and planning may be like a walk in the park. But let’s be honest. Even with that in-depth financial knowledge, it is still the thing that keeps me awake at times. It’s all about “what ifs” and how to handle them.

It boils down to spending wisely and burning cash sustainably at the end of the day. And this is where your expense analytics come in handy. Let’s start by understanding Operating Expenses (OpEx). The three main areas of your OpEx are: 

  1. Marketing and Sales (M&S)
  2. General and Administrative (G&A)
  3. Research and Development (R&D) 

Each of these departments requires a percentage of your revenue to keep running to facilitate growth. Here are some benchmarks to refer to: 

  • Your M&S costs are your most significant driver in income and are included in your CAC calculation. The average spend for this area is approximately 48% of your revenue. Therefore, it means that your M&S costs account for 48% of your revenue. 

  • The average spend for G&A is approximately 20% of revenue. 

  • The average spend for R&D is approximately 23% of your revenue. However, this number varies vastly depending on the stage of your SaaS business. In the early days, R&D costs can be several times more than your current revenue. 

CAC calculations

Acquiring your first few customers can be expensive. Unfortunately, many companies overlook staff costs in their CAC calculations, even though they account for a majority of CAC in most cases. As a result, they end up burning more money than they accounted for. 


Sales analytics and forecasting

Your headcount affects your sales analytics forecasting at each development and funding stage of a sales-driven startup. There is no complex science or formula to it. You simply need sales personnel to close deals. 

Therefore, it is crucial to know the time and cost it requires to close deals, the cost of each headcount, the number of people needed in the team to hit your revenue target - in each part of the sales funnel. 

Hire too many too quickly or not enough, and you’ll find yourself shortening your cash runway sooner than you planned to. For example, a sales team typically consists of a few: 

  • Lead research specialists (LRS) to qualify sales leads;
  • Sales Development Representatives (SDR) to book meetings;
  • Account executives (AE) to close deals.

Let’s say you have an MRR target of $100,000, and your sales team has the following weekly target to hit: 

  • LRS: 150 sales qualified leads
  • SDR: 10 meetings
  • AE: 3 deals with a total Annual Contract Value (ACV) of $10,000

Based on the above variables, you can calculate the total of lead research specialists, sales development representatives, and account executives you need to hire to achieve your MRR target. 


Cashflow forecasting

Staff costs and cashflow forecasting are closely linked together. Net salaries are not the only payroll item that has an impact on cashflow forecasting. Staff costs include taxes, employer contributions, and pension payments – all of which impact your cashflow. 

In Europe, especially, these cashflow items are as important as net salaries for cashflow forecasting. Payment dates and delays for each of these payroll items also vary accordingly, depending on where you’re based. 


Profit & Loss (P&L), gross margin and EBITDA forecasting

Your profit and loss report is the most important report for profitability analysis. The primary stakeholder who is most interested in your P&L forecast? Your investors. 

Your sales margin and EBITDA margin can be utilized in various ways in a company’s valuation models, expense analytics, and profitability reporting. 

The most significant benefit of P&L forecasting is that you can redirect your KPIs in the right direction even with minimal cash. It’s the foundation of your growth metrics. 

Chart of Accounts (CoA) and Expense groups

While mapping your Chart of Accounts may not seem like a significant thing to do, you definitely should give it some attention. 

Your metrics are there to help you navigate through the business. If you’re not achieving your milestones or don’t know when to invest in scaling your business, know that you can ALWAYS rely on your metrics for those purposes. 

Running a startup is a lot about problem-solving. But not all solutions are the right or best solutions. You’re probable wondering: Then how would I know what’s right for the company? 

My answer is, rely on your metrics. By observing the evolution of your metrics, you’ll be able to identify the best possible option for any given situation. 

For example, most companies instinctively opt to shrink their teams when they run into financial challenges. But that may not always be the best option. It’s the fastest short-term solution, but it’s not always the best solution.  

The purpose of mapping your CoA is so that you’ll get the full detailed structure of your P&L elements such as Cost of Sales (COS), gross margin rate, EBITDA, and all expense groups. All of these elements play a huge role in your revenue growth. For example, your Customer Success staff costs should be included in COS, and you’re able to do this with CoA mapping. 

Therefore, the more details you know about your cashflow and growth metrics, the more you’re able to utilize your financial analytics to achieve the outcome and growth you envision for your company. 


Key takeaway: 

If you feel your brain bubbling now, don’t worry. It’s a lot to take in – because staff costs are more than just headcount and expenditure. 

Think about it, what happens when you add one new salesperson to your headcount planning? 

It doesn’t just add a plus one to your team. It also impacts your overall financial forecasting for: 

  • Sales analytics forecasting based on sales activity and sales quotas
  • Sales forecasting and Monthly Recurring Revenue (MRR) forecasting
  • Customer Lifetime Value (LTV) forecasting
  • Customer acquisition costs analytics
  • Cashflow forecasting with updated sales cashflows and staff costs cashflows
  • Headcount analytics
  • Expense analytics
  • Profit&Loss forecasting
  • Valuation analytics with updated MRR, revenue growth rate, sales margin and EBITDA forecasts

Your metrics are more connected than you think. So yes, it is tedious to keep track of every element. My advice to overcome that is: Get your finance stack in order and automate whatever you can automate from the get-go. 

Happy Calqulating!

Author Avatar

Niko Laine

Founder, CEO and CFO

Niko is a CFO and a financial advisor who is passionate about solving problems, data analysis, mentoring smart entrepreneurs and bringing clarity and focus in difficult situations.