How Do Companies Do Headcount Planning?

Headcount planning helps companies estimate how many employees they need to meet their needs. Companies do headcount planning through analysis of company structure and budget. While it has its benefits, it can present challenges because of the estimations made for planning purposes.?

By Brandi Fowler

Companies use headcount planning to analyze their organizational structures and staffing to meet their business’s needs and budgetary goals.?

“It’s an annual process that is normally led by the finance team to determine how many overall heads a company would need in order to achieve business objectives for a given year,” said Sonar Talent CEO and co-founder Chris Mannion.

“So [by the end of December], all of the headcount planning will likely have been done for most companies for 2023. They will be assigning the overall headcount and approving an increase or decrease year-over-year to make sure the business hits its revenue and profit goals for the next current year.”

It is essentially labor planning, said FP&A Guy founder Paul Barnhurst. Headcount planning is also known as workforce planning or org charting.?

“Every company will grow or shrink or change every year and [they] will be hiring,” Barnhurst said. “So, it's really planning what are all the costs, the number of people you need to support the business, the timing of that, [and the positions for the next year]?”?

Companies may plan further, but it's usually in detail by month for the next year, Barnhurst said.

The Benefits of Headcount Planning

Headcount planning is a part of the overall planning or budgeting process, so if you don’t control it, companies will want to hire a ton of people, Barnhurst said.?

“It gets out of control if you don't really plan it and make sure you have checks and balances in place to justify the hiring,” Barnhurst said. “It's about making sure the profile of the company stays healthy, that you don't over-hire and end up having too low of net income, or you hire too slow.”?

“The plan [should coincide] with the rest of the financial plan and the strategic plan to make sure it's all aligned. Headcount planning helps companies develop an overall strategy to invest efficiently in different areas of the business. The plan needs to be made to ensure that those resources are being assigned in the right area,” Mannion said.??

As companies grow, they test different areas to invest in, whether it’s a product, the sales team, or building stronger internal infrastructure, Mannion said. The planning process determines what makes the most sense [to invest in] for a six-month or a 12-month period.

“The headcount plan then feeds into the recruitment process,” Mannion said. “So, without a realistic plan in place, if the team is constantly adding new roles and expecting the recruiting team to deliver against those roles very quickly, they will never hit strategic goals.”

Two of the areas that headcount planning can help with are company improvement and capacity planning, Barnhurst said. The company has to have the right data and understand its numbers to analyze areas of improvement.

Capacity planning helps determine the resources available to meet consumer demand.??

“If it is customer support, for example, it is analyzing whether the company has a model in place that allows them to understand what the customer needs,” Barnhurst said. “For example, I have a friend that works for a $100 million company and they did a big investment last year, adding nearly 100 people. He allowed everybody to go out and just say, ‘Hey, what do you need from a planning standpoint?’?

“They wanted another hundred people, but there was no increase in revenue. They hadn't done capacity planning, it was just, ‘Well, we have a lot of work going on so we need more people.’ That's why there's always this balance and having good capacity and metrics to say, ‘Yes, it makes sense to hire someone.’ It helps prevent the emotional side sometimes of, ‘We're all busy so we need people,’ but the data doesn't support the claim they are busy.”

How Companies Do Headcount Planning

The headcount planning for most companies sits in FP&A [financial planning and analysis] as part of the regular budget and forecasting plan for all expenses and revenue, Barnhurst said. From there, it’s coordinated with HR and the business.??

“Usually you'll lay out a hiring plan,” Barnhurst said. “Then when you actually hire somebody, there is a process in place to approve that to say, ‘Yep, it still makes sense to hire [in this department], they still need it. And that's coordinated with HR, finance, [etc.].

“It varies depending on the size of the company. With a very small company, it may just be the founder who's doing it with an analyst. For a large company, there may be a robust process and a tool such as Workday or other HR systems that they use for that process. Or in some cases, a dedicated headcount planning tool.”

Meanwhile, Mannion said he has seen businesses run quarterly or half-yearly reviews for their headcount planning. Those reviews identify areas of the business that need improvement and areas that are overachieving. The executive team will then decide whether or where to invest in the future.?

“That’s a huge feed into the headcount funding process,” Mannion said. “That then goes into the modeling of the financial team led by the CFO and with heavy input from the financial planning and analysis team.

“They will determine how many additional heads will be needed in order to achieve those financial goals. That process also includes the HR department. The head of recruiting will be involved to set expectations for what can be achieved, given timelines, markets, and things like that.”

The Challenges of Headcount Planning

Headcount planning brings benefits and challenges. Unknowns are among the main cons.

“From a macro perspective, no one really knows what the economy will do, so the financial team will make a best guess on how the macro climate is going to impact the revenue of the business,” Mannion said.? “And that has a huge impact on the growth projections for the business, which then impacts the headcount planning process.?

“The other huge unknown is internal as well. When you look at attrition, how many people will leave the organization, you can generally predict that in steady years. But the last few years have been so crazy that no one can really anticipate what 2023 is going to look like.”

You can project a 15% attrition rate for the year, for example, but you won’t know where the attrition will come from or which teams will lose people, Mannion said. As a result, more companies are trying to adopt more of an “agile headcount planning process.”

“You set these annual targets, but you don't assign where those additional open headcount billets or requisitions will go until as close as possible to the time where you will recruit that person,” Mannion said.?

An agile headcount planning process can also have a “huge impact” on layoffs, Mannion said.?

“A lot of CEOs that have made public statements about layoffs have tied it to over-hiring,” Mannion said. “And I think the two are very intrinsically linked. If you have a robust headcount planning process that's linked to a very efficient recruiting process, then you can deliver on the headcount goals, and you can be very targeted in where you add additional new hires.?

“Whereas traditionally, or for the 10 years leading up to maybe 2022, headcount planning has not really been that important. Because from a lot of CEOs and CFOs that I've spoken to, their perspective is that the recruiting team will actually never be able to hire all the open roles anyway.”

Mannion said having a data-driven headcount planning process closely tied to the recruitment process will be key to hiring people effectively and may help prevent mass layoffs.

Layoffs essentially result when headcount assumptions are way off, Barnhurst said.?

“Let's take Facebook,” Barnhurst said. “They probably had some very aggressive VR assumptions and other things and the growth didn't materialize. They hired the people assuming the growth would materialize. So you got out over your skis and you hired before the revenue was there. The revenue didn't follow, and so to keep your profit margins and stock up, you have to cut expenses to keep the net income, and generally, that's people.”

Top Takeaways

How Do Companies Do Headcount Planning??

• Companies use headcount planning to ensure they have the right amount of employees with the right skill sets to meet the company’s needs.?
• Headcount planning is an annual process usually led by the FP&A team.
• A solid headcount plan can help prevent over-hiring.?
• Headcount planning involves analysis of areas of improvement, capacity planning, and more.?