# Headcount

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Headcount Analysis
Common-sizing By Headcount

Understanding Common-sizing
To common-size, you typically divide every number by the same number. It's conventional, for example,
common-size an income statement by dividing each entry by the total sales for the period covered by the statement
Doing so converts each dollar figure, from cost of goods sold to operating income to income taxes to operating
expenses, to its percentage in terms of total sales.

For Example:
The rationale for common-sizing in terms of total sales is that most of a company's activities depend
revenues. The more the company sells, the greater its cost of goods sold. In a well-managed firm, greater revenues
result in greater profits. And, although there are exceptional cases, a higher level of sales tends to cause
level of salaries. Because total sales exerts an effect on so many of the items in an income statement, a common
sized statement is usually based on total sales.

Common-sizing by Headcount AKA Headcount Analysis
Headcount, of course, refers to the number of people who are on the payroll at any given time. Particularly
are in the midst of a “downsizing” or "rightsizing" situation, it is useful to common-size on the basis of headcount
Common-sizing on the basis of headcount results in some number of dollars per employee.

Worksheet 1
If gross profit and an operating income figure such as EBITDA are not sensitive to headcount, while such
expense classifications as salaries are sensitive, then there can be a compelling business reason to reduce
number of employees. For example, if XYZ Widgets can expect roughly the same level of revenue regardless
headcount, management will give serious thought to reducing the number of employees.

Of course, doing so can have unanticipated consequences. It might be that, while increasing headcount does
increase gross profit, decreasing headcount below some minimum level results in poor customer service-
guaranteed to reduce gross profit.

Worksheet 2
On the other hand, if headcount is directly related to gross profit, there might well be an argument for increasing
headcount, particularly if the business uses some method of direct sales. The trick is to increase the number
salespeople, and hold steady the number of staff who do contribute only to expenses, not to gross profit
process is tricky because, in most cases, the greater the gross profit, the larger the number of staff required
support after-sale processes.

Suppose, however, that management believes that they can convert the responsibilities of three of their current
time staff from both sales and staff functions to sales only. They also consider hiring one additional salesperson
They believe that if these employees are free to perform a sales role only, instead of both revenue-producing
activities and support activities, each salesperson can generate an average of \$13,138 per month. The remaining
employees will devote 100 percent of their time to performing support activities.

Management obtains the dollar figures for Gross Profit, in row 7, by multiplying the Sales headcount in row
their assumed sales level of \$13,138 per salesperson. They also assume that their average salary per employee
will be \$5,450. Restated, these assumptions are:

1. Both total gross profit and average gross profit are sensitive to the number of sales employees.

2. Total salary expense is sensitive to the total number of employees, but average salary expense is constant

The result, if management's assumptions pay off, is that they can actually increase total headcount and cause
Widgets’ EBITDA to become positive, even during its traditionally money-losing months. The assumptions
are optimistic, particularly the notion that making some employees full-time salespeople will double
employee gross profit. But even if the per-employee increase in gross profit is only 50 percent, the results
increase the profit in good months, and reduce the loss in bad months.

© Copyright, 2010, Jaxworks, All Rights Reserved.
employee gross profit. But even if the per-employee increase in gross profit is only 50 percent, the results
increase the profit in good months, and reduce the loss in bad months.

In large corporations, common-size analysis on the basis of headcount is done frequently and is especially
often happens that one division reduces its headcount so as to decrease its expenses, hoping that as it does
revenues will not suffer. It can also happen that the employees who leave that division find employment in
division of the same large corporation: usually, one that is not currently under pressure to reduce its expenses

The net result is that, although one division might improve its profitability through a reduction in expenses,
division's profitability suffers be-cause of an increase in expenses. Then, the corporation, considered as a
has probably not improved its profitability. However, it has managed to disrupt people's lives, increased
anxiety among those whose positions have been retained, and probably increased non-productive costs
overhead procedures usually change when people leave.

Therefore, when divisions report that they have reduced headcount and consequently increased their profitability,
is incumbent on them to estimate the effect of doing so on the corporation as a whole. Although this estimate
often a difficult task, it is a necessary ingredient of an accurate estimate of the effects of their analysis
consequent actions.

© Copyright, 2010, Jaxworks, All Rights Reserved.

© Copyright, 2010, Jaxworks, All Rights Reserved.
dcount Analysis
on-sizing By Headcount

example, to
the statement.
to operating

depend on its
greater revenues
cause a higher
a common-

Particularly if you
headcount.

such major
reduce the
regardless of its

headcount does not
service-which is

for increasing
the number of
profit. This
required to

current full-
salesperson.
revenue-producing
The remaining

in row 6 by
per employee

constant.

cause XYZ
assumptions involved
double the per-
results would

© Copyright, 2010, Jaxworks, All Rights Reserved.
results would

especially tricky. It
does so its
employment in another
expenses.

expenses, another
as a whole,
increased levels of
costs because

profitability, it
estimate is
analysis and

10, Jaxworks, All Rights Reserved.

© Copyright, 2010, Jaxworks, All Rights Reserved.
Jan        Feb         Mar          Apr         May           Jun         Jul       Aug
Headcount          5          5           5            5           4             4           4         3
Gross profit     \$42,589    \$53,765     \$38,846      \$15,214     \$20,512       \$21,213    \$20,674    \$12,698

Salaries         \$20,000    \$20,000     \$20,000      \$17,500     \$17,500       \$17,500    \$17,500    \$17,500
Payroll taxes     \$2,240     \$2,240      \$2,240       \$1,960      \$1,960        \$1,960     \$1,960     \$1,960
Lease             \$1,000     \$1,000      \$1,000       \$1,000      \$1,000        \$1,000     \$1,000     \$1,000
Phone               \$500       \$500        \$500         \$500        \$500          \$500       \$500       \$500
Supplies            \$200       \$200        \$200         \$200        \$200          \$200       \$200       \$200
Insurance           \$500       \$500        \$500         \$500        \$500          \$500       \$500       \$500

Total OPEX       \$24,440    \$24,440     \$24,440      \$21,660     \$21,660       \$21,660    \$21,660    \$21,660

EBITDA: Actual   \$18,149 \$29,325        \$14,406      (\$6,446)     (\$1,148)       (\$447)     (\$986)   (\$8,962)
Common-sized By Employee
Gross profit      \$8,518 \$10,753          \$7,769      \$3,043      \$5,128        \$5,303     \$5,169     \$4,233

Salaries          \$4,000     \$4,000       \$4,000      \$3,500      \$4,375        \$4,375     \$4,375     \$5,833
Payroll taxes       \$448       \$448         \$448        \$392        \$490          \$490       \$490       \$653
Lease               \$200       \$200         \$200        \$200        \$250          \$250       \$250       \$333
Phone               \$100       \$100         \$100        \$100        \$125          \$125       \$125       \$167
Supplies             \$40        \$40          \$40         \$40         \$50           \$50        \$50        \$67
Insurance           \$100       \$100         \$100        \$100        \$125          \$125       \$125       \$167

Total OPEX        \$4,888     \$4,888       \$4,888      \$4,332      \$5,415        \$5,415     \$5,415     \$7,220

EBITDA: Actual    \$3,630     \$5,865       \$2,881     (\$1,289)      (\$287)        (\$112)     (\$247)   (\$2,987)

© Copyright, 2010, Jaxworks, All Rights Reserved.

© Copyright, 2010, Jaxworks, All Rights Reserved.
Sep        Oct        Nov           Dec          Totals
3          3          3             3
\$11,854    \$12,779    \$55,155       \$52,702      \$358,001

\$17,500    \$17,500    \$20,000       \$20,000      \$222,500
\$1,960     \$1,960     \$2,240        \$2,240       \$24,920
\$1,000     \$1,000     \$1,000        \$1,000       \$12,000
\$500       \$500       \$500          \$500        \$6,000
\$200       \$200       \$200          \$200        \$2,400
\$500       \$500       \$500          \$500        \$6,000

\$21,660    \$21,660    \$24,440       \$24,440      \$273,820

(\$9,806)   (\$8,881)   \$30,715       \$28,262       \$84,181

\$3,951     \$4,260    \$18,385       \$17,567       \$94,079

\$5,833     \$5,833      \$6,667        \$6,667      \$59,458
\$653       \$653        \$747          \$747       \$6,659
\$333       \$333        \$333          \$333       \$3,217
\$167       \$167        \$167          \$167       \$1,608
\$67        \$67         \$67           \$67         \$643
\$167       \$167        \$167          \$167       \$1,608

\$7,220     \$7,220      \$8,147        \$8,147      \$73,194

(\$3,269)   (\$2,960)   \$10,238         \$9,421      \$20,884

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© Copyright, 2010, Jaxworks, All Rights Reserved.
Enter Average Sales Per Salesperson                \$13,138
Enter Average Salary Per Employee                   \$5,450
Jan     Feb            Mar         Apr            May       Jun        Jul
Headcount (staff)             2       2              2           2              1         1          1
Headcount (sales)             4       4              4           4              5         5          5
Gross profit               \$52,552  \$52,552        \$52,552     \$52,552        \$65,690   \$65,690   \$65,690

Salaries                 \$32,700     \$32,700       \$32,700     \$32,700        \$32,700   \$32,700   \$32,700
Payroll taxes             \$3,662      \$3,662        \$3,662      \$3,662         \$3,662    \$3,662    \$3,662
Lease                     \$1,000      \$1,000        \$1,000      \$1,000         \$1,000    \$1,000    \$1,000
Phone                       \$562        \$737          \$608        \$678           \$486      \$551      \$531
Supplies                    \$142        \$263          \$132        \$299           \$106      \$177      \$173
Insurance                   \$500        \$500          \$500        \$500           \$500      \$500      \$500

Total OPEX               \$38,566     \$38,862       \$38,602     \$38,839        \$38,455   \$38,591   \$38,566

EBITDA                  \$13,986      \$13,690       \$13,950     \$13,713        \$27,235   \$27,099   \$27,124
Common-sized By Employee
Gross profit             \$8,759       \$8,759        \$8,759       \$8,759       \$10,948   \$10,948   \$10,948

Salaries                   \$5,450     \$5,450        \$5,450       \$5,450        \$5,450    \$5,450    \$5,450
Payroll taxes                \$610       \$610          \$610         \$610          \$610      \$610      \$610
Lease                        \$167       \$167          \$167         \$167          \$167      \$167      \$167
Phone                         \$94       \$123          \$101         \$113           \$81       \$92       \$88
Supplies                      \$24        \$44           \$22          \$50           \$18       \$30       \$29
Insurance                     \$83        \$83           \$83          \$83           \$83       \$83       \$83

Total OPEX                 \$6,428     \$6,477        \$6,434       \$6,473        \$6,409    \$6,432    \$6,428

EBITDA                     \$2,331     \$2,282        \$2,325       \$2,285        \$4,539    \$4,517    \$4,521

© Copyright, 2010, Jaxworks, All Rights Reserved.

© Copyright, 2010, Jaxworks, All Rights Reserved.
Aug       Sep        Oct          Nov          Dec           Totals
2         2          2            2            2
6         6          6            7            8
\$78,828   \$78,828    \$78,828      \$91,966     \$105,104        \$840,832

\$43,600   \$43,600    \$43,600      \$49,050       \$54,500       \$463,250
\$4,883    \$4,883     \$4,883       \$5,494        \$6,104        \$51,884
\$1,000    \$1,000     \$1,000       \$1,000        \$1,000        \$12,000
\$510      \$489       \$468         \$447          \$426         \$6,492
\$170      \$166       \$162         \$158          \$155         \$2,103
\$500      \$500       \$500         \$500          \$500         \$6,000

\$50,662   \$50,638    \$50,613      \$56,649       \$62,684       \$541,729

\$28,166   \$28,190    \$28,215      \$35,317       \$42,420       \$299,103

\$9,854    \$9,854      \$9,854     \$10,218       \$10,510       \$118,169

\$5,450    \$5,450      \$5,450      \$5,450        \$5,450        \$65,400
\$610      \$610        \$610        \$610          \$610         \$7,325
\$125      \$125        \$125        \$111          \$100         \$1,753
\$64       \$61         \$58         \$50           \$43           \$968
\$21       \$21         \$20         \$18           \$15           \$311
\$63       \$63         \$63         \$56           \$50           \$876

\$6,333    \$6,330      \$6,327      \$6,294        \$6,268        \$76,632

\$3,521    \$3,524      \$3,527      \$3,924        \$4,242        \$41,537

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