In 2017, a customer of mine saw its annual revenues increase 350%. With only 4 project managers implementing its enterprise software, the company got by with a crude back of the envelope system to match hiring with project demand. Today, the company expects revenues to double in 2018. However, with 10 full time project managers and a staff in excess of 50 people, the management team needs a more sophisticated system to track its numbers.

As the second half of the year begins, the management team is trying to forecast how many staff still need to be hired for the remainder of 2018, taking into account the number of expected project wins, the yield of each project manager, and the estimated monthly cash flow available to use for hiring. They must create a forecasting model that can adjust as the company grows and scales.

Whether you have 100 employees, or are wondering whether you have enough cash to hire your first, the analysis described below needs to be performed on a regular basis.

The Variables

There are 3 main variables to examine: the expectation of new client/contract wins (sales funnel), the level of monthly incoming cash flow from existing and new contracts (cash), and the number of staff that needs to be in place now and at the end of the year to execute on the company’s strategy (HR). Note that the term “staff” consists of full-time and part-time employees, as well as contractors.

This level of analysis can be done at any point during the year. However, the best times to perform the analysis are during your annual budgeting session at the end of each year, at the midpoint of the year as you revisit your year- end targets, and finally, any time you’re concerned about running out of cash.

It takes two to tango: The CFO and the CHRO (Chief Human Resources Officer).

The 2 biggest obstacles to growth and scaling operations are a scarcity of funding and talent. The CHRO hires the right talent for each role and ensures they are properly supported and incentivised. In collaboration, the CFO manages the company’s funds to deliver the company’s strategy with the people in place.

People exist at the intersection of the CFO and the CHRO. In many companies, people take up 70%+ of the operating expenses in salary and benefits and are seen as a cost. On the other hand, as the two worlds of finance and people converge in high performing companies, staff is being viewed more as an asset worthy of continuous investment.

The collaboration between the two produces a higher ROI (return on investment) and better employee satisfaction, engagement and productivity. There’s a larger contribution by the CFO to workforce planning (the focus of this article) and the use of analytics to understand and measure the workforce better. There’s also more data led decision making in HR and a rigorous approach to tracking key HR metrics on a continuous process. (We’ll return to these metrics in a future article)

The Question: How many people can I hire and when?

Let’s assume it’s June 20 and the business owner is interested to know how many new staff she needs to hire over the next 6 months to be able to hit her year-end targets.

I will divide my analysis into 4 steps.

Step #1: What is the owner’s expectation of new client/contract wins for the remainder of the year?

This is a sales funnel question. By using a CRM (customer relationship management) software such as Pipedrive, Salesforce, or Zoho, the business owner will monitor a list of projects that are going through the different steps of the business’ salesfunnel – from lead through to close.

The business owner must understand the metrics that drive the company’s sales funnel. He must know how many different stages there are in the funnel, how long it takes for a prospect to move from one stage to the next, with each stage being different in time from the next, and the probability of the prospect moving forward to the next stage.

In essence, the business owner needs to know how long it will take for a prospect to move through the entire funnel.

If it takes less than 6 months, then all prospects can be used in the analysis. If it takes longer than 6 months, then only include the clients you can close in 2018.

Once we have our list of clients/contracts, we take the first contract, multiply it by a percentage that indicates our best guess likelihood it will close, and put it in the month it’s expected to close. We do this for each contract. For example, Project Alpha has a total size of $20,000 with a 30% probability of closing in October. We would then enter $6,000 ($20,000*30%) in October in our spreadsheet. And so forth.

Step #2: Understanding the cash cow

This is a cash runway question. (See previous article in Renegades magazine for a detailed discussion around calculating cash runway.) The business owner creates a table in excel with project names taken from the sales funnel running down and months of the year, starting with January and ending with December, across the top.

We have 3 different types of “cash” we’ll enter into the table. The first is cash collected. This is the cash from existing or completed projects already received in the bank. These dollar amounts will be entered in the month they were received.

The second is the dollar amount of cash that has been explicitly outlined to be collected in the future in an invoicing table in a signed contract. These dollar amounts may already have been invoiced, or will be invoiced in the future, but no cash has been collected yet. This is called the bookings number. (I will be dedicating a future article to discuss the difference between cash collected, bookings, and revenues given its importance to forecasting revenues correctly)

The third type of “cash” will come from projects either in the sales funnel that are not yet closed or which have not yet been identified. This is the remainder of the revenue that is needed to reach the year-end target. This last type of cash is uncertain and where the business owner is at risk of making overly optimistic assumptions. As Mark Twain said: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Therefore, we run a scenario analysis.

This leads us to step 3.

Step #3: Scenario Analysis

This is a “what if” question. The typical scenario analysis will consist of a worst case, base/most likely case, and best-case scenario. The inputs come from steps 1 and 2, the contract wins and the cash flow. The output of each scenario will allow the business owner to make better informed decisions around hiring, business development, travel, and training costs.

Upon completion of steps 1 and 2 above, we have created our “base” case, or most likely outcome. To build the worst-case scenario we imagine what could go wrong.

The 2 biggest obstacles to growth and scaling operations are
a scarcity of funding and talent

What if we multiply each contract by a 20% probability of success, instead of 60% for our base case? Would we have enough cash to survive into 2019? What win percentage would constitute a profit breakeven point? If we were to reach that breakeven point, what could we do to access more cash or funding? The business owner should focus on a minimum of 3 months of cash reserve to be comfortable. This is calculated by dividing total cash by total expenses.

For the best-case scenario, we could multiply each project by say an 80% probability of success. Although we now have more incoming cash flow, the additional projects would also incur more operating expenses.

Once the business owner has a good sense what projects he/she will win for the remainder of the year, and the monthly cash flow for the business in different scenarios, he/she can turn to the hiring plan.

Step #4: The hiring plan

This is a staffing question. How many people can we hire and when?

Start each year with a hiring plan. This means you are thinking about what your next 1, 10, even 20 roles will be and assigning names ahead of hiring them. These could be old colleagues you want to work with again, or individuals you’re actively cultivating to bring on over the next 3-12 months. The more detailed and real the plan is, seeded with people who are ready to work with you, the better.

As of June 20, we know who’s assigned to which projects that are active and paying. If you’re a solopreneur, then that is your personal work schedule. Working with a time management software like Harvest, Hubstaff, or TSheets will show the business owner what percentage of staff time is allocated to projects, business development and so forth. Next, we need to model which staff will be assigned to potential future projects over the next 6 months. Use each scenario analysis to assign individuals to future projects.

From this analysis, the business owner knows whether she has too many or not enough staff for the remainder of the year.

The question becomes, how can we operate smartly until new contracts are won, and what revenues and expenses might kick in once the contracts are confirmed?

Firstly, it’s important to understand how long it takes for a new hire to be up and running. This will determine the time lag for hiring. Many times, it’ll takes 3 months before someone is running at 90%+ effectiveness. Therefore, the individual must be hired 3 months before the project starts.

Secondly, to create a cash buffer for upfront costs that arise from hiring ahead of the project, the business owner must have a clear and effective invoicing system set up. (Best invoicing techniques were discussed in a previous article in Renegades magazine) If hiring and on-boarding takes 2-3 months, then make sure you invoice 100% before the client work starts, or create an invoicing schedule that pays you at least 60% of the total income upfront. In addition, design the project such that project costs are mainly incurred or paid towards the end of the project.

By doing this exercise, the business owner will know when each project will be ending, the expected re-assignment of staff, what the next target project is, and which staff will need to be supported by ‘bridge capital’ between projects.

Employee Impact

As a business owner, it’s important to recognise that this analysis can be a very challenging exercise for employees in your business. It can be difficult for them to visualise future projects and clients. The uncertainty is a sign of risk for them. It’s only the owner and key financial staff that have the flexible mindset to do this exercise on an ongoing basis and thrive on the perceived risk.

As Ian Stewart, a fellow Mastermind Group member of mine, so eloquently summarises:

“I think the more successful business owners do not crave certainty. A belief of certainty limits opportunity, by describing the path ahead in further detail. That is the mindset employees wish for, certainty of their job and status quo, and lessor need (or want) for change. And of course, with that, they believe in lessened perceived risk.”

The worst-case scenario is that the business owner misjudges his cash flow situation and has to layoff certain well respected and strong performing staff. This will cause stress and fear inside the company.

The best case is that new clients are won, income soars, and the team grows.

The ultimate metric to watch on a monthly basis is the cash runway. It’s essential to reserve at least three months of cash cushion to maintain a healthy business. Too much runway and you may never take off; too little runway, and the business could skid into oblivion.