Am I Overstaffed?
We would all like to run profitable businesses. The largest expense for a business are its people. If we have too many of them compared to our sales volume we can quickly tank profitability. Fortunately there are a few easy things to take a look at to determine if we are overstaffed (or underselling). Once we understand where we are in the equation we can trim headcount or agree to an appropriate sales quota.
What is a Full Time Employee?
Full Time Employees (FTE’s) work 40hrs per week. A single employee working 40hrs/wk is considered a value of 1 FTE.
What About Part Time Employees?
If you had two part-time employees and each worked 20hrs/wk the two of them combined would have a value of 1 FTE.
What About Subcontractors?
Some business use subcontractors for various functions. For this exercise you do need to understand how many hours you are giving to subs. If I had two different subs and consistently gave each of them 10hrs/wk that would have a value of 0.5 FTE.
What About Overtime?
If you consistently pay overtime you have more FTE’s than you think AND you are overpaying for that labor! Four employees that each work 46hrs/wk will have produced the FTE equivalent work of 4.6 FTE but cost you 4.9 FTE. Use the higher value to turn the knife that you are being inefficient and costly.
Grade School Addition:
Now that you know how to account for your FTE’s – Add ‘Em Up! Use a single decimal point as necessary to account for any variability of part time staff, subcontractors, and overtime.
Let’s Get Those Revenues!
It may be tempting to open up Quickbooks and run your P&L. If your P&L is accurate it is a great place to get the data. Given how many inaccurate P&L’s I have seen this always worries me. If you are unsure go to your quoting tool and run a report for won sales in a 12mo period. It’s nice to run this year over year so you can see if you have variances. We are looking for typical 12mo run rate.
Sales: This is a real-time temperature gauge and leading indicator we can use to determine our headcount health. This is the top of the funnel and if it isn’t right here it gets no better later. We can see the data immediately and should be keeping an eye on it monthly, quarterly, and annually. This allows us to project and evaluate in real time.
P&L: This is a delayed temperature gauge and trailing indicator we can use to determine our headcount health. This is the bottom of the funnel and limited by how well we had sold. This data should be what has been executed (labor used and products installed) by the business and is delayed compared to sales due to the typical long lifecycle of complex installation projects.
Grade School Division:
Take your 12 month revenue and divide by your FTE count. This will give you your Revenue Per FTE.
Formula: 12mo Revenue / FTE Count = Revenue Per FTE
Example: $2,000,000 / 8 People = $250,000 per FTE
What is Healthy?
This number will change due to inflation. It used to be viewed that $200k/FTE was a good number and today I tend to see unhealthy businesses (single digit net profit) at that level. I generally try to stay above $250k/FTE and, if possible, north of $300k/FTE. The lower the number the more likely you are to be overstaffed (or underselling!)
What tends to drive it higher?
Sales Quota
Set Correctly (>$250k/FTE)
Hardware:
Not discounting it
Labor
Billing for 65% or more of it per billable employee (PM, Eng, Prog, Tech, Svc. Tech)
Billing a 4x multiple from the hourly rate you pay an employee
Service
Having a higher service rate than your install rate to account for lost hardware GM$
Change Orders
Keep ‘em tight!
Conclusion:
If you do all of the above and your Rev/FTE is low you are overstaffed. It’s also possible your Sales Quota is incorrect and you are underselling compared to headcount.
