Translating Capacity Plans to Financial Projections: Top 10 Considerations for Success

Great job! You built a long-term capacity plan model that shows the FTE requirements for the foreseeable future. Next, your boss and finance department want a financial projection. It's not as simple as multiplying the FTEs by the hourly rate to come up with financial projections. I am going to share with you all the mistakes I made so you can accelerate your learning curve!

1. Keep track of the number of working days in a month! Frontline workers, who are usually hourly, make up the largest component of the compensation line. Months with more working days impact the operating expense line more compared to months with fewer working days.
2. It is not just the base rate that hits the operating expense line. Usually, there is a percentage the base rate needs to be grossed up due to fringe benefits such as medical insurance, unemployment insurance, retirement benefits, etc
3. OT and Holiday pay have a different multiplier than the base rate. If your department operates during holidays, it probably means that it's paying your workers their base rate times some type of multiplier.
4. Accounting 101, all operating expenses are not cash-out; some need to be accrued. I usually see this in companies that allow vacation days to carry over at the end of the year. These vacation day carry-overs are accrued the following year and reverses as the months pass.
5. The base rate changes at least once a year because of annual merit increases. Know when it occurs and account for it!
6. Finance and payroll use pay periods vs. actual months to record compensation expenses. Depending on your company's scheduled pay periods, the financial projection periods will need to be blended. So pick the best methodology and iterate to align closer!
7. If your business operates in multiple regions with different pay bands for the same role, it is recommended to separately forecast FTEs per region.
8. When the month closes, continuously compare projected rates and FTEs to the actual rates and FTEs. Understand what is causing the variance and don't settle for actual $ being close to projected $.
9. Continuously ask questions to Finance and Payroll until you have a good understanding of how the $ flow in and out of the compensation line.
10. You don't have to keep track of possible future tailwinds and headwinds to the financial projections, but keep track of the big ones. It will allow you to provide yourself with optionality, and having good options is always good!

Lastly, have fun building the financial projection based on your capacity model! It will help you understand the P&L statement of your department more in-depth.