Anticipating Labor Cost Fluctuations

What problem did you tackle?

A high-end website development firm frequently felt the crunch of needing to hire rapidly when projects piled on. This meant that expenses related to surges in just-in-time hiring and shelling out wages were surprising and stressful. And to add fuel to the fire, payroll happens well before invoices can go out the door.

Granted, the company has a healthy run of projects coming in and going out. So at any given moment in time, it’s a generally reliable assumption that payments for earlier projects should be able to fund upcoming payrolls. But all it would take is just a few delayed project payments to really throw a wrench in the cash flow machine.

Being able to predict when cash needs to leave the door based on anticipated labor would allow the company to plan for having the cash reserves in case payments from customers get delayed for any reason.

How did Norman Professional Services craft a solution?

The company already kept track of its active and pending projects and made best attempts to estimate how many labor hours would be required to support them across periods broken out by months. While no one has a perfect crystal ball, these estimates were a reliable data point to aid with anticipating the company’s payroll expenses.

By exploring average salary bands of current and anticipated new hires for the different levels of talent that work on these projects, Norman Professional Services was able to take the planned hours by month and use a blended rate by talent level to approximate the expected payroll outlay each month.

Building this into the client’s existing cloud-based spreadsheet that tracked projects over time, the enhancement provided the extra level of detail necessary for the client to anticipate future hiring needs and the payroll costs associated with it. This elevated the company’s current understanding of labor forecasting from just identifying the types of talent needed for upcoming projects up to a level where there was visibility to the expected money outlay to support such a talent force of in-house and subcontracted talent combined.

What was the positive impact?

The enhancements to the spreadsheet had offered the company a clearer view of month-by-month expectations on payroll related to service delivery. Combined with an Accounts Receivable report that Norman Professional Services already delivered monthly to support a regular collections strategy, the company felt like they had a greater degree of insight into cash requirements to keep everyone engaged and working on projects, while anticipating future projects as well.

Because the company set an expected blended rate of the cost of labor, negotiations for future contracts are better informed to arrive at bill rates or fixed project prices that are more easily able to be calculated to be profitable. This allowed the organization to focus on work that will improve, rather than erode, at the bottom line.

They also gained insight into how much higher or lower they are paying their talent compared to the expected average for the talent level. This will help them make the appropriate labor structure considerations, including training and promoting from within, outsourcing, and securing new in-house talent.

What’s next?

Crafting an ongoing map of payroll expenses is just one part of the process. Comparing actual performance and profitability against those predictions is another part, and may even be more important! When looking back at actual hour and dollar expenditure on a project, the company can potentially extract insights into efficiencies that some projects found that can be replicable across other projects. Or it can discover inefficiencies (or scope creep) that bogged down others, serving as a lessons learned to watch out for red flags in the future.

Norman Professional Services can aid the company in comparing its historical actuals on a company-wide and project-by-project basis to validate assumptions built into the hours projections, and help test and refine the company’s ability to estimate accurately. Additionally, NPS can build a formal and official budget within the company’s QuickBooks file for ease of comparison reporting not just on payroll, but also on revenues and all other expense categories. Double checking how the company is doing against budget can shed light on situations where the company may need to secure extra capital when the going gets tough or make apparent when the company is likely to have funds available to help bolster and multiply the company’s success when things are going well.