635: Hiring Forecast Formula: Predicting How a New Hire Impacts Profit

Before English was widely spoken in the far corners of the globe, Latin was the lingua franca for much of the European world from the days of the Roman Empire into the middle centuries. Latin stands at the root of many of our English words and offers us contextual insight into the flavor of our language. Some Latin words proved so powerful in the fullness of their meaning that we simply adopted them without alteration into our common language. Such it is with the financially laced Latin phrase pro forma. With past-centric financial statements like profit and loss and balance sheets, it is helpful to see what-was in the lifecycle of our business.   With the power of subdivided bank accounts and the Level Two Dashboard merging the perspectives of real-time cash, real-time receivables, and real-time payables, it is helpful to see what-is in the current state of our business in real cash. We need the what-could-be picture to help us with a complete past, present, and future snapshot of our business.   The pro forma is a common financial statement with powerful insights. Pro forma literally means “as a matter of form(ality)”.  In other words, if you want to know the hypothetical future of an element of your business, especially a financial element, then create a form or a formality and run hypothetical scenarios. The pro forma allows for such scenarios and provides powerful insight.  The downside is that it takes time and focus.  It feels unproductive because it is a future that is not promised. It is the perfect work and effort given by an executive leader looking to have proximity to the business.  The good news for a pro forma is that when you have the initial foundation of calculation built on a simple spreadsheet, you can continue running scenarios with often nothing more than a few tweaks to the calculator each time. Here are some of the key areas you would implement and utilize a pro forma: Determining the compensation of a new hire Discovering impact to the bottom line through any role (new or existing) Uncovering future revenue and or expenses projections based on anticipated sales Future plan your product inventory (or billable hour inventory in a service business) and availability based on seasonality To simulate a variety of “what if” scenarios with business finances, personnel, and production A simple pro forma is often the first step to answering the question, “what would happen if…”  If we hire that person?  If generated that revenue?  If we stocked up on that inventory?  If we saw a 10% reduction or a 20% increase in sales? There are a few basic elements needed to build a simple pro forma calculator for your business. First, you will need to define the purpose of the particular pro forma calculation.  An example purpose may be to answer, “What is the financial impact to the business of hiring a new person?” Next, define what categorical outcomes the pro forma will provide… what is the ultimate result or number you are looking for?  In our example, the “financial impact” means looking at the net income of the business if we hire the person and they receive a compensation of X and produce a work-product of Y. Once you have your ultimate result defined then begin to work backwards to fill in the gaps of values (inputs) you will need to know in order to calculate a final result. Typical foundational cells or values to include in a compensation pro forma are: Base compensation values Incentive compensation (bonus) values Any other expenses (overhead, etc.) values Type(s) of product or service(s) Average ticket price of product(s) or service(s) A spread of months and years to run your scenarios (Year One/Month One, Year One/Month Two, etc.) Pro formas can actually be quite addictive as you become equipped with greater objective information to make decisions in a constantly moving subjective climate.   A pro forma is best situated within a business that runs the RPMs of great leadership. A culture of repetition ensures that the necessary communication feedback loops are in place to regularly run pro formas for decision-making. A culture of predictability ensures that the results of the pro formas find a home in the decision-making process.   A culture of meaning ensures that the decisions made based in part on pro forma generated data is properly and appropriately integrated into the day to day aligned with the vision, the mission, and the values of the business.