Headcount Analysis

Common-sizing By Headcount

Understanding Common-sizing
To common-size, you typically divide every number by the same number. It's conventional, for example, to
common-size an income statement by dividing each entry by the total sales for the period covered by the
statement. Doing so converts each dollar figure, from cost of goods sold to operating income to income taxes to
operating expenses, to its percentage in terms of total sales.

For Example:
The rationale for common-sizing in terms of total sales is that most of a company's activities depend on its
revenues. The more the company sells, the greater its cost of goods sold. In a well-managed firm, greater
revenues result in greater profits. And, although there are exceptional cases, a higher level of sales tends to cause
a higher level of salaries. Because total sales exerts an effect on so many of the items in an income statement, a
common-sized statement is usually based on total sales.

Common-sizing by Headcount AKA Headcount Analysis

Worksheet 1
If gross profit and an operating income figure such as EBITDA are not sensitive to headcount, while such major
expense classifications as salaries are sensitive, then there can be a compelling business reason to reduce the
number of employees. For example, if XYZ Widgets can expect roughly the same level of revenue regardless of its
headcount, management will give serious thought to reducing the number of employees.

Of course, doing so can have unanticipated consequences. It might be that, while increasing headcount does not
increase gross profit, decreasing headcount below some minimum level results in poor customer service-which is
guaranteed to reduce gross profit.

Worksheet 2
On the other hand, if headcount is directly related to gross profit, there might well be an argument for increasing
headcount, particularly if the business uses some method of direct sales. The trick is to increase the number of
salespeople, and hold steady the number of staff who do contribute only to expenses, not to gross profit. This
process is tricky because, in most cases, the greater the gross profit, the larger the number of staff required to
support after-sale processes.

Suppose, however, that management believes that they can convert the responsibilities of three of their current
full-time staff from both sales and staff functions to sales only. They also consider hiring one additional
salesperson. They believe that if these employees are free to perform a sales role only, instead of both revenue-
producing activities and support activities, each salesperson can generate an average of $13,138 per month. The
remaining employees will devote 100 percent of their time to performing support activities.

Management obtains the dollar figures for Gross Profit, in row 7, by multiplying the Sales headcount in row 6 by
their assumed sales level of $13,138 per salesperson. They also assume that their average salary per employee
will be $5,450. Restated, these assumptions are:

1. Both total gross profit and average gross profit are sensitive to the number of sales employees.

2. Total salary expense is sensitive to the total number of employees, but average salary expense is constant.

The result, if management's assumptions pay off, is that they can actually increase total headcount and cause
XYZ Widgets’ EBITDA to become positive, even during its traditionally money-losing months. The assumptions
involved are optimistic, particularly the notion that making some employees full-time salespeople will double the
per-employee gross profit. But even if the per-employee increase in gross profit is only 50 percent, the results
would increase the profit in good months, and reduce the loss in bad months.

In large corporations, common-size analysis on the basis of headcount is done frequently and is especially tricky.
It often happens that one division reduces its headcount so as to decrease its expenses, hoping that as it does so
its revenues will not suffer. It can also happen that the employees who leave that division find employment in
another division of the same large corporation: usually, one that is not currently under pressure to reduce its
expenses.
involved are optimistic, particularly the notion that making some employees full-time salespeople will double the
per-employee gross profit. But even if the per-employee increase in gross profit is only 50 percent, the results
would increase the profit in good months, and reduce the loss in bad months.

In large corporations, common-size analysis on the basis of headcount is done frequently and is especially tricky.
It often happens that one division reduces its headcount so as to decrease its expenses, hoping that as it does so
its revenues will not suffer. It can also happen that the employees who leave that division find employment in
another division of the same large corporation: usually, one that is not currently under pressure to reduce its
expenses.

The net result is that, although one division might improve its profitability through a reduction in expenses, another
division's profitability suffers be-cause of an increase in expenses. Then, the corporation, considered as a whole,
has probably not improved its profitability. However, it has managed to disrupt people's lives, increased levels of
anxiety among those whose positions have been retained, and probably increased non-productive costs because
overhead procedures usually change when people leave.

Therefore, when divisions report that they have reduced headcount and consequently increased their profitability,
it is incumbent on them to estimate the effect of doing so on the corporation as a whole. Although this estimate is
often a difficult task, it is a necessary ingredient of an accurate estimate of the effects of their analysis and
consequent actions.
 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Totals
Headcount 5 5 5 5 4 4 4 3 3 3 3 3
Gross profit $42,589 $53,765 $38,846 $15,214 $20,512 $21,213 $20,674 $12,698 $11,854 $12,779 $55,155 $52,702 $358,001

Salaries $20,000 $20,000 $20,000 $17,500 $17,500 $17,500 $17,500 $17,500 $17,500 $17,500 $20,000 $20,000 $222,500
Payroll taxes $2,240 $2,240 $2,240 $1,960 $1,960 $1,960 $1,960 $1,960 $1,960 $1,960 $2,240 $2,240 $24,920
Lease $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $12,000
Phone $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $6,000
Supplies $200 $200 $200 $200 $200 $200 $200 $200 $200 $200 $200 $200 $2,400
Insurance $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $6,000

Total $24,440 $24,440 $24,440 $21,660 $21,660 $21,660 $21,660 $21,660 $21,660 $21,660 $24,440 $24,440 $273,820

EBITDA: Actual $18,149 $29,325 $14,406 ($6,446) ($1,148) ($447) ($986) ($8,962) ($9,806) ($8,881) $30,715 $28,262 $84,181

Common-sized By Employee
Gross profit $8,518 $10,753 $7,769 $3,043 $5,128 $5,303 $5,169 $4,233 $3,951 $4,260 $18,385 $17,567 $94,079

Salaries $4,000 $4,000 $4,000 $3,500 $4,375 $4,375 $4,375 $5,833 $5,833 $5,833 $6,667 $6,667 $59,458
Payroll taxes $448 $448 $448 $392 $490 $490 $490 $653 $653 $653 $747 $747 $6,659
Lease $200 $200 $200 $200 $250 $250 $250 $333 $333 $333 $333 $333 $3,217
Phone $100 $100 $100 $100 $125 $125 $125 $167 $167 $167 $167 $167 $1,608
Supplies $40 $40 $40 $40 $50 $50 $50 $67 $67 $67 $67 $67 $643
Insurance $100 $100 $100 $100 $125 $125 $125 $167 $167 $167 $167 $167 $1,608

Total $4,888 $4,888 $4,888 $4,332 $5,415 $5,415 $5,415 $7,220 $7,220 $7,220 $8,147 $8,147 $73,194

EBITDA: Actual $3,630 $5,865 $2,881 ($1,289) ($287) ($112) ($247) ($2,987) ($3,269) ($2,960) $10,238 $9,421 $20,884
Enter Average Sales Per Salesperson $13,138
Enter Average Salary Per Employee $5,450
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Totals
Headcount (staff) 2 2 2 2 1 1 1 2 2 2 2 2
Headcount (sales) 4 4 4 4 5 5 5 6 6 6 7 8
Gross profit $52,552 $52,552 $52,552 $52,552 $65,690 $65,690 $65,690 $78,828 $78,828 $78,828 $91,966 $105,104 $840,832

Salaries $32,700 $32,700 $32,700 $32,700 $32,700 $32,700 $32,700 $43,600 $43,600 $43,600 $49,050 $54,500 $463,250
Payroll taxes $3,662 $3,662 $3,662 $3,662 $3,662 $3,662 $3,662 $4,883 $4,883 $4,883 $5,494 $6,104 $51,884
Lease $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $12,000
Phone $562 $737 $608 $678 $486 $551 $531 $510 $489 $468 $447 $426 $6,492
Supplies $142 $263 $132 $299 $106 $177 $173 $170 $166 $162 $158 $155 $2,103
Insurance $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $6,000

Total $38,566 $38,862 $38,602 $38,839 $38,455 $38,591 $38,566 $50,662 $50,638 $50,613 $56,649 $62,684 $541,729

EBITDA $13,986 $13,690 $13,950 $13,713 $27,235 $27,099 $27,124 $28,166 $28,190 $28,215 $35,317 $42,420 $299,103

Common-sized By Employee
Gross profit $8,759 $8,759 $8,759 $8,759 $10,948 $10,948 $10,948 $9,854 $9,854 $9,854 $10,218 $10,510 $118,169

Salaries $5,450 $5,450 $5,450 $5,450 $5,450 $5,450 $5,450 $5,450 $5,450 $5,450 $5,450 $5,450 $65,400
Payroll taxes $610 $610 $610 $610 $610 $610 $610 $610 $610 $610 $610 $610 $7,325
Lease $167 $167 $167 $167 $167 $167 $167 $125 $125 $125 $111 $100 $1,753
Phone $94 $123 $101 $113 $81 $92 $88 $64 $61 $58 $50 $43 $968
Supplies $24 $44 $22 $50 $18 $30 $29 $21 $21 $20 $18 $15 $311
Insurance $83 $83 $83 $83 $83 $83 $83 $63 $63 $63 $56 $50 $876

Total $6,428 $6,477 $6,434 $6,473 $6,409 $6,432 $6,428 $6,333 $6,330 $6,327 $6,294 $6,268 $76,632

EBITDA $2,331 $2,282 $2,325 $2,285 $4,539 $4,517 $4,521 $3,521 $3,524 $3,527 $3,924 $4,242 $41,537