How do fixed costs scale with headcount? Can I use a rule of thumb ratio, say salary x 1.5?
I've heard that start-ups often write proforma budgets using a rule of thumb for figuring fixed costs (rent, utilities, fringe benefits, etc.) in other words costs that scale with headcount. The ratio I've heard is 1.5-2.0 times salary, depending on location. Is that reasonable?
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Yes, it is reasonable - depending on location. – Net Tecture 13 years ago
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possible duplicate of [The 100k per Employee Rule in Small Software Business](http://www.brightjourney.com/q/100k-per-employee-rule-small-software-business) – David Benson 13 years ago
3 Answers
I think multiplying payroll by a fixed figure won't be very accurate because some expenses, like rent, scale by number of people, not by salary.
But I agree that extensive navel-gazing trying to figure exactly what expenses will be incurred when is time-consuming, painful, and probably wildly inaccurate. I take a different approach altogether, and it works well for me:
- For each job function (sales guy, software engineer, hardware engineer, etc) I establish a monthly budget for expenses and a monthly budget for travel. For software engineers I use something small, like $1K/mo expenses and $250/mo travel, but the numbers should be much larger if your engineers are using expensive tools or hardware.
- I create hand-crafted line items by month for rent+utilities, corporate legal, patent, extraordinary marketing expenses (like trade shows). Ongoing marketing expenses (like advertising) I embed into cost of sales.
- I multiply salary by 1.3 to represent health insurance, taxes, etc.
My figures end up being amazingly accurate, and not too painful to create. Of course you then have to create a hiring ramp by job title, and decide what each position pays.
Yes, people generally use that kind of uplift. Beware that it is only a rule of thumb: some costs scale with salary, some don't, and given that often in startups you're paying below-market salaries you should try and get realistic numbers on office costs and any company size-driven taxes based on where you are located.
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Actually office cost is one that doesn ot scale. You have a big or a small office, but you can normally not add deskes for people. So, this is juping in stairs, when you switch offices. – Net Tecture 13 years ago
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Budgeting is never an exact science. In the startup context you are often looking at specific office options with their own particular costs and capacities - but also you may be looking at a longer horizon where it's fully appropriate to look at a loaded 'cost per seat.' And, of course, at an early stage many cities have multiple options in business centres etc where you can if you like pay rent / a license fee by the seat. – Jeremy Parsons 13 years ago
I think that you should never calculate costs like that. Take a good time to do a really detailed budget. But a budget is nothing if you don't have a at least 1 year business plan.
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But for my experience, it is something like 2x the salary. You should see what you are providing (gas, car rental, healthcare, taxes, courses/year, xtmas salaries, vacations substitutes, travels, conferences). And you should have a spare invested fund for each employer of at least one salary (if they leave the company in many countries you have pay for 30 days and hire another person at same time to learn about the position). Well.. many things that you will definitely pass through and you will not lose your health to solve those things if you have good emergency funds.
