Rickerism

When planning a start-up, there is a simple equation for creating projections:

f(x) = ax + b

Where ‘x’ is the number of people, ‘a’ is the fully loaded weight and ‘b’ is the marketing budget. The marketing budget is not headcount driven. It is how much the company spends on advertising and tradeshows. For a business-to-business company, the value of ‘b’ can be very small. For a consumer company, ‘b’ can dwarf the headcount.

Normally you deal with month-to-month burn, so the ‘a’ and ‘b’ are monthly values. In the late 1990s, the value of ‘a’ was $10,000. That is, a typical start-up burned $10,000 per person per month, not including marketing expenses. If you added up all of your line items for salaries, benefits, taxes, travel, office supplies, rent, communications, equipment, etc. and divided it by your total headcount, you would come to a number very close to $10,000. The reason is that salaries dwarf almost everything else.

You can validate the numbers for yourself. Typically, a high tech company that does not require intensive equipment (like chip making) has 8 employees per $1 million in revenue. That equates to 8 people times 12 months times $10,000, which is $960,000.

This “ax+b” approach provides some key advantages:

1. Top-down prioritizing. The equation allows you to focus on ‘x’. How many people will I have and what will they be doing?

2. Benchmarking. If your expenses are over or under $10,000 per person per month, then you know if you are doing better or worse than your industry.
3. Little time for little things. Managers can burn a lot of time trying to calculate how much they will spend on little items like mobile phone bills. Headcount budgeting alleviates a lot of the minutia that gets lost in the rounding anyway.

I will walk through an example budget of $2 million.

With these numbers, the CEO can make priority decisions. “Sales and marketing, you have four people. What are they going to do?”

Headcount budgeting does not let your accountant off the hook. He still needs to track how much the company is spending on mobile phone bills and look for ways to reduce costs. However, the chairman of the board need never deal with such things. If the board keeps its eyes on ‘a’ and ‘x’ and making sure that those number are good, then the company will be well managed.