AARON & SCOTT EPISODE 1 (PART 2)

The Other P&L: Podcast Section (Scott and Aaron Episode 1 Part 2)

Aaron: (00:00): Okay.

Scott: (00:04): Hey Aaron, CFO. I really don’t understand why CFOs are so focused on headcount, right? It, every time we need, we have an open position. We gotta go through this role. There are several layers of approval to get somebody who is, has already said that they’re gonna resign in two weeks. I can’t get approval to post a job until four weeks after they leave. Then it takes me too long to hire the position. And at the same time, Aaron, you, and the other senior leaders are complaining that we’re not hiring people fast enough. Now here’s my point, right? You’re so focused on headcount and the number of headcounts. We can only have 200 employees exactly in the company and you manage it so carefully. So that the number of current employees, plus a number of open positions only equals 200.

Scott: (00:58): It does not equal 210. It’s only 200. So this is slowing me down. And by the way, it’s creating issues with our leaders who are looking to post because you’re so focused on a headcount number, only giving us one headcount for a team. And maybe that position pays $150,000, that if the manager had an opportunity to manage his or her labor expense budget, and you just gave ’em a budget and say, run with it, they might say, I’m gonna hire two or three people for that same cost and just you hold them accountable for that headcount or for that labor cost of the year. You know what? You allow them to go and sign a contract with $50,000 or a hundred thousand dollars or in million without you being involved. But yet every little headcount thing you wanna prove it,

Aaron: (01:51)

that’s a lot to unpack with the dynamics because what you’re talking about is the dynamics of a corporate culture about how an individual or a group of individuals manages. But, but let’s take this pipe by bite, right? So, as a CFO, you should be the executive leader. You should be focused and making sure that the ship is running right from the back office, accounting function, the defensive side of the equation to, Hey, look, the offensive side where we’re formulating strategy. And part of that is making sure that the operations of the business and the trajectory of the business are going well. One thing for many companies is a headcount and so often, okay, Hey, if I had 250 headcounts entering the year and I exit with 250 as a CFO, feel good because, at a macro level, my expenses are somewhat controlled just by that simple metric.

Aaron: (02:50): However, how do I with numbers is a great and ongoing story with finance guys because I could have turnover and mix shift change where all of a sudden I’m hiring higher-end people executive-level people and I’m replacing, replacing the staff level, people that churn during the year. So, one thing that is really effective for companies is having a decentralized responsibility as it relates to hiring or replacing headcount, right? Where we set budgets at a corporate level or through the CFO lens and people can hire and use the gas pedal or the break to manage their budget and to recalibrate their team to what they need. So they might have started off the year with a team of 14, but guess what? Maybe I wanted to shift that mix to having a little bit more senior people or maybe a heavier contract mix as CFO.

Aaron: (03:54): What do I really care about? I care about two things here. Number one, I wanna make sure that my expenses are being managed. So I give a budget that has to be controlled. And the second thing Scott is that we have to worry about the trajectory while I might stay in budget for the year. What’s that annual run rate coming out in December or whatever your year-end is, but let’s just say December I ramp up and my headcount went really high. So as we reset the budget for next year, that we’re going to completely blow out all profitability measurements. That’s why we care about headcount,

Scott: (04:32): I completely agree about headcount, but why can’t you measure it in labor expense and have a runway for labor expense? That’s my whole pro I completely understand as a C H R why there’s a need to make sure that we don’t go over a budget for labor co I totally get it right. That’s how I run my own personal family budget. Right? I get it. But why is there such a focus on headcount, which means bodies, this a focus on labor expense, which, and you can throw in the overhead of 50% plus for handle benefits and office and computer services and all that different stuff? I understand that piece, but there with all the financial technology that we have today, why are you more willing to measure it by labor, give leaders, regular reports on where they are with their labor expense and what their run rate is, and where you anticipate them to meet during the end the year and let them manage that. Not through headcount, but through labor expense, getting back to my original example of hiring a hundred one person, 150,000, or hiring three people at 50,000.

Aaron: (05:46): And that’s a point really well taken because I think you get into the CFO, right? Where Hey, look, I wanna hire a different mix of people. Well, no, because it doesn’t fit into the paradigm of the headcount that we had, right. Or, the labor costs and this, and it creates this ugly negative variance. Right? Well, you realize on the other side, I’m saving money here. So that net it’s the same right. Or CFO. And some people just can’t see past that part of it is culture. Part of it is, Hey, look the way the company might be set up, I can’t see that part of the equation. So that’s why I think it’s a really great balance to have I would say two key elements. Number one is authentic ownership of the budget by department owners or business unit owners or however you structure it maybe even at a cost center level so that, Hey, look, there’s accountability to managing to a budget.

Aaron: (06:53): And, that’s not just on the operating expense level. Right. a really great application is if revenue’s tight if this is a down year, what are you doing to scale back? what are those things that we are doing to hold the line? And maybe we, instead of growing and hiring people, slow down our hires and cut discretionary spending, right? I think that’s definitely a key component putting it with the business. But then I think the really great thing and I’m very biased being a finance person, but putting some trusted business advisor that can help guide the business to say, Hey, look, let’s make sure we don’t blow things up, but let’s enable something that can be sustainable and that we can stay not within budget, but also satisfy your needs.

Scott: (07:46): So, Aaron, if you were to give me and just say, here’s the budget that labor expense budget for each department. And here’s what our runway is today. I am more than happy from a CHR perspective to manage that. And I guarantee you that I will come in and make sure that every department is out within budget, I will manage the break and the accelerator for you, but give me approval. Give me the ability to go ahead and do that. Give me the budget, say, Scott, here you go. Run with it. I will work with the individual leaders that allow me then to post a job quicker without having to come through you and say, oh, by the way, Julie is resigning in three weeks. Can I please have the approval to go ahead and post a job? So let’s figure out a way that you and I can work together so we can move faster because candidates aren’t gonna wait around for two or three days for you to approve an offer or that we can move forward. And that sort of thing you have to make almost offer same day as you’re interviewing, as long as you find somebody that’s gonna that what you’re looking for and meets the qualifications of the job.

Aaron: (08:57): And just real quick to respond to that a hundred percent agree in terms of why do we create an artificial step, an approval that doesn’t really matter? does the CFO know the particular resume, the functional need, should they absolutely not. That’s not the role of a CFO, right? Is it well, what I would add on top is that we have, um, enough technology years ago, Scott, right? When maybe I didn’t have so much gray in my beard, the information might not have been as easy to obtain. So where was I? I don’t know. I have to rerun the numbers. Let’s crunch the numbers again to make sure or, Hey, look what is our revenue doing? I don’t know. We’re not closing the books for another two weeks.

Aaron: (09:51): That’s not where we are the numbers. definitely big publicly traded companies. That data is just like that. You can get after it. You have rolling forecasts, even at small companies, there’s such application, such easy applications to get after this, to be able to say, let’s get the entire picture, okay. Hey, we’re still running on the plant. This is just a replacement hire. There’s no change in our operations. Now, the only caveat I’d have here is if, for some reason as CFO, you look at the big picture. So while maybe a department or business unit is doing really well other parts of the business might be suffering, right. And we have to protect our shareholders. And whether that means to protect earnings or whatever the case might be there has to sometimes be a top-down call to say I know it’s a replacement hire, but we’re having a freeze on it.

Aaron: (10:46): That’s not gonna be a one-off situation. That’s gonna be a macro discussion, but assuming but for that, I completely agree. And I think as we go into a modern era of management, this is something a CFO should simply say, Hey, look, we have a golden rule. Here’s the budget. And if you’re gonna hire someone, that’s fine. the replacement $50,000, you’re gonna hire someone at $50,000. The CFO should didn’t even know that as far as I’m concerned. So I think that’s a great question, Scott. And I think that’s something that you can build very readily in a company. Well, let’s go make it happen, h