• Wade Myers

Fractional Employee FTEs

Q: Is there a reason why direct labor employees increases in increments smaller than 1?  Is there a way to change it to increase in whole numbers?

A: Good question. Obviously full time employees only come in chunky, full employee increments, but in most cases in a startup - especially in the early days of launching - employees are fulfilling many roles: they may sell for part of their time, fulfill the role of account manager for part of their time, and act in the role of customer support. And, in many cases, overtime, part-time labor, or 1099 contractors are used for growth to fill in the gaps between hiring full time employees.

In addition, because of the imperfection of forecasting, it would hard to know so far in advance during the planning phase what month the actual hiring takes place.

And, given the nature of startups, hiring full time equivalents in every few months throws costs and margins into a dramatic sawtooth up and down pattern that invites more questions and scrutiny than it would otherwise.

By scaling direct labor and direct sales and account management roles in a fractional way, it smooths out the costs and margins and reduces the noise. To try to precisely guess when an employee would be hired is rather like false precision. So that’s why we have settled on fractional growth of Direct Labor rather than increments of full employees. The other practical issue is that rounding algorithms usually round up any extra fraction of an employee to a new FTE and that’s not how it would actually work in practice. Everyone would just work harder for a long time and you finally break down and hire another employee because current employees are stretched way too thin. Rounding up in full time increments would force the model to add full time employees pretty further in advance of reality and make the costs, margins, and cash look lower than what would actually happen.

The app allows you to enter fractional FTEs to one decimal and the reports also show it that way. Most partners, advisors, and investors will think it is very reasonable to assume 1.5 FTEs, for example, in a particular role in a particular month as a way of reflection part time work, overtime work, or contractor work.

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