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Budget Boot Camp

For many HR Directors, drafting the annual HR department budget comes with the understanding that future project costs will be hyper inflated with the expectation that the majority of it will be left on the cutting room floor leaving a shoe-string level of funding for critical projects. If this matches your experience, this week’s blog on budgeting fundamentals and best practices can help. What the C-suite is trying to do is systematically collect financial data from the department heads and then prioritizes the budget dollars based on the degree to which they support organizational objectives. Developing a budget is a process with two common methods.

  1. Incremental budgeting – the current budget as a starting point and a new budget is developed by making adjustments upwards or downwards to each item based upon expectations.
  2. Zero-based budgeting – every item included in the budget must be justified before being included; therefore, the process begins with a blank page.

Regardless of which method your company uses, the critical step in preparing to write the budget is understanding the company’s objectives and how HR will need to respond in support. This means not only talking with the C-suite but also the other department heads. Will the company opening a new warehouse or office?  When is the next new product scheduled to be brought to market? Is a new IT system rolling out? Are there any mergers or acquisitions planned? Entering any new markets?

 Providing market based salary and benefits data for current and new job classes is a key part of the budgeting process. From a human resource perspective, the answers to these objectives impact company labor in several ways:

  1. The number of full and part time employees needed next year;
  2. Number of temporary staff or contractors needed next year;
  3. Benefit cost increases due to changes in headcount, vendor fees, or policy;
  4. Projected turnover rate with associated recruitment and onboarding costs;
  5. New compensation and benefit plans offered; and
  6. Impact of new or changed laws such as minimum wage, worker’s compensation, or insurance.

Most HR budgets cover operating expenses, such as the items listed above. Your HR budget may also contain capital expenditures. The difference between these two types of budgets is that operating expenses are for goods and service that are consumed or used up during the budget period whereas a capital expenditure is for an asset or project with a useful life beyond that period. For example, criminal background checks for new hires are an operating expense and a new HR information system is a capital expense. It is important to identify capital costs because they may require special funding sources such as a bank loan or selling of other assets.

It is also important to determine which projects and services are recurring or non-recurring. A recurring cost would be payroll expense. A non-recurring cost would be employment attorney fees. Knowing which items are recurring will help after the fact in managing expenses and identifying budget variances.

The opening paragraph spoke to inflated budgets and deep cuts. Much of this occurs to areas considered discretionary and contingency spending. Wide budget variances, both positive and negative, often result due to inaccurate forecasting or misunderstanding of company goals. WageWatch salary survey data provides the most current industry market metrics needed to build your compensation and benefits budgets.

At WageWatch, our expert HR team provides businesses in a large range of industries with accurate and timely survey data, Our benefits surveys and salary reports ensure that salary and benefits plans are on par with those in the industry. For more information on market compensation data, please call WageWatch at 888-330-9243 or contact us online at (WageWatch.com).