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Preparing a Budget for Human Resources

HRM - Jojonomic | Officeless Operating System, No Code, HRIS, Human Capital  & Expense Management

HR does more than what seems on the surface. For a business owner or employee who doesn’t know the ins and outs of HR and how it works, complaining about not getting a pay raise or additional benefits and expecting an immediate turnaround is not wrong. 

A company’s owner or senior leadership is responsible for conducting proper budgeting of the funds they are expected to allocate throughout the year for payroll and benefits, make space for new initiatives, handle employee issues, and take into consideration other unexpected costs. 

As the expense function of the organization, budgeting to the tee for the entire year is not possible. Unprecedented surges in demand may give rise to an increased need for employees. This can increase the compensation costs too. 

If leadership does not take a well-planned approach, chances are that the people operations function has to request additional funds to complete the year and even complete basic stuff like giving out year-end bonuses. Also, a well-planned budget keeps the company from hiring unnecessarily and leaving money for attracting and retaining top talent in the organization. 

What is HR budgeting? 

Before we learn how to prepare an HR budget, let us understand what an HR budget entails. An HR budget includes the funds the business needs to hire people, give salaries to new and existing workers, conduct learning and development initiatives, engage employees, offering benefits like health care plans, paid time off, and retirement benefits. 

HR budgeting generally makes use of the historical data of the expenses and the performance results of the organization which might indicate the need for new talent or the need to lay off employees. While these are basic factors, while conducting budgetary planning, you should consider a wide range of factors to make sure that the estimates are accurate and fulfill the needs of the organization. 

How to Prepare an HR budget 

For preparing an HR budget, one cannot follow a one-size-fits-all approach. There are far too many factors and vast differences from company to company, even if they belong to the same industries. So, preparing an HR budget is unique to every organization. 

The basis of the HR budget is set by the strategic direction of the organization. For example, if the organization is committed to expanding, not accounting for the increase in the number of employees it will require means failure. If a company wants to downsize, or even divest from certain business areas to focus on a single expertise, the HR budget needs to be prepared likewise. 

But even if there is no defined approach to budgetary planning for HR, here are some ways that can help determine the best way to budget:

Review Company Performance

One of the best and most common factors considered when planning an HR budget for the year is reviewing the performance of the company and increasing or decreasing the budget accordingly. This means looking at past budgets and determining the best allocation based on any overspending or underspending that was done.

Choose the Correct Strategy

When it comes to choosing a strategy for budgeting for HR, zero-based budgets are the best approach. This means that any money allocated to different activities should be justified before it is included in the budget. Incremental budgeting is also a good strategy if the next year’s goals of the firm and the growth expected to achieve are clear.

Analyze Performance in Real-time                                                                                                                                                                                                                                                                                          

Another approach to budgeting is an analysis of the performance of the HR function in real time. This means that the level of budget allocation to tasks kike recruitment, hiring, and training, and their outcomes should be considered before raising or reducing the budget for any activity in the upcoming year. 

Gather Data from Other Sources

There is a lot of information that is available in an organization. A great deal of this information is useful for preparing an HR budget. This includes financial and non-financial data. Some examples of data sources that can be utilized by the HR department when preparing a budget are given below: 

  1. The rate of employee turnover
  2. Recruitment budget (Advertising, hiring agency fee, personality and skill tests)
  3. Background checks and drug testing
  4. Any plans for introducing new benefits
  5. Training and development needs
  6. Payroll costs
  7. Expected overtime or temporary employees
  8. Any consultants/ external auditors to hire
  9. An expected increase in salary costs
  10. Any policy changes or regulation updates that might impact costs
  11. HR-related traveling costs
  12. Employee welcome pack
  13. Printing costs
  14. HRIS maintenance and subscription costs
  15. Administration of 401(k) retirement benefits
  16. Health insurance and other insurance benefits
  17. Software for performance appraisals
  18. Employee recognition-related expenses
  19. Expenses of labor relations (consultants and attorneys)
  20. Implementation of a diversity program
  21. Fee of compliance forms
  22. Employee assistance programs


5 Tips for Preparing an HR Budget 

While the HR budget is highly dependent on the data gathered from various sources, here are some tips that can help in reducing the risk of underbudgeting or going way over the projected expenses: 

  1. Conduct an HR Audit

An HR audit every once in a while can help get a fresh perspective on the HR activities being done in-house. For example, the experts at GritHR Solutions can recommend HR activities that the industry might be practicing already to make sure that the company is following the current trends.The audit also helps identify the areas of improvement. Therefore, the budget should take into consideration the recommendations given by the external HR team.  

  1. Analyze and Prioritize Needs

There is a long list of activities that HR could invest in. However, many times HR is faced with a budget constraint. In this case, budgeting based on past data and growth projections would not work since there is limited money available. 

This calls for identifying the activities that are essential for propelling the growth of the organization and the activities on which the HR department can be flexible. 

Having a clear idea about the goals and strategy of the organization can help prioritize the activities and allocate resources accordingly. 

  1. Optimally Allocate Funds

Even if HR has access to a great deal of money, there are still some activities that would be left out. In any case, it is recommended that the funds are optimally allocated to each activity, neither overestimated nor underestimated. 

The amount of funding for each activity also depends on the priority that it has. For example, if the organization has aging upper management, allocating funds to mentorship would be a priority. 

  1. Propose Necessary Adjustments As Needed

One mistake that is often made is keeping the budget static. This could mean carrying the same budget for salary costs from the previous year, disregarding annual salary increases and the need to recruit more employees if the organization needs extra hands. 

The HR budget is a reflection of the changing business needs and is an indicator of business growth. Therefore, if it is static year-on-year, it means that the money being allocated to HR is not yielding any benefit for the bottom line. 

  1. Set Realistic Budget Caps

Any activity would likely go over budget depending on the situation and any new needs that are identified at that time. For example, the need to invest in software that efficiently handles the mentorship program might be realized when HR is implementing the strategy. 

In this case, it is okay to set a realistic budget cap for each activity. It does not mean that every activity needs to be over budget. In some ways, setting a cap also helps determine where HR can be flexible with the costs so the money allocated to one activity can be reduced to invest in another. 

However, making considerable changes in the budget afterward is not recommended since it leaves no purpose for budgeting in the first place. 

Summing it Up 

HR is an expense function. Therefore, designing a budget that justifies the finances demanded from the top management is necessary to assure that each activity has allocated funds to it. It also means that the budget for human resources activies and strategic inititatives does not run out before the year even ends. 

Budgeting beforehand is a smart approach and also keeps the goals clear and propels the team to follow the planned calendar to the tee except for a few necessary changes.  


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