Budgeting is one of the most high-stakes guessing games businesses participate in. Because budget planning is (ideally) done in the months before the year the budget actually occurs, most budgets must be created without all the details. However, you don’t have to go into the HR budget planning process blindfolded. The four categories below represent the primary line items; apply the guidelines to your own company and you’ll be off to a good start.
HR Budget Planning Considerations
1. Employee Wages & Salaries
The greatest cost in your HR budget will be employee salaries and wages, so it should come first in your HR budget planning template. Think about:
- Hiring plans for the following year. This includes projecting base compensation, bonuses, and commissions for newly created positions.
- Average salary increases across the board.
- Annual raises. If you give employees annual increases that coincide with performance evaluations, budget for that percent increase.
Because wages are the most expensive line item in HR budget planning, review this area carefully. What if you end up bringing on 10 new employees and haven’t budgeted for hiring costs at all? Fortunately, you can use your employee roster to see historic data in this area and budget for it accordingly.
A variety of people may take part in building the budget for the HR department:
- HR managers may have existing salary and market data that can help project numbers for the upcoming year.
- Finance leaders (vice president of finance, the CFO, etc.) should also be involved, as they have historical point of view and can project based on that data.
- The small business owner will review and approve the HR budget once it is drafted.
2. Cost Of Employee Benefits
The next line item to consider is employee benefits. To forecast this amount, take into account your organization’s strategy toward contributing to employee benefits, including health and other insurances and 401(k) contributions.
The amount your health insurance provider charges you is called the premium. As the employer, you can elect how much of the premium you’ll contribute and how much is your employees’ responsibility. As you go through the budgeting process, review your health insurance strategy and determine if you want to change your contributions based on overall business performance.
Estimate for the next year’s health insurance premium increase. Each year, your premium is subject to change—usually increase—but these increases are not necessarily predictable. So how do you budget an increase? While you can’t necessarily base your new line item on its history, you can gather market data (trend increases, etc.). Take a conservative approach to budgeting here, because underestimating these costs could put you in the red.
Go through this planning process for all insurances you offer, including health, dental, etc.
This is the easiest line item to budget for because it’s a fixed percentage. You can estimate that all employees will receive a specific amount. Wondering if you should you auto-enroll your employees into your company’s 401(k) program? Check out this article.
Note: When budgeting for new hires throughout the year, estimate the benefits they may elect and at what level, so you can put the benefits cost in your budget along with their salary.
3. Training and Development
Estimating the cost of employee training and development can be as basic as calculating the cost of joining webinars, attending seminars, attending conferences, education reimbursement plan, certifications, etc. Use data from previous years as a guideline.
4. Paid Time Off (PTO)
While the budget for the HR department probably does not include PTO or vacation time accruals (this is usually a line item in the accounting budget), the time off accruals that go unused and are carried on your books are a liability to the company. The HR department should be involved in reviewing these HR balances, so the amounts can appropriately be recognized. The bottom line here: Account for PTO accruals in your books somehow, whether in HR or accounting.
The Importance Of HR Budget Planning
If you’re an HR leader who wants to be taken seriously in your organization, you have to understand the numbers behind your job. HR is an important function that impacts every employee in an organization—and that has a cost. The better you understand the cost of being an employer, the better decisions you can make for your organization.
Looking for help with your HR budget?
We get a lot of questions about the cost of insurance and market data for salaries—these are things we help manage in our role as a PEO. We have access to market trends, and can help provide data points for both insurance costs and salaries. We partner with companies to help them obtain and decipher that market data, so they can make HR budget plans that save money. We’d love to help you, too—just contact us today to talk with our HR experts.