How to prepare HR Budget

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HR Budgeting is a powerful financial tool that can estimate the expenditures made by the HR vertical . This strengthens and allows the HR to control the cost rather than letting it control the HR initiative. The budget is drawn parallel to the goals of the organization. If the organization expands and requires to register a double digit growth in terms of its strength, it percolate to apportion funds in different areas including recruitment , retention, up-skilling, global mobility management and etc. The allocation of funds would be governed by the HR Strategies. The decision makers in an organization remain the main players to approve the budget. The recommendations and inputs are taken from different sources including operation, marketing, logistics and every other vertical within the organization. Macro areas including employee retention, recruitment and training and micro areas including programs designed for incremental benefits are all mapped into one complete budgeting program. It can be zero-based budget with no reference to last year’s expense.

The organization plan is drawn and the HR strategy gets aligned to it. Different expense points are defined followed by the identification of the bottlenecks which may affect the business. Such as sudden business ramp-up by a competitor would lead to a compensation review to arrest attrition. Similarly, every such area which may stand a threat within the HR systems needs to be covered. Allocation would be on the basis of priority and necessity. Few areas such as communication may not require a big budget but is an important and a continuous process. Correspondingly training and retention will have a great attention for a stable organization. In case the company plans to expand, recruitment would remain the primary focus. Legal and statutory will require allocation and follow-up as per the administrative guidelines. A study of the business units and products is important to identify the growth mode. Recognise the problem areas in those units. Emphasise on the HR strategies that can eradicate and improve productivity including time to market, profit-margins etc. This includes increase retention through employee engagement program and the recruitment of top performers. Implement metrics to measure these improvements. The metrics to calculate the ROI should be clear to the HR at all levels so that everyone can ‘think numbers’. Few measures as suggested in HR Management needs to be considered . This include average cost of recruitment per year, average cost of recruitment per staff, average cost of training per year, percentage training cost / sales turnover or productivity, training cost per employee, salary budget ratio / sales turnover, health safety cost per year, human resources cost per sales turnover and compensation and benefit cost / sales turnover per year. This helps in building up the high level report for the CFO to deliberate on it.

The HR Budget would further require the CFO’s approval. HR Specialist suggests certain measures which can be implemented to sell the budget to the CFO. Other than linking it to the organizational goals and emphasizing revenue returns, every program needs to highlight the benefit. Even an assistance package offered to an employee at the point of retrenching, adds to the bottom line. The average or the below average employee is considered as ‘cost’. Hence even when an advance salary of one month is offered to the employee at the time of separation, it still saves the outages for forthcoming months. Hence the cost of outages should be included as revenue. Measure the employee effectiveness program with the increase in profitability. Every engagement expense adds on to the productivity. Besides the training program that amount to up-skilling therefore connected to the profitability. The Budget needs to be in line with the current and future strategies of the organization. If the productivity level within the organization was high last year, the focus this year might be on the logistics and marketing. This year the spending on the human capital might shift into that direction. Finally it needs to include certain pre-emptive measures to mitigate any exigency including calamities such as swine flu, which may require relevant coverage of health benefits and talent deployment.

Every risk needs to be mitigated and loop holes mended. The budgeting program needs to be industry driven. Such as the cost of hire and ROI on training can be curbed if the retention programs are introduced. As explained by Dr. John Sullivan “The CFO from a top firm that I once worked for told me at our first meeting that he “hated” HR people. When I asked him why he said it was because they always used a term he hated, “strategic investment”. “Strategic investment”, to him, meant “putting a lot of money in up front and maybe getting a little return a long time later”. He later added that he also loved to cut the HR budget first because no matter how much you cut it…they still managed to “suck it in” and find a way to maintain all of their existing services”. Therefore the pre-emptive approach to understand the financial measure and implementing them through metrics will prepare a fail-safe  HR Budget.