8 HR budgeting tips
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Why is a HR budget important?
Why is a HR budget required? Like any other business function, HR needs to manage costs, forecast ahead and allocate resources wherever they are needed most. A HR budget is one way to prevent overspending, inefficient resource allocation, and to ensure your organisation’s most valuable asset – its people – are looked after.
At a glance, a HR budget will reveal where resources should be allocated, provide a comprehensive overview of where and how funds will be spent, and what initiatives will be prioritised. This in turn helps HR leaders align their activities with organisational objectives, avoid resource bottlenecks, and streamline processes.
Data is king
Data makes the wheels of the business world turn, so it’s imperative that, as a starting point, HR has access to historical data. To create a HR budget, it’s important to ensure you have access to financial information, performance results, evidence of return on investment (ROI) from the previous financial year’s initiatives and programs, and historical data from every department relating to core metrics like turnover, engagement, labour costs, and so on.
Information in the HR budget includes, but is not limited to:
Current and expected future headcount
Recruitment expenses
Employee turnover rates
Compensation and benefits. Few areas of the HR budget will be analysed as much as this one. In addition to standard remuneration – ideally industry benchmarked to ensure fairness and market competitiveness – include allocations for benefits packages and incentives, including bonuses and any additional perks that contribute to employee satisfaction and retention.
Recognition programs
Training and development. This should include allocations for training sessions, workshops and online learning platforms.
Payroll costs
Labour costs, including anticipated overtime and use of external agency staff
Incentive compensation
Technology, including human resources management, workforce management, benefits management, payroll, LMS, intranet design and maintenance, data storage, etc.
Employee safety and wellbeing, including allocation of funds for workplace safety measures, wellness programs and mental health initiatives.
External consultant fees (e.g. legal, technology, recruitment, etc.)
HR administration, including anything required to ensure the administrative functions of the HR department can be funded and resources, including salaries for HR staff, office supplies and other day-to-day operational expenses.
Don’t forget your own HR team’s needs: Do they have the resources and tools required to meet the demands of the business? Will they need to upskill?
Budgeting tips
Although there is no set way to prepare a HR budget, and the process will be heavily impacted by the company’s strategic direction, most HR budgets follow these steps:
Define your business goals. Take the time to understand your organisation’s overarching strategic goals for the new financial year, so that HR goals can be aligned to these. This will have a significant impact on where resources should be allocated. For example, is the organisation likely to expand operations? Reduce headcount? Are mergers or acquisitions planned? There will of course need to be some flexibility in any plan and associated goals, as unexpected circumstances and events come up. For example, who could have predicted the impact of COVID-19 at the start of FY21?
Review historical financial performance. To budget for the future, you’ll have to review past budgets and the strategic plan. Did anything not perform as expected? Was expected ROI lower than expected? You can then establish goals and identify capital expenditures based on historical performance.
Decide on your budget type. There are generally two types of budgets used:
- Incremental HR budget – By using the data from the previous year’s HR expenses, it’s possible to make adjustments to the numbers for the upcoming year based on the other tips in this list.
- Zero-based HR budget – This is where a new HR budget or one that needs a complete overhaul is required. Start with a clean report with just the new year in mind, then allocate according to where the budget needs the most support.
- In both cases, planning the HR budget is a systematic process that involves a close look at the previous year’s expenses, current year forecasted costs, projected number of employees, and other future predictions so that HR functions are not under-resourced.
Analyse real-time performance data. Before you can create your budget, you’ll need to review HR performance data and budget actuals as they are in real-time. This analysis should include revenue, both departmental and organisational expenses, staffing (recruiting, hiring, turnover), and employee remuneration (also see ‘The role of technology’ below). Some cross-functional collaboration may be required to obtain this information – e.g. from payroll or finance.
Obtain a comprehensive view of how finance impacts operations. A single source of performance data will help your analysis – but again, you may require help from the finance team to prepare. When you can see a 360-degree view of all financial and non-financial information, you can:
Set more realistic budget caps
Understand where you can build flexibility into your budget
Monitor your budget’s performance in real-time
When planning and setting budgets, prioritisation is critical. You can anticipate future talent requirements by understanding the needs of the business. Assess the skills in your workforce and those needed for upcoming projects or business growth. Allocate more dollars to high-priority activities or initiatives that align best with your overall business strategy. Also consider feedback from employees: are there urgent issues to be addressed that are impacting engagement, productivity, turnover, cost blowouts, etc.? Was an employee engagement initiative or training program ineffective or underused? If so, consider reallocating resources to more successful initiatives.
Assess if any government grants or funding might help with any of those activities or initiatives – for example, funding for apprenticeships.
Ensure you have measures in place to track your spending so you stay within budget and can see whether a reasonable ROI is being achieved.
The role of technology
HR and workforce management technology provides a rich repository of data that can be used to budget and build business cases for HR initiatives and investments.
For example, Humanforce’s HCM suite offers advanced people analytics to uncover meaningful patterns and trends to help with future budget allocations and strategic decision-making.
Here are just a few of the reports that may help CHROs gauge past performance and forecast ahead.
Workforce Headcount: Consolidates all personnel information for easy workforce planning, mapping, and reporting needs. Pulls data through on all current employees and job information from each record.
Attrition Analysis: Assesses the historical lifecycles of employees to provide an attrition rate for the business. This can be used to help HR understand the attrition trends that should be investigated to reduce the risk of future regrettable leavers. Data is pulled from leaver’s job attributes such as their tenure, supervisor and business unit.
Starters & Leavers: Shows increase/decrease of staff headcount via the number of starters vs. number of leavers every month. Pulls data through from company start and end dates.
Remuneration Spend: Looks at expected total remuneration spend and average labour cost trends and forecasts. Pulls through all remuneration data from all current job records.
Annual Remuneration: Provides an overview of annual spend on remuneration across the workforce including information such as gender pay gap. Pulls through all remuneration data from all current job records.
Training Needs: Based on employee survey text responses to provide an overview of the trending themes and needs across the business when it comes to training and development.
Training Investment: Consolidates all training costs; both monetary and time investment is included. Pulls through all training data from each individual record.
Recruitment Spend Analysis: Summarises the overall cost of recruitment and the breakdown of the different sources used to recruit staff.
Talent Planning: Helps you quickly distinguish clusters of people that need specific support, as well as people who have high potential/performance and are ready to pivot to other positions should the need arise – to help with resource allocation.
Business Performance: Collates all performance metric data into a single page to assess performance trends across your organisation.
In addition, data and analytics relating to all aspects of workforce management can be accessed from the Humanforce suite. This may include reports relating to overtime, absenteeism, tardiness, shift take-up rates, and more.
If you’re looking to invest in technology in FY25, we recommend you download our essential guide to choosing a HCM suite here.
Expect the unexpected
A carefully constructed HR budget will aim to maximise the impact of finite resources – be it financial or human resources. However, the world is volatile and it’s impossible to predict everything. That’s why a ‘hope for the best, plan for the worst’ mindset is ideal.
Your HR budget should include contingency plans for unforeseen challenges. If your budget is contingent on revenue projections, safeguards should be built in for economic downturns. A financial buffer can help balance unexpected circumstances without scrapping, totally overhauling or compromising HR initiatives.
About Humanforce
Humanforce is the best-in-one platform for frontline and flexible workforces, offering a truly employee centred, intelligent and compliant human capital management (HCM) suite – without compromise. Founded in 2002, Humanforce has a 2300+ customer base and over half a million users worldwide. Today, we have offices across Australia, New Zealand, and the UK.
Our vision is to make work easier and life better by focusing on the needs and fulfilment of frontline workers, and the efficiency and optimisation of businesses.
To learn more about how Humanforce’s solutions can help automate people processes in your business, please contact us.
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