How to Create an HR Department Budget
DECEMBER 02, 2015
We're approaching that time of year. Yep, budget time.
Being able to build a department budget is a valuable skill. It shows the organization that you are able to be a true business partner. And you will learn a lot about the company by participating in the budgeting process.
Here are the eight steps to use when creating your next HR department budget.
1. Know the Budget Calendar
Every organization I've worked for had a budget calendar. It outlined when budgets were due, when budget reviews took place, and when department managers would know when their budget was approved.
Having a clear understanding of the process is important. If your organization doesn't have a formal budget calendar, find time to talk with your chief finance officer. Ask them to share with you the specifics of how the process works.
2. Review Prior Budgets
Before starting a new budget, take a moment to review what happened in the past. Get an understanding of what was budgeted for in prior years and how accurate those budget amounts were.
Did you budget a lot of funds for something that wasn't spent? Why wasn't the money used?
Did you not budget enough funds for something? Why did you exceed budget?
This might prompt the need for some extra research, but it's totally worth it. If you have to justify your budget numbers, then you will want to know this information. Trust me.
3. Establish Goals
With previous years in mind, now it's time to establish our goals. We want to make sure that we get the financial resources to accomplish our goals and objectives. We also need to understand what other departments expect of human resources. It's important to meet with finance, marketing, operations, etc. to find out what goals they have that might impact human resources. And don't forget to meet with the HR team about their individual goals that will impact the department budget.
4. Identify Capital Expenditures
Most of the time, as a human resources pro, I had few capital expenditures. But it's possible that you might. Capital expenditures are incurred when the business spends money on fixed assets. An example would be property, plant or equipment. If you have a question about whether a budget request is a capital expenditure, ask your accounting department. They will be happy to tell you.
The capital budget is like a budget within a budget process. The capital budget is separate from the operating budget but goes through the same reviews and approvals as the operational budget.
5. Create the Department Budget
Now that we're ready to start actually putting numbers into the department budget, it's time to understand how your organization creates budgets. There are two types of budget strategies:
Incremental budgets are based upon adjusting the current budget. For example, "We spent XX dollars on office supplies last year. So, budget that we will spend 5% more this year."
Zero-based budgeting means that every item on the budget must be justified. Past budgets are not considered in the process.
As you think about your budget line items, remember a few key areas:
Revenue: An increasing number of human resources departments are generating revenue. They sell training programs to third-parties or allow tours of their organization (for a nominal fee). HR isn't always an "expense only" department anymore.
Expenses: Unlike some departments, HR has two types of expenses: 1) costs that only impact the human resources department and 2) costs that impact the entire organization. You'll want to consider each carefully and work with finance to make sure your budget submission reflects both.
Staffing analysis: I've worked for a couple of companies that charged back recruiting expenses to each individual department, but for the most part, recruiting is an HR expense. Having a current staffing analysis will help develop and justify your recruiting budget.
Employee compensation: For this area, I'm calling compensation the total package: wages, bonuses, benefits, perks, etc. HR might want to consider having current benchmarking data to establish and justify their budget numbers.
6. Know Where You Have Flexibility
Some people will call this step "sandbagging". It's when you add money to your budget knowing it will be cut in the review process - so you end up where you wanted to be all along. While I cannot officially condone sandbagging, I can unofficially tell you the process exists.
I'm not bringing this up to encourage manipulating the budget. I am mentioning it because, at some point, you will be asked to tweak your budget numbers. Be prepared and know where you can make adjustments without sacrificing quality.
7. Look for Budget Support
Once your budget is finalized, you will want to have supporters. Especially in the senior management team that reviews and ultimately approves the budget. They might not be able to give HR everything they want, but make sure your supporters know what the top 1-2 goals for the department are so those funds don't get cut.
8. Monitor Your Budget Regularly
After the budget is approved, create a process for reviewing expenses to ensure you stay on track. If your organization has a regular P&L review meeting, get yourself invited to it. You will learn a lot about financials and the company. And, don't be surprised if, at some point, you're asked to reforecast your budget. That's taking this process and rebudgeting (only in a much smaller timeframe.)
The art of creating a budget is essential to human resources management. We're the experts on HR, so we should be responsible and accountable for how much it costs. Budgeting isn't always the most fun activity, but it's one where you will learn a lot about the organization and build valuable relationships with the rest of the business.
Share This Story :
Learn more about Cornerstone
Interested in learning how Cornerstone can help you attract, develop, retain, and manage your talent to maximize your business results?