When it comes to optimising human resources, there are three questions that many companies grapple with, these are:
- How can we get the best out of our workforce?
- How can we improve our staff retention rates?
- How can we best prepare for expansion?
The answer to all of these questions is rooted in ring-fencing a dedicated HR budget to cover all of your human resource functions. Investing in attracting, retaining and developing your staff will ensure that they feel valued and supported and keen to help you reach your business goals.
There are a number of expenses to include when HR budgeting. In this article, we highlight what you should factor into your HR budget and explain the best way to plan one.
What is HR budgeting?
An HR budget accounts for all the expenses needed to cover all of your company’s human resource needs, from recruitment, onboarding, wages, training, benefits, perks and staff management to offboarding and succession planning.
Your HR budget should also look to the future and factor in expansion plans that will necessitate additional recruitment and cover contingencies, such as the need to make redundancies and cover the cost of maternity, paternity and adoption leave, for example.
Who is responsible for my business' HR budget?
Whoever deals with HR in your business, whether a dedicated team, an individual or even yourself, should be responsible for drawing up your HR budget financial forecast annually, but it is the company director or owner who'll ultimately sign off on that budget. Smaller companies often rely on external support and software to help them with their HR processes and this is also included in HR budgeting.
Anna Moss is the Founder and Director of Firecask, a full-service digital marketing, web design and development agency based in Manchester. She says that she gets comfort from being able to bring in outside HR help as and when she needs it.
“There are 12 of us in the company and in the past, when we were much smaller, HR came fully under my remit, but as we've grown I’ve taken on some external HR consulting support," she says.
"It’s great to have an outside perspective because I'm not an HR expert. So I have an independent HR consultant who helps us on an ad hoc basis. Her costs are factored into our overall HR budget, which we create on an annual basis, but some years our HR budget is higher than others, particularly if we have to use our HR consultant more for when something unexpected comes up, such as a problem with a staff member’s health."
Moss has also invested in HR software to help with the automation of some HR tasks. “We use a system called Charlie, which is where everyone can log their holidays and sick leave and that also comes under our HR budget,” she says.
Why plan your HR budget?
As with any area of your business that requires investment, it’s important to plan and allocate resources to HR in advance, and these figures should be recorded within your company balance sheets. When you plan your HR budget in advance, you can see how much money you have to spend on different aspects of HR, from hiring to developing your staff.
“Long gone are the days when HR used to be just about disciplining people and process-driven functions,” explains Kate Palmer, HR Advice and Consultancy Director at Manchester-based Peninsula, which provides HR consultancy services to over 70,000 SMEs in the UK and - as part of the Peninsula Group - over 120,000 globally.
“HR is broad, it encompasses a lot of different areas, from your recruitment strategies to the culture you create to equality, diversity and inclusion (EDI), corporate social responsibility and environmental social and governance (ESG) to social events. And it’s really important to plan for all these things in advance as they can easily run away with you."
“Your investment in HR should be aligned to your HR strategy, which is something that you should be allocating for in each financial year. It’s helpful to know how much money you've got to play with, throughout the course of your financial year, so you can, for example, put on a brilliant staff end-of-year party or run a training initiative around EDI. And, it’s useful to have some of your budget allocated for the unexpected, like a sudden acquisition.”
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How to prepare an HR budget
Every company is different and so each HR budget is unique, but there are two areas that it is advisable to focus on when HR budgeting:
1. Assess your past HR budgets
It’s useful to go back and analyse historical HR budgets to see whether they were accurate and then adjust them to allow for higher costs and changes in the size and makeup of your workforce. Use real-time performance data to compare all HR expenses against revenue.
2. Look at your current and future HR plans
To pull together your HR budget for the forthcoming year, you will need to draw on information submitted by every department in your company. This must include growth strategies; future hiring plans and current staff turnover rates; overtime rates, current salaries and future salary rises; bonuses; talent acquisition and recruitment; benefits; training; payroll; staff entertainment; and, HR support, such as Intranets, HR software, DEI strategy, employee health and wellbeing, compliance and general HR admin.
With historical, current and forecast HR numbers ready, companies then either create an incremental HR budget, which uses historical HR data and then adjust these figures either up or down to account for changes in the company's HR strategy and external factors, such as inflation. Or they may use the zero-based HR Budget approach, where they work from a clean slate and allocate budget for different areas of HR according to current needs, this is often used by new and young companies with little past data to draw upon.
What is the largest cost in an HR budget?
For most companies, salaries take up the bulk of the HR budget, says Palmer at Peninsula: “Salary is the major cost for us in our HR budget and those of the businesses we support.” In fact, salaries and wages are often the largest of any business cost.
However, it is often the case that as you grow and scale, so too will your HR costs as you look to cover more areas with a broader focus.
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